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Key provisions of cross-border regulations in case of outbound merger

Cross border mergers are growing significantly with the shrinking of the globe. Moreover, India is steadily mountain climbing the ease of enterprise scores and is turning into a desired business vacation spot. Such a Conducive financial environment has spurred the boom of move border mergers.

What is a Cross Border Merger?

In India, a merger happens when two corporate entities combine to create a single organization or enable one entity to survive while another entity owns or manages the management. However, the definition of corporate mergers is not limited to the domestic geographical area but is also commonly used on a global scale. This means that a company or body corporate from anywhere in the world may combine with another company or body corporate from a different country. This is what is called Cross Border Mergers.

An international body called the International Organization for Securities Commission (IOSCO) was founded in 1983 to promote and safeguard the interests of investors and businesses, as well as the need to govern cross-border merger transactions. India is a signatory member of this organisation. According to IOSCO norms, any foreign entity that wishes to participate in cross-border transactions with an Indian entity must have its security regulator sign the Memorandum of Understanding with SEBI (Stock Exchange Board of India).
A cross-border merger is of two types:

  • Inbound merger
  • Outbound merger

An inbound merger occurs when a foreign business merges with a domestic firm to form a domestic firm. In a cross-border merger, the resulting entity is a domestic or foreign organization that takes over the assets and liabilities of another company. An outbound merger occurs when a domestic corporation joins forces with a foreign company to form a new entity.

As per the law in India, an outbound merger happens when an Indian company merges with a foreign company, and the Indian company's shareholders have the option to buy the resulting company's shares. The foreign company will become a wholly-owned subsidiary or joint venture of the Indian company.

In India, outbound mergers are controlled and limited by:

  • Companies Act, 2013
  • Foreign Exchange Management Act, 1999
  • Foreign Exchange Management (Transfer foreign security)  Regulation, 2004
  • Foreign Exchange Management (cross-border merger) Regulation, 2018
  • Overseas Direct Investment Regulation
  • Stock Exchange Board of India (SEBI)
  • Reserve Bank of India (RBI)
  • Competition Act, 2002
  • National Company Law Tribunal (NCLT)
  • Income Tax Department

Procedure to be followed in an Outbound Merger in India

Cross-border mergers are complex procedures, and there has often been a schism between countries because the laws and regulations regulating such transactions differ from country to country.

By facilitating international mergers, the Indian government has been able to help reduce certain possible problems. To facilitate and control cross-border mergers, the Indian government released the Foreign Exchange Management (Cross-Border Merger) Regulation, 2018 under the Foreign Exchange Management Act, 1999. Acquisition of a foreign company can be achieved by investment, according to the RBI's overseas direct investment rule.

Procedure for an outbound merger before the enactment of Company Act, 2013 and FEMA (Cross-Border merger) Regulation, 2018

  • In India, every merger, acquisition or amalgamation is processed through  court approval. Any company looking for a merger, acquisition or amalgamation needs to submit a scheme for its restructuring or acquisition before the court for obtaining approval for the scheme. Before authorizing the arrangement, the court must weigh the interests of creditors, business shareholders, and the overall economic benefits of such a deal.
  • The company is also required to obtain approval from CCI (Competition Commission of India). A merger is said to be invalid if it is anti-competitive, according to the Competition Act of 2002. CCI has the authority to assess any mergers that arise outside of India and to cancel those mergers if they are anti-competitive to the Indian market. 
  • The  company can acquire a foreign entity by way of Overseas Direct Investment, the company’s value of shares has to be then evaluated by the AD category-1 bank registered with SEBI.
  • The shareholders of the Indian company shall be issued the securities of the foreign company. Securities up to USD 2,50,000 as per the Liberalized Remittance Scheme (LRS) can be held by each resident individual.
  • The shareholders of the Indian company shall open an Earners Exchange Foreign Currency account, through which the shareholders shall be paid the profits, dividends declared or other returns earned in the resultant company.
  • The Indian parties must obtain the foreign entity's share certificate within 6 months of the investment date and must send the EEFCA's debit and credit information to an AD category-1 bank to prepare the Annual Performance Report that must be filed with the RBI.
  • The company is required to obtain approval from RBI and were mandatory to make several filings before it like ODI form, Annual Performance Report etc.
  • As per the provisions of FEMA regulation 2004, Indian parties are restricted to making investments in  foreign entities engaged in sectors like:
    • Real estate,
    • Trading in Transferable Development Rights,
    • Gambling business,
    • Banking sectors.
  • Indian parties cannot invest in entities whose authority falls under the Financial Action Task Force notification notified by the Government of India, such as Pakistan and Bangladesh, unless with the approval of the Government of India.
  • As per the provisions of FEMA regulation 2004, Indian parties can make ODI through the  automatic route without the intervention of the Government of India.
  • The  resultant  company shall open a Special Non-Resident Rupee account (SSNR) for receiving Overseas Investment from the Indian parties.
  • The account shall be valid for 2 years from the date of investment.
  • The Indian Body corporates can invest up to 400% of their net worth.
  • As per the guidelines of RBI, the Indian parties can fund the Overseas Direct Investment through:
    • Drawal of foreign exchange in Authorized Bank of the Indian party,
    • Swap of shares as per the valuation of the AD-bank,
    • Proceeds of  external commercial borrowings,
    • Balance held in EEFC account,
    • In exchange of ADR/GDR.
  • The Indian company is responsible for paying the obligations of the resulting company under the scheme, which requires the approval of the Indian company's creditors.

Compliance required to post the Enactment of the Companies Act, 2013 and FEMA Regulation, 2018

Post enactment of the Companies Act, 2013 and FEMA (cross-border merger) regulation, 2018, both have gone hand in hand to regulate and govern the cross-border mergers in India. Section 234 of the Companies Act of 2013 contains provisions for cross-border mergers.

Outline for carrying out an outbound merger under the Companies Act of 2013 and the FEMA legislation of 2018:

  • Provisions of section 230-232 of the Companies Act, 2013 i.e., approval of NCLT, shareholders, creditors, SEBI and tax authorities is necessary.
  • Even if the investment complies with the ODI regulation schedule, prior approval from the RBI is mandatory under rule 25A of the Act.
  • Valuation of the target company is prepared as per International Accounting Standards and to be submitted to RBI.
  • As per FEMA 2018, the resultant company is not required to acquire the liabilities if it is not in conformity with FEMA regulations.
  • The regulation mandates that a timely report of the entities' annual results, both the Indian and the resultant company, be submitted to the RBI.
  • The Indian company shall become the  branch office/ liaison office of the  resultant company under the provisions of  branch/liaison office regulation, 2016.
  • The Resultant company can operate in India as if any other foreign company operates as per the provisions of the Foreign Exchange Management Act, 1999.


A cross-border merger encourages body corporates to explore all possible markets around the world. Companies from developing and under-developed countries usually benefit from technological advancements, business models of the transferee organisation, and the promotion of cross-cultural peoples through cross-border mergers. Such a cross-border merger benefits not only the businesses involved in the process, but also customers and governments by offering quality and alternative goods, combining various countries, and generating economic benefits and tax revenues for the government.

However, since the laws regulating cross-border mergers vary from country to country, there are limits to such a transaction. It is necessary to remember that, for the transaction to be completed successfully; all parties participating in the merger must comply with the laws governing their respective jurisdictions. This would make the deal more complicated and time-consuming, and unlike domestic mergers, there is no idea of a quick merger process for cross-border mergers in India.


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