Cross Border Mergers – A Summary of

Recent Developments
_____________________________________
Over the past one year, a number of significant developments have taken place in terms of the
Companies Act 1956, which contemplated only inbound mergers, the provisions under the Companies
Act 2013 (Companies Act) prescribes regulations for both inbound and outbound mergers.
The Ministry of Corporate Affairs, Government of India (MCA) notified Section 234 of the
Companies Act with effect from April 13, 2017 which permitted cross border mergers. Further, in
Consultation with the Reserve Bank of India (‘RBI’), the MCA also notified corresponding
amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016
(Companies Merger Rules) vide Rule 25A with effect from April 13, 2017.
The regulations under the Companies Act governing cross border provide that RBI approval is
mandatory for such mergers. Accordingly, with a view to establishing a regulatory framework for
regulating cross-border mergers, on 26 April 2017, RBI released the draft of Foreign Exchange
Management (Cross Border Merger) Regulations, 2017 (Draft FEMA Merger Regulations) on
which RBI sought public comments till May 9, 2017.

Tax and Regulatory Framework The salient
features of the regulatory and tax regime
governing cross border mergers is briefly
discussed below:
A. Companies Act, 2013 Section 234 of the
Companies Act and Rule 25A of the
Companies Merger Rules read with Section
230 to 232 of the Companies Act (together
referred to as Company Law Regulations) lay
down the comprehensive framework
governing cross border mergers.
The Company Law Regulations also envisage
that a scheme of merger may inter alia
provide for the payment of consideration to
the shareholders of the merging company in
cash, or in Depository Receipts, or partly in
cash and partly in Depository Receipts, as the
case may be.
Rule 25A provides a list of specified
jurisdictions1 for outbound mergers. In other
words, in case of an outbound merger, the
foreign transferee entity shall be required to
be incorporated in the permitted jurisdiction.
However, no such jurisdictions are prescribed
in the case of inbound mergers. Accordingly, a
foreign company situated in any jurisdiction
can merge into an Indian company
B. Foreign Exchange Management Act, 1999
The FEMA Merger Regulations provide that
any transaction undertaken in relation to a
cross-border merger (both inbound and
outbound mergers) shall be deemed to have
prior approval of the RBI as required under
the abovementioned Rule 25A. Thus, if all the
conditions set out in the FEMA Merger
Regulations are complied with, no separate
application is required to be made to the RBI
for its approval. Inclusion of such deeming
approval provision under the FEMA Merger
Regulations has relaxed the mandatory
requirement, as set out under the Companies
Act, to seek prior approval of the RBI for cross
border mergers. Further, the FEMA Merger
Regulations require that the valuation of the
Indian company and the foreign company for
the purpose of cross border merger shall be
done in accordance with abovementioned
Rule 25A of the Companies Merger Rules.
C. Income Tax Act, 1961(i) Inbound Merger
The key provisions relating to inbound
mergers as provided under the Income-tax
Act, 1961 are as follow• Capital Gains
exemption in the hands of the merging
foreign company and the shareholders of such
company
(ii) Outbound Merger • No Capital Gains
exemption in the hands of the merging Indian
company and the shareholders of such
company
Key Considerations
A.Foreign Exchange Management Act/
Companies Act
• Fast track facility not available for cross
border mergers
• Requirement of specified jurisdictions
applicable to both inbound and outbound
mergers
Valuation requirements for Cross Border
Mergers
• Limited scope of activities of Branch office in
India of the resultant Foreign Company under
an Outbound Merger
• Adequacy of prescribed transition time
period
Compliance in respect of immovable property
acquired in/outside India
• Merger of Foreign LLPs with Indian
Company and vice versa
Prescription for special purpose bank
accounts
• Deemed Approval
B. Income Tax
• Capital Gains exemption not available for
outbound mergers
• Permanent Establishment exposure for
resultant foreign company in case of
outbound mergers
Conclusion
With the advent of the regulations under the
Companies Act and FEMA, a definitive
roadmap has been laid down to facilitate
cross border mergers. The regulations are
expected to allow Indian Companies to unlock
their global potential and expand their
business overseas and to assist foreign
companies with Indian subsidiaries to
effectively integrate their Indian operations at
the global level without resorting to the
cumbersome process of winding up. While
some of the unresolved issues in the Draft
FEMA Merger Regulations now stand clarified
under the FEMA Merger Regulations, there
still exist some anomalies amongst the various
regulations, which we expect may be suitably
addressed by the regulatory and tax
authorities in India through suitable
amendments and clarifications in due course.
