Cross Border Merger

CBM
● The term cross-border merger has been defined under the Merger Regulations as
any merger, amalgamation or arrangement between an Indian company and
foreign company in accordance with Companies Rules notified under the CA 2013.
This may be in the form of an inbound merger or an outbound merger.
Timeline:
● 1956: Only Inbound
● 2013: Inbound and Outbound allowed
● 2017: Companies Act, 2013 (Section 234 + Rule 25A) enabled cross-border mergers.
● 2018: RBI FEMA Regulations filled foreign exchange gaps.
● 2022: Mandatory Form CAA-16 for mergers with land-border nations (e.g., China,
Bangladesh).
Benefits of Cross-Border Mergers

● Advantage of Scale: Companies transacting across borders can utilize

each other’s scale, overcoming limitations.
● Expansion Across Borders: Corporates merging across borders can
expand their market and customer base globally.
● Foreign Exchange Earnings: Cross-border mergers boost the economy
through foreign exchange dealings.
● Technology Adaptation: Corporates can adopt each other’s technology,
facilitating business expansion.
● Tax Benefits: Many countries offer financial assistance or tax benefits for
foreign investments.
Cross Border Merger
A Cross Border merger is a merger of two companies located in different countries.
A Cross Border Merger could involve an Indian company merging with a foreign company or vice versa.
If the Resultant Company formed due to merger:

is an is a

or

Indian Company Foreign Company

Inbound Merger Outbound Merger

Change
 Cross Border Mergers – Law in brief
• The Companies Act, 2013 – Section 234, notified with effect from 13th April, 2017 and the Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016 ( as amended)

Provides permission for Cross Border Mergers subject to prior approval of Reserve Bank of India.

• On 26.04.2017, Reserve Bank of India issued draft regulations on Cross Border Mergers for comments
from the public.
• The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA 389/2018) dated
20.03.2018 are notified w.e.f. 20.03.2018.

As per the Regulations, Merger transactions in compliance with these Regulations shall be deemed to have been
approved by Reserve Bank of India. In other cases involving non compliance require prior approval of Reserve Bank of
India.
CA Section 234
All mergers must follow Sections 230–232 of the Companies Act and submit compliance certificates (signed by
directors/company secretaries).

Bare Provisions

(1) The provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis
mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the
jurisdictions of such countries as may be notified from time to time by the Central Government:

Provided that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and
amalgamations provided under this section.

(2) Subject to the provisions of any other law for the time being in force, a foreign company , may with the prior approval of the Reserve
Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may
provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository
Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

Explanation.—For the purposes of sub-section (2), the expression “foreign company” means any company or body corporate
incorporated outside India whether having a place of business in India or not.
Definitions
2(43) Foreign Company means any company or body corporate incorporated outside India
which,—

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode;
(b) conducts any business activity in India in any other manner.

2(11) Body Corporate includes a company incorporated outside India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf
MCA Rule
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

Jurisdictional Eligibility (Rule 25A):

● Foreign companies must be from jurisdictions that:

○ Regulatory Compliance:
■ SEBI MoU signatory OR FATF-compliant.
■ Central bank part of Bank for International Settlements (BIS).
● Exclusions: FATF black/grey-listed countries (e.g., Pakistan, Iran).
● Approval Process:
○ Step 1: RBI pre-approval for forex compliance.
○ Step 2: NCLT application under Sections 230–232 (creditor/ shareholder approvals).
○ Step 3: Post-sanction filings with RoC (Registrar of Companies).
● Independent valuation by registered valuer (Insolvency and Bankruptcy Board-registered).
RBI Regulation
Foreign Exchange Management (Cross-Border Merger) Regulations, 2018

Key compliance requirements include:

● Compensation
● Outstanding Borrowings / Guarantees
● Assets or Securities
● Offices
● Valuation
● Compliance with MCA guidelines under the Companies (Compromises,
Arrangements, and Amalgamations) Rules, 2016
 Cross Border Merger – Compensation

Inbound Merger:

Cash Payment Permitted as per the Scheme sanctioned by NCLT

May issue or transfer any Security and / or

Issue of Shares or Securities
a foreign security as per FEMA 20(R)

Challenges:

1. As per FEMA 20(R), Foreign Security is not permitted to be issued by an Indian Company. Only Depository
Receipts are permitted – Eg ADR, GDR or Unlisted Depository Receipts.
2. Foreign Listing :Presently, Indian companies are not permitted to list on foreign Stock Exchanges and Vice Versa –
However, SEBI is actively considering to permit foreign listing of Indian Companies and vice versa.
● Deemed RBI Approval: No separate RBI approval needed if FEMA conditions are met.
● Inbound Mergers:
a. Foreign assets/liabilities transferred to Indian company must comply with FEMA
(e.g., ECB norms, sectoral caps).
b. Two-year window to align non-compliant assets/borrowings.
● Outbound Mergers:
a. Shareholding in foreign entities must adhere to LRS limits (e.g., $250,000/year for
individuals).
b. Indian offices become foreign branches (restricted to FEMA-permitted activities).
● Transition Period: Two years post-NCLT approval to sell non-compliant assets or repay
liabilities.
Inbound Mergers (Foreign → Indian Company):

The following conditions need to be adhered to for an inbound merger:

The issue or transfer of any security by the resultant Indian company to the foreign
transferor company must be in compliance with:
1. the provisions relating to sectoral caps, pricing guidelines, entry routes, and reporting
requirements of the foreign exchange management laws of India and
2. the provisions of;
○ the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and
○ Foreign Exchange Management (Overseas Investment) Rules, 2022,
i. where the foreign transferor company is a joint venture (JV) or wholly owned
subsidiary (WOS) of the Indian company or where the merger leads to
acquisition of a step-down subsidiary of the JV/WOS of the Indian company.
○ compliance with the requirements prescribed by the Foreign Exchange Management (Transfer
or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘FEMA 2017’).-for
issue of shares
1. Compliance: Securities issuance must align with FEMA rules, sectoral caps,
pricing guidelines, and reporting requirements.
2. Liabilities: Overseas borrowings/guarantees of the foreign company must
conform to FEMA within 2 years; no remittances allowed for repayment
during this period.
3. Assets: Resultant Indian companies must sell foreign assets/securities not
permitted under FEMA within 2 years and repatriate proceeds.
4. Bank Accounts: Foreign currency accounts may be opened for 2 years
post-merger.
5. In case the merger results into acquisition of Stepdown Subsidiaries of
JV/WOS of the Indian Party by the resultant company, then such acquisition
shall be in compliance with Regulation 6 and 7 of FEMA 120.
6. Foreign Exchange Management (Non-debt Instruments) Rules, 2019
 Foreign Direct Investment - FDI
POST – 15.10.2019 position
• Foreign Exchange Management (Non-debt Instruments) Rules, 2019
• https://fifp.gov.in/Forms/FAQs_FDIPolicy.pdf
•Non-debt instruments: means the following instruments; namely :-
(i) all investments in equity instruments in incorporated entities: public, private, listed and unlisted;
(ii) capital participation in LLP;
(iii) all instruments of investment recognized in the FDI policy notified from time to time;
(iv) investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and
Infrastructure Investment Trusts (InvIts);
(v) investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per
cent in equity;
(vi) junior-most layer (i.e. equity tranche) of securitisation structure;
(vii) acquisition, sale or dealing directly in immovable property;
(viii) contribution to trusts; and
(ix) depository receipts issued against equity instruments;
 • ‘Foreign Direct Investment’ (FDI) means investment through
capital instruments by a person resident outside India in an
unlisted Indian company; or in 10 percent or more of the post
issue paid-up equity capital on a fully diluted basis of a listed
Traditional Indian company;

Definitions • ‘Foreign Portfolio Investment’ means any investment made by a

person resident outside India through capital instruments where
…. such investment is less than 10 percent of the post issue paid-up
share capital on a fully diluted basis of a listed Indian company or
less than 10 percent of the paid up value of each series of capital
16
instruments of a listed Indian company;
 FDI Flow Chart
Foreign Company Instruments Reporting
(PROI) Capital Instruments/CCD/ Filing - Within
Warrants/Equity Shares/ 30 days of
Convertible Instruments/ receipt
FCCB Allotment -
Approval Automatic
Route Route Pricing Guidelines Within 180
Listed Entity – SEBI days
Guidelines Form FC GPR –
Cent. Merchant Banker or CA 7 days of
Govt. Allotment
Form FC TRS –
17
within 60 days
Indian Company receipt of
consideration

Indirect Investment-Downstream Inclusive

Outbound Mergers (Indian → Foreign Company):

compliance with the provisions of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations,
2004 (‘ODI Regulations’) is required.

Valuation:

● Valuer must belong to a recognized global body (e.g., ICAI, CFA Institute).
● Compliance with International Valuation Standards (IVS).

Limit of Liberalized Remittance Scheme, where the resident Indian is an individual:USD 2,50,000 per financial year

Compliance with 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, 2016
1. Shareholders: Indian residents acquiring foreign securities must comply
with Overseas Investment Rules or the Liberalized Remittance Scheme
(for individuals).
2. Liabilities: Repayment of rupee-denominated liabilities must follow FEMA;
no acquisition of non-compliant liabilities.
3. Assets: Foreign companies must sell non-compliant Indian assets within
2 years and repatriate proceeds.
4. Bank Accounts: Special Non-Resident Rupee Accounts may be opened
for 2 years.
FTM in CBM
● the recent amendment to Rule 25A, notified on September 9, 2024, recognizes a
scheme of arrangement whereby a foreign holding company can amalgamate with
its Indian wholly-owned subsidiary under the fast-track merger route as outlined in
Section 233 of the Companies Act, effective from September 17, 2024. (Inbound)
● This process includes:
○ Prior approval from the Reserve Bank of India for the Indian transferee
wholly-owned subsidiary and the foreign transferor holding company.
○ Submission of a declaration in Form No. CAA 16 for mergers involving
companies or bodies corporate sharing a land border with India.
○ Additionally, it is important to note that exemptions under Schedule I to the
Combinations Regulations, 2011, such as transaction-specific exemptions for
minority investments and intra-group transactions, are not included in the draft
M&A regulations.
■ These exemptions are expected to be integrated into the rules that the
Competition Commission of India (CCI) will frame under Section 63 of the
amended Competition Act, 2002.
 ○ The amendment has introduced Deal Value of Transaction (DVT) as a new
category of jurisdictional threshold to determine the notifiability of a transaction,
alongside existing asset and turnover-based criteria.
○ A notification is triggered when the transaction value exceeds INR 20 billion (INR
2,000 crore / USD 251 million / EUR 247 million approximately), provided the
target enterprise has ‘substantial business operations in India.’
○ Declaration filings for mergers involving entities from countries sharing land borders
with India (e.g., China).

Effect of Amendment:
● Reverse Flipping Trend: The amendment aligns with the growing trend of "reverse flipping," where
companies relocate their holding structures to India (e.g., PhonePe, Razorpay) to leverage India’s
market potential, regulatory reforms, and access to capital.
● Prior Framework: Cross-border mergers previously required NCLT approval (time-consuming) under
Section 234. The fast-track route (Section 233) was limited to domestic mergers until this
amendment.