Introduction and background

A cross-border merger explained in simplistic terms is a merger of two companies located in different countries. A cross-border merger could involve an Indian company merging with a foreign company or vice versa. If the resultant company being formed due to the merger is an Indian company, it is termed an inbound merger and if the resultant company is a foreign company, it is an outbound merger.

Cross-border mergers may play a vital role in the commercial growth of the economy. Companies Act, 1956 (CA 1956) dealt with cross-border mergers in a limited way. Sections 391-94 of the CA, 1956 laid down provisions with respect to cross-border mergers. However, under the CA, 1956, only inbound mergers were permitted. The term “transferee company” defined under Section 394(4)(b) of the CA, 1956 included only Indian companies and hence transfers were not allowed to be made to foreign companies.

Companies Act, 2013 (CA, 2013) brought about a significant change in this position. Section 234 of the CA, 2013 which was notified in December 2017 has made provisions for both inbound and outbound mergers. It enables the Central Government in consultation with Reserve Bank of India (RBI) to make rules pertaining to cross-border mergers.

In pursuance of the aforesaid, RBI had issued draft regulations in this regard in April 2017. The Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (Merger Regulations 2018) have been recently notified and are effective from 20-3-2018. Mergers which are in compliance with the Merger Regulations are deemed to be automatically approved by RBI and do not require a separate approval.

The Merger Regulations are a comprehensive set of rules which deal holistically with cross-border mergers. Cross-border mergers are defined under the Merger Regulations as any merger, arrangement or amalgamation in accordance with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Companies Amalgamations Rules) notified under the CA, 2013.

A foreign company under the Merger Regulations means a company which is incorporated outside India. Similarly, an Indian company is one which is incorporated in India. Outbound investment is permitted only with companies incorporated in the countries mentioned in Annexure B of the Companies Amalgamations Rules. The companies which take over the assets and liabilities of the companies involved in the cross-border merger are called “resultant company”. A resultant company may be either Indian or foreign.

The Merger Regulations lay down detailed processes for both inbound and outbound mergers. The salient features of the Merger Regulations are as follows:

Inbound mergers

An inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed. Following are the key regulations which need to be followed during an inbound merger:

Transfer of securities

Typically, the resultant company of the cross-border merger can transfer any security including a foreign security to a person resident outside India in accordance with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017. However, where the foreign company is a joint venture/wholly-owned subsidiary of an Indian company, such foreign company is required to comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (ODI Regulations).

Branch/office outside India

An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India for in accordance with the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2015.


The borrowings of the transferor company would become the borrowings of the resulting company. The Merger Regulations has provided a period of 2 years to comply with the requirements under the external commercial borrowings (ECB) regime. The end use restrictions are not applicable here.

Transfer of assets

Assets acquired by the resulting company can be transferred in accordance with the Companies Act, 2013 or any regulations formulated thereunder for this purpose. If any asset is not permitted to be acquired, the same shall be sold within two years from the date when the National Company Law Tribunal (NCLT) had given sanction. The proceeds of such sale shall be repatriated to India.

Opening of overseas bank accounts for resultant company

The resultant company is allowed to open a bank account in foreign currency in the overseas jurisdiction for a maximum period of 2 years in order to carry out transactions pertinent to the cross-border merger.

Outbound mergers

An outbound merger is one where an Indian company merges with a foreign company resulting in a foreign company being formed. The following are the major rules governing an outbound merger:

Issue of securities

The securities issued by a foreign company to the Indian entity, may be issued to both, persons resident in and outside India. For the securities being issued to persons resident in India, the acquisition should be compliant with the ODI Regulations. Securities in the resultant company may be acquired provided that the fair market value of such securities is within the limits prescribed under the Liberalised Remittance Scheme.

Branch office

An office of the Indian company in India may be treated as the branch office of the resultant company in India in accordance with the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016.

Other changes

(a) The borrowings of the resulting company shall be repaid in accordance with the sanctioned scheme.

(b) Assets which cannot be acquired or held by the resultant company should be sold within a period of two years from the date of the sanction of the scheme.

(c) The resulting foreign company can now open a special non-resident rupee account in terms of the Foreign Exchange Management (Deposit) Regulations, 2016 for a period of two years to facilitate the outbound merger.

Implications of the Merger Regulations

Prior to the enactment of CA, 2013, Indian companies were prohibited from merging with foreign entities. The notification of Section 234 in December 2017 brought about an end on this restriction and made out-bound mergers a reality.

The Merger Regulations further consolidate this process by laying down detailed ground rules to be followed during cross-border mergers. Moreover, providing deemed approval of RBI to companies which are compliant with the Merger Regulations is a welcome step. The time period of 2 years, provided to the parties to sell off the assets not permitted to be held and to become compliant with the ECB regime provides flexibility to the transferor and transferee companies.

One can hope that with serious and effective implementation, the Merger Regulations would go a long way in creating a more conducive commercial environment and would strengthen and increase India’s presence on the global front.


*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at and **Soumya Shekhar is Research Associate.

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