Mergers and Acquisitions

A Complete Analysis on Cross-border M&A and FDI in India

Cross-border M&A

Mergers and Acquisitions are a great way to scale up and grow a business and increase the value of the business. At present date, mergers and acquisitions (M&A) have become a preferred choice for many entrepreneurs willing to expand their businesses. M&A seek to merge with or acquire the business of all sizes and across several industries. It helps the business to stay competitive and adapt to new trends. Even an overseas expansion can be done by a cross-border M&A instead of setting up a subsidiary in a new territory. Cross-border Mergers and Acquisitions has risen rapidly and has reshaped the industrial structure at the international level. Cross-border Mergers and Acquisitions is a popular trend but there are some legal and regulatory challenges. In India, cross-border mergers and acquisitions were notified by the Ministry of Corporate Affairs under Section 234 of the Companies Act, 2013[1] allowing cross-border M&A from 13th April 2017 onwards. Within no time the RBI also notified regulations to operational the cross-border M&A. Let’s see how cross-border M&A is regulated in India.

What is cross-border M&A?

When two or more companies incorporated in two or more jurisdictions come together to do business, it is called a cross-border M&A. Cross-border M&A is generally undertaken to enhance the growth of a business and increase its level of competition in the global market. Cross-border M&A lead to the transfer of control authority from the domestic company to operating the merged or acquired company. The assets and liabilities of the two companies are combined to form a new legal entity and these two companies become an affiliate of the new legal entity.

What is the regulatory framework of cross-border M&A in India?

Cross-border M&A is regulated by the followings in India:

  • The Companies Act, 2013
  • The Insolvency and Bankruptcy Code, 2016
  • The SEBI ( Substantial Acquisition of Shares and Takeovers) Regulations, 2011
  • The Foreign Exchange Management Act, 1999 (FEMA)
  • The Income Tax Act, 1961
  • The Transfer of Property Act, 1882
  • The Department of Industrial Policy and Promotion (DIPP)
  • The Indian Stamp Act of 1899 and other allied laws as may be applicable

Some of the major regulations relating to M&A under FEMA are the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000; the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 and Foreign Exchange Management (Cross-Border Merger) Regulations, 2018. These regulations provide provisions for mergers, de-mergers, amalgamations and arrangements between Indian companies and foreign companies opting for Inbound and Outbound Investments. These regulations also intend to attract massive Foreign Direct Investment.

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What are the types of M&A?

  • Horizontal M&A- This type of cross-border M&A takes place between two companies in different jurisdictions having a similar product in the same industry.
  • Vertical M&A- This type of cross-border Mergers and Acquisitions takes place between two companies in different jurisdictions working at different stages but in similar products.
  • Con-generic/Conglomerate M&A- This type of cross-border Mergers and Acquisitions takes place between two companies in a different jurisdiction, in the same industry but both companies have no mutual buyer or customer or supplier relationship and no related products. The con-generic merger is of further two types: A pure conglomerate merger and a mixed conglomerate merger.
  • Market-extension M&A- This type of cross-border Mergers and Acquisitions takes place between two companies in different jurisdictions that sell the same products or services but operate in different markets.
  • Product-extension M&A- This type of cross-border M&A takes place between two companies in different jurisdictions that sell related product or service and operate in the same market.

The above-mentioned are the types of M&A that can take place between two companies. When it comes to cross-border Mergers and Acquisitions, they are generally two types, they are:

  • Inbound M&A- In this type of M&A, a foreign company merges with or acquires an Indian Company. This results in the formation of an Indian company.
  • Outbound M&A- In this type of M&A, an Indian company merges with or acquires a Foreign company. This results in the formation of a foreign company.

Key points on Cross-border Inbound Merger

  • Transfer of Securities

The new company formed as a result of cross-border M&A (resultant company) can transfer any security like foreign security to a person resident outside India as per the provisions of FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017. Where the foreign company is a Joint Venture or a Wholly Owned Subsidiary then such a foreign company has to comply with the provisions of ODI Regulations.

