This article is written by Mohammad Azhar, Ideal Institute of Management and Technology , School of Law affiliated to GGSIPU , B.A. LL.B. (5th Year) during his internship at LeDroit India
Keywords: Cross Border Mergers, FEMA, Inbound Mergers, Outbound Mergers, RBI, Companies Act
Abstract
Cross border mergers under FEMA (Foreign Exchange Management Act , 1999) have emerged as a crucial component and at the same time it has become a dynamic tool to govern the mergers taking place across nations, especially Indian companies expanding their business internationally. As the policies have liberated under FDI , the mergers have also got updated regulations and along with the The Companies Act ,2013 the FEMA , provides the legal framework and structure to govern both inbounds and outbounds mergers , especially foreign companies willing to merge with the Indian companies. This article delves into the basic legal framework , key features ,case laws related to and explaining the cross border mergers be it inbound and outbound.
Introduction
Globalisation and economic liberalisation have allowed the Indian companies to promote the business out of the domestic border , be it through inbound investment or outbound investment . Due to the the economic libaralization and changing environment, this shift led to making proper and well articulated legal framework and structure to govern the cross-merger transaction whether
- A foreign company merges with an Indian company (Inbound), or
- An Indian company merges with a foreign company (Outbound)
Initially, these transactions were governed by ambiguous legal provisions. However, with the introduction of Section 234 of the Companies Act, 2013, along with Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, and supported by RBI’s Foreign Exchange Management (Cross Border Merger) Regulations, 2018, India now has a clear and structured legal framework to regulate such mergers.
Understanding Cross Border Mergers under FEMA
What is a Cross Border Merger?
Under FEMA, a cross-border merger involves a merger, amalgamation, or arrangement between an Indian company and a foreign company, conducted under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, issued under the Companies Act, 2013..
- Inbound Merger: A foreign company merges into an Indian company, creating a new entity based in India.
- Outbound Merger: An Indian company merges with a foreign company, resulting in a non-resident company continuing as the survivor.
Legal Framework And Statutory Bodies Regulating Cross Mergers
Companies Act, 2013
- Section 234 of the Companies Act , 2013 permits both inbound and outbound mergers, marking a major departure from the older regime that only allowed inbound mergers
- Approval National Company Law Tribunal (NCLT) is required.
Rule 25A of the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016
- Government Approval is Mandatory
If an Indian company wants to merge with a foreign company (or vice versa), they need prior approval from the Reserve Bank of India (RBI). Without that, the merger won’t be legally valid. - Follow FEMA Rules
These cross-border mergers must also stick to the rules under the Foreign Exchange Management Act (FEMA). That means everything—from valuation to transfer of assets or securities—must be compliant with foreign exchange laws. - File with the NCLT
Once RBI gives the go-ahead, the company still needs to file a merger scheme with the National Company Law Tribunal (NCLT) to get the merger officially sanctioned.
FEMA (Cross Border Merger) Regulations, 2018
Two-Way Classification: Inbound and Outbound Mergers
- Inbound Merger: A foreign company merges into an Indian company.
- Outbound Merger: An Indian company merges into a foreign company.
Each has different compliance requirements under FEMA.
RBI’s Automatic vs. Approval Route
- If all the conditions in the regulation are met (like sectoral caps, reporting norms, etc.), the merger may fall under the automatic route ,no separate RBI approval needed.
- If conditions aren’t fully met, prior RBI approval becomes necessary.
Inbound Mergers
Inbound merger simply means when a foreign based company merges with an Indian company, the merger is called inbound merger.
Although there are certain rules and regulations that need to followed to make this merger happen and these regulations are –
- The Indian company becomes the surviving entity.
- The foreign company’s shareholders become shareholders in the Indian entity.
- Compliances include:
- Issuance of Indian securities to foreign shareholders.
- Adherence to pricing guidelines and sectoral caps under FEMA.
- Reporting of FDI inflows to RBI.
Illustration – Old Navy Inc. (U.S.A.) and Snitch (India) both are clothing brands in their respective countries and Old Navy Inc. merges with Snitch in India . But post merger Snitch continues to operate in India while Old Navy Inc. receives its share.
Case Law:
Walmart-Flipkart Acquisition (2018)
In one of the biggest cross-border acquisitions in India’s retail sector, Walmart Inc. entered into a definitive agreement in 2018 to acquire a 77% controlling stake in Flipkart for $16 billion, pending regulatory clearance. This move positioned Walmart as the largest shareholder in Flipkart, India’s leading e-commerce company at the time. The remaining stake was retained by key existing investors such as Binny Bansal, Tencent, Tiger Global, and Microsoft. Walmart also infused an additional $2 billion in fresh capital to support Flipkart’s future growth. Despite the acquisition, Flipkart and Walmart continued to operate under distinct brand identities and structures.
