Published On: September 15th 2025
Authored By: Sumedha Ghuse
MMM Shankarrao Chavan Law College
ABSTRACT
Cross border mergers refer to the merging of two companies- one Indian while the other is foreign. Globalization has brought the world closer in terms of business by means of working multi-nationally. When an Indian company merges itself with a Foreign Company to expand its customer base as well as strengthen their market value. Such transactions are not merely procedural combinations; they represent potent strategic instruments for companies seeking to penetrate new markets, harness the distinct strengths of foreign businesses, and augment their competitive positioning on a global scale. By expanding both customer bases and global operational footprints, these mergers frequently lead to a significant uplift in overall operational efficiency.
Mergers are of two kinds- Inbound Mergers, where the resulting entity is a domestic company and Outbound Mergers where the resulting entity is foreign company.
LEGAL FRAMEWORK
India has defined legal framework regulating cross border merges through acts passed by the parliament and revising the said acts from time to time to keep up with the upcoming challenges and requirements. This framework is primarily anchored in the Companies Act, 2013, the Foreign Exchange Management Act (FEMA), 1999, the Competition Act, 2002, and regulations issued by the Securities and Exchange Board of India (SEBI). Each of these statutes and their subordinate legislations play a critical role, ensuring comprehensive oversight and protection of various stakeholder interests.
A. The Companies Act, 2013
The act provides the framework required for merges whether cross-border or domestic. It provides the guidelines for mergers and its regulation, provisions for protection of shareholders and creditors and ensures fair evaluation. It was introduced to replace the previous Companies act of 1956 to tend to the growing corporate landscape of India.
Sections 230-240: Chapter XV of the act focuses on Compromises, Arrangements and Amalgamations, and provide guidelines for these transactions. The main objective ofthese sections is to protect the rights of shareholders, creditors and employees while maintaining overall stability of the company. It objectively addresses the varied interests of the stakeholders. It aims to cover all possible situations to occur in a merger.
Section 234: This section explicitly provides for Cross-border mergers. It generally requires the company to acquire approval from RBI for the merger with certain exceptions where approval is deemed to be granted. Through an amendment to the Companies Amendment Rules,2016 the parliament added rule 25A which prescribes the rules to both inbound and outbound mergers incorporated in ‘certain jurisdictions’ .The amendment to the Merger Rules further prescribes that such cross-border mergers and amalgamations must adhere to the requirements under the Companies Act and that the valuation (in case of an outbound merger) be conducted by valuers who are members of a recognised professional body in the country of the transferee company and as per internationally accepted accounting standards and valuation[1].
Section 233 and Rule 25A: These provisions provide for fast track merger process introduced for a quicker approval and registration. To facilitate the merger of foreign holding companies with their wholly owned Indian subsidiaries, the Ministry of Corporate Affairs (MCA) amended Rule 25A of the Companies Merger Rules. The notification was issued on September 9, 2024, and will take effect on September 17, 2024. The MCA’s amendment to Rule 25A allows a foreign holding company to merge into its wholly owned Indian subsidiary through the fast-track merger route under Section 233 of the Companies Act. This amendment streamlines the merger process and reduces regulatory hurdles.[2]
B. Foreign Exchange Management (Cross Border Merger) Regulations, 2018
RBI issued RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross Border Merger Regulations”) on March 20, 2018 for both inbound and outbound mergers. The Cross Border Merger Regulations specify that where the resultant company is a foreign company, such transaction would constitute an outbound merger, and where the resultant company is an Indian company, the same would constitute an inbound merger. While the Cross Border Merger Regulations stipulate the treatment of offices in the transferee entity jurisdiction, borrowings of the transferee entity, rights to hold assets, bank accounts of the company, valuation, reporting requirements and treatment of assets that would otherwise not be permitted under the extant foreign exchange laws in India, the critical provision in the Cross Border Merger Regulations is the one that provides for deemed RBI approval for cross-border mergers.[3]
A significant simplification introduced by the FEMA 2018 Regulations is the concept of “deemed approval.” Regulation 9 stipulates that any transaction undertaken as a result of a cross-border merger in compliance with these Regulations is considered to have the prior approval of the RBI, as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016. This provision, coupled with the fast-track merger process, significantly reduces the regulatory burden on companies undertaking corporate restructuring. However, if the transaction does not fully comply with the regulations, explicit prior RBI approval remains mandatory.
