Cross-Border Mergers in India: Legal Framework and Challenges

Abstract

Cross-border mergers and acquisitions (M&A) are key tools in the globalisation strategy of multinational enterprises. India, being an emerging economy, has witnessed a significant uptick in such transactions over the last decade. While the legal framework in India has evolved to facilitate cross-border mergers, several regulatory, procedural, and structural challenges persist. This article explores the legal framework governing cross-border mergers in India and analyses the associated challenges within both inbound and outbound contexts.

Introduction

In the era of globalisation, corporate entities increasingly seek to merge or acquire businesses across borders to gain market access, achieve economies of scale, and access new technologies. Cross-border mergers (CBMs) are an essential part of this strategy. India, as a rapidly developing economy, has become both a destination and origin for such mergers. However, cross-border M&As in India are governed by a complex interplay of regulations which, while supportive in intent, often create hurdles in implementation.

Legal Framework Governing Cross-Border Mergers in India

1. Companies Act, 2013

The principal legislation governing mergers and amalgamations in India is the Companies Act, 2013, specifically Section 234, which permits mergers and amalgamations between an Indian company and a foreign company, subject to certain conditions.

Companies Act 2013, s 234.

This provision was introduced to replace the restrictive provisions under the erstwhile Companies Act, 1956. The 2013 Act, coupled with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, provides the procedural framework for CBMs.

Companies (Compromises, Arrangements and Amalgamations) Rules 2016, r 25A.

2. Foreign Exchange Management Act, 1999 (FEMA)

Cross-border mergers inherently involve foreign exchange and therefore fall under the domain of FEMA. In 2018, the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 were notified, allowing both inbound and outbound mergers under automatic route, provided they comply with certain conditions.

Foreign Exchange Management (Cross Border Merger) Regulations 2018.

These regulations classify CBMs as:

• Inbound mergers: Foreign company merges into an Indian company.
• Outbound mergers: Indian company merges into a foreign company.

3. Competition Act, 2002

If a CBM meets certain asset or turnover thresholds, it must be approved by the Competition Commission of India (CCI) to ensure the transaction does not create an adverse effect on competition in India.

Competition Act 2002, ss 5–6.

4. Income Tax Act, 1961

Tax implications are a significant consideration. While mergers may be tax neutral under domestic provisions, in CBMs, the tax treatment often becomes complicated due to international tax laws, transfer pricing, and the absence of comprehensive Double Tax Avoidance Agreements (DTAAs).

Income Tax Act 1961, ss 47, 90.

Challenges in Cross-Border Mergers

1. Regulatory Complexity

Despite the establishment of an enabling framework, practical implementation is hindered by the multiplicity of regulators—MCA, RBI, CCI, SEBI, and the Income Tax Department—leading to delays and compliance burdens.

2. Jurisdictional and Legal Differences

The merger of an Indian company with a foreign entity requires that the foreign company be incorporated in a jurisdiction approved by the Central Government. Currently, only a few jurisdictions such as the USA, UK, Singapore, etc., are recognised.

Companies (Compromises, Arrangements and Amalgamations) Rules 2016, r 25A(1).

This restricts the scope of mergers and complicates structuring in non-notified jurisdictions.

3. Valuation and Accounting Standards

Differences in valuation methodologies and accounting practices between Indian and foreign companies often pose due diligence and integration difficulties.

4. Taxation Issues

The lack of clarity regarding capital gains taxation, indirect transfer provisions under section 9 of the Income Tax Act, and withholding tax obligations can create significant financial uncertainty.

Income Tax Act 1961, s 9.

5. Procedural Delays

Approval from the National Company Law Tribunal (NCLT), which supervises the scheme of merger, often takes several months. Such delays impact the commercial viability and timing of transactions.

Comparative Perspective

In countries such as the UK and Singapore, cross-border mergers are facilitated by relatively streamlined procedures and harmonised tax regimes. India still lags due to its bureaucratic regulatory system and lack of comprehensive coordination between agencies.

Recommendations

• Regulatory Harmonisation: A single-window clearance system could significantly reduce complexity and delays.
• Jurisdiction Expansion: The list of permissible foreign jurisdictions should be expanded to reflect current global trade dynamics.
• Tax Clarity: Detailed tax guidelines for CBMs would help reduce uncertainty and litigation.
• Strengthening Institutional Capacity: Improving the functioning and efficiency of NCLT and other regulatory bodies would ensure timely approvals.

Conclusion

India has made commendable strides in setting up a legal and regulatory structure that permits and facilitates cross-border mergers. However, to truly unlock the potential of such transactions, it must address the persisting challenges in execution and compliance. A more predictable, transparent, and flexible regime would not only attract greater foreign investment but also support Indian companies in their globalisation efforts.

 

References

• Companies Act 2013
• Companies (Compromises, Arrangements and Amalgamations) Rules 2016
• Foreign Exchange Management Act 1999
• Foreign Exchange Management (Cross Border Merger) Regulations 2018
• Competition Act 2002
• Income Tax Act 1961
• Ministry of Corporate Affairs, ‘Circular on Cross Border Mergers’ (2018)
• Saurabh Bindal, Mergers and Acquisitions: Legal and Regulatory Framework (LexisNexis 2020)
• Anirudh Wadhwa and Rajesh Sharma, Justice R S Bachawat’s Law of Arbitration and Conciliation (6th edn, LexisNexis 2017)