  • Transfer of Assets

Assets that the resultant company acquires can be transferred as per the Companies Act, 2013 or any other regulations formulated thereunder. If the acquisition of any asset is not permitted then the same shall be sold within two years from the date a sanction is given by the National Company Law Tribunal (NCLT) and the proceeds of the sale shall be repatriated to India.

  • Branch/office outside India
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As per the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations of 2015, an office or a branch of a foreign company outside India shall be deemed to be the resultant company’s office outside India.

  • Borrowings

Borrowings of the transferor company become the borrowings of the resultant company. Further, it is provided in the Merger Regulations that requirements under the External Commercial Borrowings (ECB) Regime have to be complied with within 2 years.

  • Opening overseas bank accounts for the resultant company

To carry out the transactions related to the cross-border M&A, the resultant company is allowed to open a bank account in foreign currency in overseas jurisdictions but for a maximum duration of 2 years.

Key points on Cross-border Outbound Merger

  • Issue of securities
    The issue of securities by a foreign company to the Indian company can be issued to a person resident in India as well as outside India. If the securities are issued to a person resident in India then the acquisition should comply with the ODI Regulations. In addition, the securities of the resultant company can be acquired if the fair market value of the securities is within the limits prescribed under the Liberalized Remittance Scheme.
  •  Branch Office
    As per the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations of 2016, an office of an Indian company in India will be treated as a branch office of the resultant company in India.
  • Other key points
    1. The borrowings of the resultant company are repaid as per the sanctioned scheme.
    2. Assets that are not permitted to be acquired by the resultant company should be sold within 2 years from the date of sanctioning the scheme.
    3. As per the Foreign Exchange Management (Deposit) Regulations of 2016, the resultant company can open a special non-resident Indian rupee account for two years to carry out the outbound merger.

Procedure for M&A with a foreign company under section 234 of the Companies Act, 2013

This section provides that the Central Government in consultation with the Reserve Bank of India is empowered to make rules relating to mergers and acquisitions. Chapter XV which talks about mergers and acquisitions applies to all companies registered under the Companies Act, 2013 and incorporated within such jurisdictions as may be notified from time to time by the Central Government unless otherwise provided in any other law for the time being in force. A foreign company may merge into a company registered under this Act or vice versa with the approval of RBI. The terms and conditions of the scheme of merger provide for the payment of consideration to the shareholders of the merging company whether in cash or depository receipts or partly in cash and partly in depository receipts. For a foreign company to merge with an Indian company, it has to comply with the provisions of sections 230 to 232 of the Companies Act. The transferee company shall perform valuation from valuers who are participants of a recognized professional frame in its home country. The valuation should be as per the international standards of accounting and valuation.

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Cross-Border M&A and FDI

It can essentially be understood that FDI and cross-border Mergers and Acquisitions are tools preferred by companies to expand their business overseas. The rise in FDI can be to some extent be attributed to the rise in cross-border M&A activity. Both are important sources for value creation. Companies are pursuing growth of the business in overseas markets through M&A. Overseas jurisdictions that have liberal laws become a lucrative option for companies to invest. If a foreign company enters into such an overseas market via M&A, then it leads to an inflow of FDI in such overseas jurisdiction.

With the Indian government introducing liberal laws to attract FDI, cross-border M&A transactions have also increased. In cross-border M&A, the foreign company either acquires or merges with a local company which saves the cost of the foreign company in investing in land and construction of a production unit or office.


To project India as a global manufacturing hub, the Government of India is continuously making efforts to reform the existing laws or introduce new laws to check and revitalize the economy. To encourage cross-border M&A activities, the government has formulated attractive tax policies and regulatory reforms. So Indian corporate is more likely to aspire to consolidate by improving the size, scale and operation models.

Also Read:
Key Stages in Merger & Acquisition Transactions
Due Diligence in Mergers and Acquisitions Transactions

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