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This article has been written by Pranali pursuing the Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. This article has been edited by Zigishu  Singh (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho). 


When “The world is our home and you are our guest” provided hospitality out of bounds to the “Joy of Flying”, it exposed the opportunities in cross border mergers in the aviation sector. Etihad airlines flew across the international borders to revive an already deflating Jet airline that was running into debts. The Indian Foreign Direct Investment Policy provided the visa to Etihad Airways to cross borders and merge with Jet airways, eventually drawing a picture that the world is a global market. In this globalised market, moreover, in the last decade, we have seen a radical growth in the cross borders mergers where some have come to life while some have miserably failed. 

Cross border merger is a combination of two or more companies incorporated in two or more countries. Companies of different jurisdictions choose this inorganic method to enhance their growth and uplift their standard to compete in the global market. In pursuant to the viability of the converted deals, below are the reasons as to why foreign companies are crossing borders to acquire domestic targets and trying to find a home in India.   

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Key influencers to attract foreign investment to India

One of the primary factors to attract Foreign Investment to India is to build shareholder value or to increase the customer base in India. The other drivers are strategies developed and executed by Multinational Companies to protect and display their global presence on the world map. Several factors which motivate firms for cross border mergers are state below:

Financial markets are global  

The Indian financial markets have globalised themselves with the help of technology. Some of which are the Bombay Stock Exchange, the National Stock Exchange, the Bond market also known as the debt market has allowed the free flow of foreign investment in the country. With good technical support and rapid technological development clubbed with the liberalisation of the financial market, it is possible to make the world a global market. The risk has spread out wider and diversified due to globalisation of the financial market.

Market pressure and stiff international competition

There is stiff competition in the industry, and hence one cannot help but be part of the competitive race. There is immense market pressure and therefore, a huge competition amongst entities to rank on top of the ladder and get recognised globally. The aim is to build a global brand. Crossing borders helps the companies to achieve synergies in local/global operations and across industries.

To explore new market opportunities due to rapid evolving technology

Cross border mergers could be vertical or horizontal, forward or reverse or a conglomerate which enables the multinational companies to seek new opportunities. The technological developments that take place every minute also enhance the chance of seizing new opportunities. Modern and latest technology helps approach remote locations within a click of a button, therefore, it is possible to reach out faster to the customer base. At the beginning of the year 2021, we heard about Tesla, starting its operations in India and having its registered office in Bengaluru.  

Exploring assets in India due to its diverse geography and location

India is a geographically diverse country with rich history and heritage where the language, culture and customs are widespread and different at every kilometre travelled to the last mile. India is the second-largest populated country in the world and hence the second-largest customer base from the perspective of a global market. 

Multinational companies want to invest in India to spread out their reach which in turn will result in exploring the assets in India. The foreign company will gain access to strategic proprietary assets owned by the domestic target company. Furthermore, economically, the situation will create good value and efficiency. Diversification generates an opportunity for investors to develop their business geographically, at a bigger scale, or by type of industry. 

Increase in efficiency improves the quality of goods and services

Strategic partnership increases a company’s efficiency in providing good quality of goods and services. Due to the presence of strategic alliance inputs such as raw materials, labour, technology etc can be made available via imports and exports at the desired location.

Growth in profit due to fulfilment of the objectives

The formula of cross border merger provides a fillip to growth to the company, which eventually results in higher earnings which boost the morale and confidence of the investors. A high-profit margin persuades the shareholders to entrust their investment in the company with the hope of bountiful returns in the form of dividends. Cross border mergers intensify strategic alliances between firms that in turn gear economy of scale.

Growth in production

In integrated companies, double activities are eliminated due to the large scale of operations resulting in a reduction in cost. For example, new ideas can be implemented and products can be diversified and supply chains can be modified which extends the market share. With enhanced support in terms of machinery, labour and other resources the companies can operate at double their capacity, resulting in an increase in the scale of production. 

