Cross Border Merger – Implications of Companies Act, 2013

General   wpadmin   July 21, 2020

Executive Summary:

  • All over the world, “Merger & Acquisition (M&A)”, whether Domestic or Cross- border are used as strategic tools for achieving growth, competitive advantage and creating wealth for shareholder.
  • Cross-border M&A’s are a quick pathway to enter into new market.
  • The growing popularity of cross-border M&A are partly driven by the liberalization in the legal and regulatory regime all around the world.
  • In this way, a systematic and liberal law is required to boost Cross- border M&A deals in Indian corporate world, so Companies Act 1956 was replaced by the new Companies Act 2013.
  • This article seeks to examine certain key changes with regard to Cross-border M&A regulation framework in India by Companies Act, 2013.


Cross-border mergers and acquisitions have rapidly increased reshaping the industrial structure at the international level. A cross-border merger means any merger, amalgamation or arrangement between an Indian company and a foreign company in accordance with the Companies Act, 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016.

The Ministry of Corporate Affairs notified Section 234 of the Companies Act, 2013 thereby enabling cross-border mergers with effect from 13 April 2017. Thus, it was a matter of time that the Reserve Bank of India notified the regulations in order to operationalize the cross-border merger.

Meaning of Cross-border mergers and acquisitions:

In very simple words, it is a combination of businesses of two or more companies incorporated in two or more countries. Companies of different jurisdiction basically go through this process in order to enhance their growth and elevate their standard to compete in International market.

Cross border mergers result in transfer of control authority in operating the merged or acquired company. Assets and liabilities of the two companies from two different countries are combined into a new legal entity in terms of the merger, the control of assets and operations is transferred from local to a foreign company, the former becoming an affiliate of the latter.

Regulatory Framework:

In India, Cross border is majorly regulated under

  • The Companies Act, 2013;
  • The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
  • Competition Act, 2002;
  • Insolvency and Bankruptcy Code, 2016;
  • Income Tax Act, 1961;
  • The Department of Industrial Policy and Promotion (DIPP);
  • Transfer of Property Act, 1882;
  • Indian Stamp Act, 1899;
  • Foreign Exchange Management Act, 1999 (FEMA) and other allied laws as may applicable based on the merger structure.

The two most relevant regulations under FEMA from a merger & amalgamation perspective are Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (the ODI Regulations). In addition to this, the Reserve Bank of India (the RBI) has notified Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (the Cross-Border Regulation) under the Foreign Exchange Management Act, 1999 to include enabling provisions for mergers, demergers, amalgamations and arrangements between Indian companies and foreign companies covering Inbound and Outbound Investments. This is a significant move as there will be a massive surge in the flow of Foreign Direct Investment with the enactment of new laws and tweaking of existing policies.

The 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.

Types of Cross Border Mergers:

The most popular types of mergers are horizontal, vertical, market extension or marketing/technology related concentric, product extension, conglomerate, congeneric and reverse. Recently, the concept of inbound and outbound mergers was also introduced in the Companies Act, 2013 as part of Section 234 of the Act.

  • Inbound M&A’s
  • In this process foreign company mergers with or acquires an Indian company.

  • Outbound M&A’s
  • In this process an Indian company merger with or acquires a foreign company.

Key provisions of the Cross-Border Regulation in case of Inbound Mergers:

  • Transfer of Securities:

The resultant company can transfer any security including a foreign security to a person resident outside India in accordance with the provisions of FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.

However, where the foreign company is a Joint Venture or Wholly Owned Subsidiaries of an Indian company, such foreign company comply with the provisions of FEMA, 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.

  • Borrowings:

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.

Key provisions of the Cross-Border Regulation in case of Outbound Mergers:

  • 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.

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.

Key changes and requirements:

  • Valuation certificate:
  • The 1956 Act does not mandate disclosing the valuation report to the shareholders. Though in practice, valuation reports are included in documents shared with the shareholders and also to the Court as part of the appraisal process of the scheme by the Courts. The 2013 Act now mandatorily requires the scheme to contain the valuation certificate. The valuation report also needs to be annexed to the notice for meetings for approval of the scheme.
  • This enables the shareholders to understand the business rationale of the transaction and take an informed decision.
  • Compliance with accounting standards:
  • The 2013 Act has introduced a new requirement, that no scheme of compromise or arrangement, whether for listed company or unlisted company shall be sanctioned unless the company’s auditor has given a certificate that the accounting treatment of the proposed scheme is in conformity with the prescribed accounting standards. Further, the application with respect to reduction of share capital has to be sent to the Tribunal along with the auditor’s certificate stating it is in compliance with accounting standards.
  • The 2013 Act aligns the SEBI requirement which existed for listed companies for all companies, to ensure that the scheme aimed to use innovative accounting treatments for financial re-modeling are not sanctioned by the Courts. As the scheme tends to have overriding effect with respect to accounting treatment (specifically mentioned in accounting standard 14 with respect to treatment of reserves), the onus has been shifted on the auditor to confirm that accounting standards have been followed.


The Government of India has, in the past few months, announced a wave of reforms to check and revitalize the economy. With special packages being announced to boost infrastructure sector and the small and medium enterprise sector, India is actively looking to project itself as global manufacturing hub for companies looking to move their operations out of China.

As per the review, M&A, activity in India will start picking up towards the third quarter, riding high on the various attractive tax policies and regulatory reforms announced by the Government. In the post-COVID-19 era, Indian corporates are more likely to divest their non-core businesses and continue to aspire to consolidate by improving their size, scalability and operating models.


Legal Team

Proind Business Solutions Private Limited
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