Under the present provisions of Sections 391-394 of the Companies Act, 1956 it is possible for a foreign company to merge with an Indian company, but an Indian company cannot be merged with a foreign company. This is intended to ensure that the company that continues after the merger is an Indian company over which the Indian regulatory authorities continue to exercise control. Although there was some speculation that the proposed Companies Bill will alter this position and make it possible for Indian companies to merge into foreign companies, that seems to have been put to rest with the Government possibly preferring a status quo, as this report in the Economic Times suggests:
“The government has decided not to allow the merger of Indian companies with foreign companies, a proposal it deliberated on extensively while formulating the new company law.
Although this is an international best practice in the laws relating to mergers and acquisitions, the government has concluded that merger of an Indian company with a foreign company would lead to a situation where shareholders of the Indian company hold shares or other tradable securities in the foreign company.
Allowing this would amount to the migration of Indian companies to the acquirer’s soil, which the government is not comfortable with. Therefore, an overseas company acquiring an Indian firm will have to keep the acquired company as a subsidiary.
The government, however, is okay with the reverse — that is, foreign companies getting merged with Indian companies and its foreign shareholders owning shares in the merged company which is registered under Indian laws.
Sources said that if a foreign company indeed wants to merge an Indian company with itself, it can first set up a subsidiary in India and then merge the acquired Indian company with the subsidiary. This would ensure that Indian businesses would be owned by entities regulated under Indian corporate law.”