C. Security and Exchange Board of India(SEBI)
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) provides for a comprehensive framework governing various types of listed securities. Under the Listing Regulations, SEBI has laid down conditions to be followed by a listed company while making an application before the NCLT, for approval of a scheme of merger / amalgamation / reconstruction. The listed company is applicable to regulations if it remains below the threshold of market capitalization criteria for a continuous period of three years, calculated by recognized stock exchanges. The companies must also comply with all applicable security laws or regulationsof the stock exchanges. They must file to the schemes of stock exchanges involved with them prior to filing with NCLTto seek a no-objection letter from the relevant stock exchanges. The listed company also needs to disclose to the stock exchanges all information having a bearing on the performance/ operation of the listed entity and/or price sensitive information.[4]
D. Tax Implications
The exemptions under the Income-tax Act, 1961 (“the IT Act”) for tax neutrality of merger are available only if the transferee company is an Indian company. Such exemptions are not available in case of merger of an Indian company with a foreign company. Accordingly, the Indian company and its shareholders could be liable to tax in case of merger of an Indian company with a foreign company.
It is also relevant to highlight Section 72A of the IT Act which provides for carry forward and set off accumulated tax business losses and unabsorbed depreciation in case the merger complies with certain specified conditions. In terms of Section 72A, such benefit will not be available in case of outbound mergers. In addition, in case of inbound mergers, tax losses of the foreign company may not qualify as ‘accumulated losses’ under the provisions of IT Act and therefore may lapse.[5]
Transferring goods and services across borders may attract indirect tax such as GST and custom duties. Transactions between the related entities must also adhere to the Arms length principle to avoid transfer pricing issues.
CHALLENGES FOR CROSS-BORDER MERGERS
1. Weak Regulatory and Legal Framework:
India has been criticized for lack of transparency and other factors that cause delays in completion of cross border transactions. Several deals have failed or have been inevitably delayed due to inefficient merger regulations. The regulatory bodies often contradict the decisions due to inefficient co-ordination among them further prolonging the merger processes.
2. Political Instability:
The unstable and unpredictable political system and delayed legislation forms an unfavourable environment for foreign companies to initiate transactions with Indian entities. While India is a growing global hub for corporate entities and holds immense potential to grow, the political interference forms a major set back for companies.
3. Regulatory Compliance:
India has a complex framework for regulations regarding merger and acquisition that requires approval from multiple regulatory bodies. The companies need approval from NCLT, must comply with FEMA and RBI guidelines and follow the procedure provided by the Companies Act. Other bodies such as Competition Commission of India(CCI) and Enforcement Directorate also play a major role in ensuring compliance. Due to such regulations the process gets extended at times which may overthrow business valuation and cause disruptions in deal structures. Non-compliance also increases risks to penalties and further legal repercussions.
4. Company Valuation
One of the crucial aspects of mergers is company valuation which determines the financial prospect of the deal. It ensures that both parties have equivalent benefits from the deal and neither is compromised unfavourably. However, financial transparency in India is a challenge which makes it difficult for assessment. It causes a disadvantage if the company cannot be accounted for its practices hence reducing its chances to become a potential transactor.
5. Due Diligence
Conducting due diligence is a crucial step as it helps evaluate potential risks. However, it becomes difficult to produce such due diligence reports due to the multifaceted regulatory bodies and complicated shareholder agreements, etc. Due diligence also helps in anaylsing employee contracts which may affect the mergers.
6. Corporate Governance
India is still growing its corporate governance policies and is at its developing stage. Certain issues and challenges are yet to be formally addressed which creates a gap between the current framework and new changes in the corporate environment. If the company lacks certain policies and practices due to governance, the Foreign company may have to bear additional costs and work to elevate it to the company standards after merging.