Cross border merger leads to large productions of goods and services with fewer inputs which helps in gaining efficiency. Apart from this it also benefits the Indian economy such as increased productivity, increases in economic growth and development particularly gaining market power and dominance. When the companies become larger than it is easy to reap the benefits of size in competition and negotiation.

Innovation in technology reduces costs 

The immense progress in technology and innovation has reduced the costs involved, may it be in production or to provide services. The factors of production majorly have a reduced labour force and being replaced by machinery which works double that of the speed of a human. The research and development costs are distributed over a broader base which enables us to reduce costs.

Cross border mergers allow global transfer of capital, goods and services, intellectual property, technology and unites for universal networking and effectively reducing the cost. Although restructuring may lead to downscaling, in the long term it would lead to employment gains. It is essential sometimes for the continuity of business operations to downsize. Downsizing would in the long run expand the business and successfully create new employment opportunities. 

When firms from different jurisdictions integrate, it brings positive effects of investments made in India because there is sharing of best management skills and practices. This results in moving away from age-old practices and encourages a company to modify and innovate which influences the operations of the company.

Therefore the combined company can reduce its fixed costs by eliminating duplicate departments or operations, reducing the costs of the company vis-a-vis the same source of revenue, thus increasing profits.

Types of cross border mergers 

There are different types of cross border mergers. The most popular forms of mergers are vertical, horizontal, reverse, forward, product extension, conglomerate, and congeneric. Owing to globalisation and technology we even have marketplace extension or marketing/technology associated concentric mergers.  

Inbound mergers

In this method, the foreign company mergers with or acquires shares in an Indian organisation. An example of Inbound Merger is Daiichi acquired Ranbaxy.

Outbound mergers

In this method, an Indian company merges with or acquires shares in a foreign company. An example of the outbound merger is Tata metal acquiring Corus.       

There are few more examples of cross border mergers such as Wipro Limited merging its wholly-owned subsidiaries (Wipro Technologies Austria GmbH, Wipro Information Technologies Austria GmbH, Newlogic Technologies SARL and Appirio India Cloud Solutions Private Limited). Further, Sun Pharmaceutical Industries Limited (“Sun Pharma”) had filed a scheme of arrangement which provided for the demerger of business of generic products of Sun Pharma Global FZE into Sun Pharma. The synergies between Facebook and Reliance’s Jio Platforms rocked the country last year proving a giant leap in alliance for digital technology.   

Laws governing cross border mergers in India

The political scenario of India plays an important role to open economies and liberalise the markets. The government policies and regional agreements also provided a boost to cross border mergers as most foreign investors developed an interest in modern India. Over the period, India became the most important and favourable region to explore.   

The legal framework for cross border mergers in India is provided by Section 234 of the Companies Act, 2013. This has been notified and effective 13th of April, 2017, hence the concept of cross border merger became operational. 

The cross border merger between domestic companies and foreign companies is legally structured under Section 234 of the Companies Act, 2013. To elaborate, Section 234 of the Companies Act, 2013 provides that the provisions as applicable to arrangements and amalgamations between Indian companies apply on a mutatis mutandis basis even to the cross-border mergers. Further compliances for cross-border merger or amalgamation of a company are:

  • The Indian company to obtain prior approval from the Reserve Bank of India
  • Consideration has to be discharged in cash or in depository receipts or partly in cash and partly in depository receipts.  

In addition to the above, the following laws govern cross border mergers in India:

Section 234 of the Companies Act, 2013 (Companies Act) and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Companies Merger Rules) provides for mergers and amalgamations between Indian companies and foreign companies. These provisions mandate prior approval of the Reserve Bank of India (RBI) for the sort of cross border mergers. 

However, the provisions of FEMA Regulations provide for deemed approval of the RBI and therefore, relaxes the mandatory approval as required under the Companies Act, 2013. 

