Cross Border Mergers

In an increasingly globalized economy, cross-border mergers and acquisitions have become a strategic tool for businesses to expand beyond borders. A cross-border merger refers to a merger, amalgamation, or arrangement between an Indian company and a foreign company. Recognizing the growing need for international business consolidation, India has established a structured legal framework for such transactions. Such a merger serves several strategic, financial, and operational purposes:

• Merges a foreign subsidiary or related company into the Indian parent or group company, thus reducing complex holding structures, administrative costs and compliance burdens.
  

• Facilitates streamlined control, centralized management, and unified financial reporting.
  

• Provides a legal mechanism to bring back foreign operations or investments into India.
  

• Ensures proper asset-liability transfer within permitted routes.
  

Cross-border mergers in India are now supported by a cohesive legal regime involving the Companies Act, FEMA, and other regulatory statutes such as:

1. Companies Act:
- Section 234 allows for mergers or amalgamations between an Indian company and a foreign company.
- Such mergers require prior approval of the National Company Law Tribunal.
- The foreign company must be incorporated in a jurisdiction notified by the Central Government.
- Consideration can be in cash, shares, or depository receipts.

2. Foreign Exchange Management (Cross Border Merger) Regulations, 2018
- Inbound mergers (foreign into Indian) must comply with India’s foreign direct investment policy.
- Where the Foreign Company is a joint venture/wholly owned subsidiary, it shall comply with the conditions prescribed for transfer of shares as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004.
- Guarantees or outstanding borrowings of the foreign company from overseas sources which become the borrowing of the resultant company shall conform, to the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowing norms, as applicable.

3. Competition Act, 2002
- If the merger meets specified asset or turnover thresholds, it must be notified to the Competition Commission of India (CCI) for anti-trust clearance.

4. Income Tax Act, 1961
- The provisions of capital gains and transfer pricing shall be determined regarding such transaction.

Case where inbound cross border merger was used:
An Indian company owned a wholly owned subsidiary in UK which further owned a wholly owned subsidiary in South Africa. The management wanted to close the UK company but wanted to transfer the shares of South Africa company into the Indian company.
Inbound Cross-Border merger was used in such scenario to merge the Indian and UK company wherein the shares of the South African company were automatically transferred to the Indian Company.