7. Currency Exchange rates
In any international transactions, currencies and exchange rates play a significant role in striking deals with foreign partners. In case of mergers, the currency rates have the possibility of fluctuating which may affect the deals significantly. In order to have an effective transaction, the companies must thoroughly evaluate the currency market and consider possible fluctuations.
8. Integration Challenges
When a MNC or a foreign company merges with a domestic one, the challenge of integrating the newly merged company into the existing system requires in depth analysis of the local market, previous methods and processes and effectively need to create an inclusive practice methodology. India has slightly different corporate practices compared to the western market. Due to this it may cause friction and pose a challenge to smooth transitioning.
CONCLUSION
Cross border mergers are a developing avenue in India. The recent amendments and developments in FEMA Regulations and Companies Act signify a focus shifting to expanding its international transactions and open new opportunities for Indias economy. However, this legal framework is still not fully equipped to efficiently assist and guide cross-border mergers due to the various challenges faced during such transactions. The complex structure of authoritative bodies, multi-step approval processes and other factors causing delays for smooth procedure during mergers provide a setback to the Indian market. In order to navigate through such a structure, one needs to have thorough knowledge of the Indian market and its laws. However it is good to see growth and change in the present situation where efforts are being made to provide for legislations to address and solve issues related to mergers in India.
For making an impact on the global markets, India must step up and reduce the hurdles through meticulous planning, revisit tax reforms, comprehensive due diligence and ensure transparency.
REFERENCES
- ‘Notification of Cross-Border Mergers’ (azb, 27 September 2021) <https://www.azbpartners.com/bank/notification-of-cross-border-mergers/> accessed 21 July 2025
- Bhatia PJ, ‘Cross-Border Mergers: RBI Regulations and Compliance Requirements under Section 234 of the Companies Act’ (Intolegalworld, 15 March 2024) <https://www.intolegalworld.com/post/cross-border-mergers-rbi-regulations-and-compliance-requirements-under-section-234-of-the-companies> accessed 19 July 2025
- ‘Recent Changes in the Cross Border Merger Framework in India’ (azb, 10 March 2025) <https://www.azbpartners.com/bank/recent-changes-in-the-cross-border-merger-framework-in-india/> accessed 19 July 2025
- Team M and A (Mergers & Acquisitions, June 2025) <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Mergers___Acquisitions_in_India.pdf> accessed 19 July 2025
- S&R Associates, ‘Cross-Border Merger Framework in India: Limited Efficacy?’ (Legal Developments, 27 April 2023) <https://www.legal500.com/developments/thought-leadership/cross-border-merger-framework-in-india-limited-efficacy/> accessed 20 July 2025
[1] ‘Notification of Cross-Border Mergers’ (azb, 27 September 2021) <https://www.azbpartners.com/bank/notification-of-cross-border-mergers/> accessed 21 July 2025
[2] Bhatia PJ, ‘Cross-Border Mergers: RBI Regulations and Compliance Requirements under Section 234 of the Companies Act’ (Intolegalworld, 15 March 2024) <https://www.intolegalworld.com/post/cross-border-mergers-rbi-regulations-and-compliance-requirements-under-section-234-of-the-companies> accessed 19 July 2025
[3] ‘Recent Changes in the Cross Border Merger Framework in India’ (azb, 10 March 2025) <https://www.azbpartners.com/bank/recent-changes-in-the-cross-border-merger-framework-in-india/> accessed 19 July 2025
[4] Team M and A (Mergers & Acquisitions, June 2025) <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Mergers___Acquisitions_in_India.pdf> accessed 19 July 2025
[5] S&R Associates, ‘Cross-Border Merger Framework in India: Limited Efficacy?’ (Legal Developments, 27 April 2023) <https://www.legal500.com/developments/thought-leadership/cross-border-merger-framework-in-india-limited-efficacy/> accessed 20 July 2025