The FEMA Regulations offer that any transaction undertaken with regards to a cross border merger in accordance with the FEMA Regulations shall be deemed to be accepted by means of the RBI (as required in terms of Rule 25A of the Companies Merger Rules). Additionally, to ensure compliance with the FEMA Regulations, a certificate has to be provided by the managing director or whole-time director and the Company Secretary of the company/ies involved in such a cross border merger along with the application which is filed with the relevant National Company Law Tribunal (NCLT).

Tax implications for foreign amalgamating company

Section 47(vi) of the Income Tax Act, 1961: Any transfer of capital assets by a transferor company by way of a scheme of amalgamation wherein the transferee / resulting company is an Indian company is exempt from tax. The impact of transfer pricing regulations does not get triggered even though cross-border merger involves non-resident Associated Enterprise due to tax exemption provided by the Act.

Tax implications for shareholder of foreign amalgamating company

Section 47(vii) of the Income Tax Act, 1961: where shares of the transferor company are transferred in consideration for the issue of shares in the resulting company, provided the resulting company is an Indian company, this transaction is exempt from tax. 

In pursuance of the tax neutral merger arrangements, there should not be receipt-based taxation in the hands of the shareholders under the head ‘Income from other sources.’

Tax implications for Indian amalgamated company

Indian companies are eligible to claim depreciation on a pro-rata basis calculated upon the number of days assets usage in the year of the merger. In subsequent years, Indian companies are eligible to claim depreciation on the written down value (‘WDV’) basis of the block of assets. 

In the case of a merger of foreign wholly-owned subsidiaries (WoS), receipt of assets is unlikely to be construed as the receipt of dividend. Moreover, under Section 56(2)(viib) of the Income Tax Act, 1961, no tax implications shall arise for Indian companies on the issue of shares at a price above face value upon merger. However, the Indian company will have the exposure for Permanent Establishment in the overseas jurisdiction and tax implications on a year-on-year basis will need to be evaluated.

Carry forward and set-off of losses of foreign amalgamated company

Under the provisions of the Income Tax Act, 1961 subject to satisfaction of certain conditions, an amalgamated company on the merger can carry forward and set off the accumulated losses of the amalgamating company.

Another interesting aspect surrounding inbound mergers is whether business loss / unabsorbed depreciation available to foreign companies in overseas jurisdiction shall be transferred to the Indian amalgamated company. In case of inbound mergers where the undertaking qualifies as ‘industrial undertaking’ in terms of Section 72A of the Act, or inbound demergers of the foreign company having a Place of Effective Management (PoEM) in India before the event of merger/demerger, the losses will become losses of the amalgamated company.

The cross-border merger would be an advantageous instrument for Indian companies to undertake consolidation and restructuring activities to create value. However, the fact that under Indian Income-tax laws, the capital gains tax benefit is available, cross border arrangement will be extensively used to achieve a tax-neutral consolidation of legal entities/ intellectual properties in the course of corporate reorganisation including debt push down in the Indian entity. 


The world came to a standstill when COVID – 19 pandemic struck. There was an immense amount of losses incurred by the corporate be it in terms of sources of raw material, technology or labour. Many companies went into downsizing to align themselves to the current demands. 

However, we now get to see that the economy is reviving. Cross borders mergers are rolling back owing to the global competitive environment and the extensive scope in the industry which drives value to the individual firm. Corporate India is very optimistic and conscious in its approach. To overcome challenges, a good amount of time and effort has gone into developing a system that will sustain for the next decade. 

We are aware of the fact that right from school to work, India has become digital and virtual. A lot has been done with the help of technology. For example, by sitting at home at the click of a mouse button, we can order products that are on sale in the United States. Products can be reviewed and purchased online. A similar pattern is also observed in the laws of India. The government has taken and executed a lot of initiatives to attract foreign investors by bringing in reforms to the existing laws. 

The Indian government has relaxed FDI sectoral caps in insurance, aviation, defence industry making an investment in India very attractive. Furthermore, reforms such as Make in India, Atmanirbhar Bharat (self-reliance) are gaining momentum over the last half-decade.



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