Recent Changes in the Cross Border Merger Framework in India

India’s cross-border merger framework reflects the country’s commitment to fostering global business integration while upholding regulatory compliance and financial stability. With the introduction of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, and supporting provisions under the Companies Act, 2013 (“Companies Act”), the Reserve Bank of India (“RBI”) has streamlined the process for cross-border mergers, amalgamations, and arrangements. This regulatory framework aims to facilitate inbound and outbound mergers, encouraging international transactions by reducing complexities. It certainly underscores India’s effort to promote cross-border investments, enhance ease of doing business, and integrate domestic enterprises into the global economy. It also provided great flexibility to foreign investors in foreign holding companies to onshore (into India) their investments directly into Indian companies through a merger of foreign holding company into an Indian operating company. This became the need of the hour, particularly in the recent past, with significant growth of successful IPOs (Initial Public Offerings) of Indian companies on Indian stock exchanges.

A. Cross-Border Regulatory Framework in India

The regulatory landscape for cross-border mergers and amalgamations in India is comprised of inter alia corporate laws i.e., the Companies Act read with the rules made thereunder, foreign exchange regulations i.e., the Foreign Exchange Management Act, 1999 (“FEMA”) along with the rules and regulations made thereunder, approval from regulators like the RBI and the Securities and Exchange Board of India (“SEBI”) in case of listed entities. The key regulatory requirements are summarized below:

(i) Companies Act and the Companies Merger Rules:

Section 234 of the Companies Act specifically permits mergers and amalgamations between an Indian company and companies in foreign jurisdictions and stipulates that prior approval from the RBI is required for such a cross-border merger/ amalgamation (subject to certain exceptions where the approval is deemed to be granted which will be examined in this Article).

The provisions of the Companies Act read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Companies Merger Rules”) stipulate that the provisions of Section 230 – 232 of the Companies Act (which prescribe requirements for domestic mergers / amalgamations) are applicable to cross-border mergers as well, which include: (a) obtaining corporate approvals; (b) preparation of a scheme document outlining the terms and conditions of the merger/ amalgamation/ arrangement; (c) no-objection certificate from the creditors of the company; and (d) approval from the National Company Law Tribunal (“NCLT”) for approval of the scheme of merger/ amalgamation / arrangement.

Further, the Companies Merger Rules also prescribe certain permitted foreign jurisdictions in which foreign companies are situated for a cross-border merger to be permitted in terms of the Companies Act. The requirements of a permitted foreign jurisdiction include the following:

1. “whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI, or
2. whose central bank is a member of Bank for International Settlements (BIS), and
3. a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as:
   1. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
   2. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.”

Further, in case of a compromise/ arrangement/ merger/ demerger which has been incorporated in a country which shares land borders with India, a declaration in a specified format is required at the stage of application to the Ministry of Corporate Affairs (“MCA”).

As recent as September 9, 2024, the MCA introduced by way of notification a new sub-rule (5) of Rule 25A of the Companies Merger Rules which provides for the merger of a foreign parent entity with its wholly owned subsidiary in India through the fast-track merger process which was earlier only applicable to merger/ amalgamation/ arrangement between a domestic company and its parent.

The move to introduce the fast-track merger process for cross-border transactions allows group companies that are spread across jurisdictions to re-organize and restructure themselves in a timely and cost-effective manner and is in line with the effort of the regulators to ease compliance and make India more conducive to transactions in relation to companies in India and abroad.

Historically, several Indian companies, specifically in the start-up space (now unicorns), offshored their holding companies and had financial investors (PE/ VC etc.) invest into such foreign holding companies, with an objective to list such foreign holding companies on stock exchanges out of India. Now, with compelling attractiveness of the Indian stock exchanges, most of these offshored holding companies may take the route of fast-track merger to onshore their holding companies (through a merger of these foreign holding companies with Indian operating subsidiaries).

(ii) Regulations issued by the RBI

The 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.