Outbound Mergers
Outbound merger simply means when an Indian-based company merges with a foreign company, the merger is called outbound merger.
Although there are certain rules and regulations that need to be followed to make this merger happen, and these regulations are –
• The foreign company becomes the surviving entity.
• The Indian company’s shareholders become shareholders in the foreign entity.
• Compliances include:
• Issuance of foreign securities to Indian shareholders.
• Adherence to Indian outbound investment norms under FEMA.
• Prior RBI approval is mandatory before the merger can take effect.
Illustration – Snitch (India) and Old Navy Inc. (U.S.A.) both are clothing brands in their respective countries and Snitch merges into Old Navy Inc. in the U.S. But post merger, Old Navy Inc. continues to operate internationally while Snitch ceases to exist, and Indian shareholders of Snitch receive shares in Old Navy Inc.
Critical Issues and Challenges in Cross-Border Mergers: Inbound and Outbound (Under Companies Act 2013 and FEMA)
- Valuation Complexity: Determining an accurate fair value for companies operating in different countries presents significant challenges, as valuation standards and market conditions can vary widely.
- Regulatory Coordination: Outbound mergers, in particular, demand strict compliance with both Indian and international legal frameworks, making alignment between differing jurisdictions a complex process.
- Foreign Exchange Restrictions: FEMA regulations tightly govern the movement of capital into and out of India. These controls can constrain deal structuring, particularly regarding payments to or from foreign shareholders.
- Taxation Uncertainties: There is considerable ambiguity in the applicable tax regime, especially concerning capital gains, the indirect transfer of assets, and other cross-border tax issues, resulting in potential risks for merging entities.
Relevant Case law :
While direct case law on cross-border mergers is limited, courts have addressed principles of corporate restructuring in relevant rulings.
Sun Pharmaceuticals Industries Ltd v. National Company Law Tribunal [2018 SCC Online Bom 2269]
This case examined whether a cross-border “outbound” demerger—where an Indian company transfers assets to its wholly owned foreign subsidiaries—could be sanctioned under Indian law, specifically Section 234 of the Companies Act, 2013 and relevant FEMA provisions.
- Facts: Sun Pharmaceuticals sought to transfer certain investment undertakings to its wholly owned subsidiaries incorporated in the Netherlands and the US. The scheme involved a demerger, with assets moving from the Indian entity to these foreign subsidiaries. Sun Pharma applied for approval from the National Company Law Tribunal (NCLT).
- Key Issue: Whether such an “outbound” cross-border demerger is permitted under the Companies Act, 2013 and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which deals with mergers involving foreign companies.
- Ruling: The NCLT rejected Sun Pharma’s proposed outbound demerger. The tribunal found that while inbound mergers (where a foreign company merges into an Indian company) are expressly allowed by law, outbound mergers and demergers (where Indian companies merge or demerge into foreign companies) raise several regulatory and legal hurdles and are not explicitly permitted under Section 234. The judgment stressed the alignment required between the Companies Act and the FEMA (Cross Border Merger) Regulations.
- Significance: The case highlights the strict and limited scope for outbound mergers or demergers under Indian law, emphasizing that legislative intent and regulatory clarity are lacking for allowing Indian companies to transfer assets to foreign entities via demergers even when these are wholly owned subsidiaries
Conclusion
Cross-border mergers show India’s increasing openness to engage with the global economy. The Cross Border Merger Regulations of 2018 issued by the RBI have made things clearer for companies looking to restructure internationally. Inbound mergers, where foreign companies merge into Indian firms, are generally smoother and help bring in foreign investment. On the other hand, outbound mergers, where Indian companies merge with or into foreign companies, face closer scrutiny because of concerns around money leaving the country and potential misuse of regulations.
From both a legal and policy perspective, it’s important to support these cross-border mergers, as long as the necessary safeguards under FEMA, the Companies Act, and RBI rules are properly followed. As India aims to be a global investment destination, having clear and predictable rules around cross-border mergers is essential not just desirable.
References
- Section 234, Companies Act, 2013 –
- Rule 25A, Companies (Compromises, Arrangements and Amalgamations) Rules – Ministry of Corporate Affairs
- FEMA Cross Border Merger Regulations, 2018 – RBI
- Walmart-Flipkart Deal Analysis – https://corporate.walmart.com/news/2018/05/09/walmart-to-invest-in-flipkart-group-indias-innovative-ecommerce-company
- Sun Pharmaceuticals Industries Ltd v. NCLT – https://www.casemine.com/judgement/in/5ffc9bb49fca1917ab0e093f