Cross Border Mergers in India: RBI Notification and Some Implications

[Roshni Menon is a 5th year B.A., LL.B (Hons.) student at School of Law, Christ University in Bangalore]

Upon tracing the history of cross border mergers in India, one finds that the erstwhile Companies Act, (“1956 Act”) did contain provisions relating to the subject, however limited in its application. This law permitted a merger between a foreign company and an Indian company where the resultant company is an Indian company (“Inbound merger”). However, a cross border merger where the resultant company is a foreign company (“Outbound merger”) was disallowed.

The passage of the Companies Act of 2013 (“the Act”) brought about a major overhaul in the provisions concerning cross border mergers.  Significant among those was the recognition of outbound mergers under Section 234, which fell short of being notified. Introducing outbound mergers was a step in the right direction as it portrayed India’s willingness to participate in global transactions by opening the economy to foreign investors. Yet, legislative reform alone was insufficient as the provision was not brought into effect. It was only four years later that the Ministry of Corporate Affairs (“MCA”), by way of notification dated April 13, 2017, notified Section 234 of the Act, thus permitting cross border mergers.

The notification envisaged a scheme to operationalize both inbound mergers and outbound mergers. Along with this notification, changes to the Companies (Compromises, Arrangement and Amalgamation) Rules, 2016 (“Rules”) were also given effect to. The Reserve Bank of India (“RBI”) followed suit more recently by drawing up draft regulations which have now been notified and brought into effect from March 20, 2018; namely, Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“FEMA Regulations”). The Regulations are a welcome move in completing the framework for cross border mergers in India as they cover important aspects of the process from an exchange control perspective.

Prior to the FEMA Regulations, the stakeholders and experts had several concerns with the existing cross border mergers mechanism. For instance, the MCA notification provided that an approval from the RBI was necessary before approaching the National Company Law Tribunal (“NCLT”) for obtaining its sanction to the transaction. From a regulatory perspective, obtaining the RBI’s permission was imperative as cross border mergers involve a change in ownership of assets and liabilities. However, this will be less appealing to investors as obtaining an additional sanction apart from NCLT and sectoral regulators will prolong the process. Consequently, the FEMA Regulations adopted another approach in obtaining RBI’s approval by stating that where the underlying transaction is in accordance with the FEMA Regulations, it shall be deemed to be approved by the RBI. This is a particularly pragmatic provision of law, and complies with India’s move to liberalize foreign direct investment policies.

Another instance where the FEMA Regulations have eased the cross border merger norms is with respect to the validity of foreign entities acquiring or holding any asset or security within India. The draft regulations stated that where the resultant company (for both inbound and outbound mergers) was not permitted under Foreign Exchange Management Act, 1999 (“FEMA”) or rules or regulations thereunder, to acquire or hold an asset / security, it was mandated to sell the asset / security within a period of 180 days from the date of the sanctioned scheme. This provision received criticism, as failure to do so would result in levy of penalties, additional stamp duty and increased tax burden, over and above the fees, duties and taxes already paid for sanctioning the scheme. Further, the timeframe of 180 days was considered insufficient and inconvenient for the resultant company to comply with FEMA. Upon notification, the FEMA Regulations corrected the same by providing a reasonable timeframe of two years. It also permits the resultant foreign company in an outbound merger to open a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for a period of two years.

The FEMA Regulations have been consciously drafted to contain similar provisions for both inbound and outbound mergers with respect to: (i) valuation requirements; (ii) jurisdiction of foreign company; (iii) acquiring or holding assets or securities by the resultant company; and (iv) reporting requirements. This will help both Indian and foreign entities in dealing with cross border merger complexities, encourage Indian businesses to diversify and provide impetus to foreign direct investment in India.

While the FEMA Regulations have been successful in streamlining the process for cross border mergers, certain ambiguities such as the definition of cross border mergers still remain. The FEMA Regulations define ‘Cross Border Mergers’ to mean any merger, amalgamation or arrangement between an Indian company and foreign company under the applicable laws. This definition has a wider ambit as compared to Section 234 of the Act and Rule 25A of the Rules which is restricted to mergers and amalgamations alone. Clarifications need to be sought from the MCA about possible amendments to the Companies Act and Rules to broaden the scope of ‘Cross Border Mergers’ and to have a uniform definition.

Another area of concern is with respect to the tax treatment of cross border mergers. The Income Tax Act of 1961 needs to be revisited to incorporate specific provisions for the tax treatment of outbound mergers separate from that of inbound mergers. Under the Income Tax Act of 1961, tax neutrality is provided for capital gains tax where the resultant company is an Indian company. In other words, capital gains tax in an inbound merger is tax neutral. This raises doubts as to whether tax neutrality extends to outbound mergers as well. If outbound mergers are made capital gains tax-neutral, this may be counterproductive for tax authorities in India as it will result in a loss of revenue. However, the converse scenario will impose a heavy tax burden on the merging company and its members. Deliberation on cross border mergers from the taxation perspective is essential, as a foreign investor-friendly tax regime will attract more foreign direct investment in India. Recent efforts by the RBI and MCA have certainly propelled cross border mergers into the forefront, but there are still gaps in the law that need to be plugged-in.

Roshni Menon

About the author


  • The analysis made is appreciated. How would you rate the recent Walmart-Flipcart deal? Here there is noFDI. For the 2 types of cross border mergers is there any stipulation for maximum or minimum equity holding? In the top 12 bank NPA cases referred to NCLT will any case end up in cross border merger/acquisition? How do we categorise the Manipal Fortis bids?

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