Regulation 9 of the Cross Border Merger Regulations provides that any transaction on account of a cross-border merger undertaken in accordance with the Cross Border Merger Regulations shall be deemed to have prior approval of the RBI as required under Rule 25A of the Companies Merger Rules.

The concept of a deemed approval in cases of a foreign parent and Indian subsidiary and fast track approval process compliment each other to reduce the regulatory burden on companies that seek to re-arrange their corporate structure.

(iii) Foreign exchange regulations

Transactions involving foreign investment or currency either inbound or outbound, are typically subject to the foreign exchange laws which include the provisions of FEMA and the rules and regulations made thereunder.

An inbound merger results in the shareholders of the transferee foreign entity becoming shareholders of the resultant Indian company. Such equity holding by non-resident shareholders would constitute foreign investment and would have to be in compliance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) read with the consolidated FDI Policy, 2020 issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, Government of India (“FDI Policy”) which inter-alia prescribes sectoral caps, entry restrictions and conditions on foreign investments in India.

In contrast, in an outbound merger, the shareholders of the transferee Indian company become shareholders of the resultant foreign company which constitutes overseas investment. A person resident in India holding shares in the Indian transferor company can acquire or hold securities of the resultant foreign company in accordance with the Foreign Exchange Management (Overseas Investment) Regulations, 2022, Foreign Exchange Management (Overseas Investment) Rules, 2022 and the Master Direction on Overseas Investment issued by the RBI.

Such overseas investment is required to comply with inter alia requirements of bonafide business activity; overall investment limit of 400% of net worth; compliance with pricing guidelines; and reporting obligations by the Indian entity; and Investment when routed back to India not to exceed more than two layers of subsidiaries.

In this regard, while procedurally, the mode of undertaking a cross-border merger/ amalgamation may have become easier, no specific exemptions or relaxations have been provided under the extant foreign exchange regulations for cases of cross-border mergers/amalgamations/ arrangements.

B. Recent Cross-Border Mergers in India

An e-commerce platform operating in India under the name of 'Zepto' by Kiranakart Technologies Private Limited applied for an amalgamation with its foreign affiliate situated in Singapore. The rationale of the restructuring was inter alia rationalization of the group structure by reducing the number of legal entities in order to optimize the legal entity structure to be more aligned with the business objective to achieve more business synergies, assist in faster decision making, ensure significant cost savings, creation of a focused platform for future growth and simplify the holding structure from the perspective of flexibility in enabling future fund raising from Indian as well as from overseas investors.

The NCLT provided its approval to the scheme and noted that the applicant could take benefit of the deemed RBI approval under the provisions of the Cross Border Merger Regulations and that there is no requirement to obtain a no-objection certificate from the RBI. The NCLT approval is publicly available on the official website of the NCLT.

C. Way Forward

While there has been significant ease in the process by virtue of the deemed RBI approval and fast track process (through which the approval or application from the NCLT is not required) in certain cases, however, the process of compliance with both the Companies Act as well as the foreign exchange regulations which stipulate valuation methodologies, investment conditions and restrictions, reporting compliance requirements and approval routes, still form a vast web that requires careful navigation and that have the possibility of prolonging the process.

Streamlining regulatory approvals by reducing dependency on the NCLT and creating faster alternative approval mechanisms can significantly cut down processing time. Relaxing foreign exchange restrictions, particularly for outbound mergers, and aligning investment limits with international best practices would boost global integration. Further, Indian capital markets are witnessing unprecedented growth and there is a strong demand from foreign financial institutions to list their Indian business and investee companies on the Indian stock exchanges. Amongst others, these liberalized regulations will facilitate foreign holding companies to be onshore in India and get foreign investors to own shares directly in Indian companies and consequently holding shares in Indian listed companies (after listing of the Indian operating companies).

By implementing these measures, India is positioning itself as a competitive hub for cross-border mergers and acquisitions, attracting greater foreign investment and fostering economic growth.