Author: Sakshmit Mathur, Amity Law School, Noida
Abstract
The M&A have grown in their cross-border scenario to become a strategic mode by the global corporations aimed at expansion into the emerging markets. India, with its rapidly growing economy, attractive valuation, and investor-friendly reforms, has emerged as a hotbed for such transactions. However, navigating the regulatory framework—especially the Foreign Exchange Management Act, 1999 (FEMA) and the Competition Act, 2002—poses significant challenges. This article provides a precise legal analysis of the compliance requirements, procedural hurdles, and recent developments concerning cross-border M&A under FEMA and Indian competition law. It draws on regulatory guidance, leading case law, and recent transactions to provide insights for legal practitioners and corporates alike.
Introduction
Globalization has driven an uptick in cross-border mergers and acquisitions, particularly in high-growth economies like India. These transactions are often critical tools for companies to access new markets, acquire technological capabilities, or consolidate operations. Despite their strategic importance, cross-border M&A in India must be structured and executed in line with stringent regulatory frameworks, notably FEMA and Competition Law.
The Reserve Bank of India (RBI) and Competition Commission of India (CCI) play pivotal roles in regulating such transactions. With continuous updates in policy, understanding how to mitigate regulatory and procedural risks is crucial for stakeholders. This article explores these legal requirements and barriers in-depth.
To the Point: Key Issues in Cross-Border M&A
1. FEMA Compliance
Regulations of cross-border mergers and acquisitions in India lie mainly in the framework of the country of foreign investment or the system managed by the Foreign Exchange Management Act, 1999 (FEMA). Compliance with its provisions is critical to ensure regulatory legitimacy.
Sectoral Caps and Investment Routes: Foreign Direct Investment (FDI) in India is permitted either through the automatic route, which does not require prior approval, or the approval route, which mandates prior clearance from the Reserve Bank of India (RBI) or the relevant administrative ministry. Sector-specific caps apply, with 100% FDI allowed in manufacturing and e-commerce (marketplace model), while sensitive sectors like defence and print media are subject to restrictive caps (e.g., 74% or 26%) and fall under the approval route. Investments from countries sharing land borders with India also require prior approval as per Press Note 3 (2020).
Pricing and Valuation Standards: Transactions involving capital instruments must adhere to valuation norms based on internationally accepted methodologies, including Discounted Cash Flow (DCF), Net Asset Value (NAV), or Comparable Company Analysis. Valuations must be certified by a SEBI-registered merchant banker or a chartered accountant, ensuring alignment with pricing guidelines prescribed by the RBI.
Reporting and Compliance: post-transaction, entities are required to submit specified forms—Form FC-GPR for share issuances, Form FC-TRS for share transfers, and ODI forms for outbound investments—through the FIRMS portal within the prescribed timelines. Non-compliance may attract penalties under FEMA.
2. Competition Law Scrutiny
The Competition Act, 2002, enforced by the Competition Commission of India (CCI), mandates prior approval for combinations that meet specified thresholds. The aim is to prevent transactions that may result in an Appreciable Adverse Effect on Competition (AAEC) in the Indian market.
Thresholds and Notifiability: Combinations fall within the threshold stage or are notifiable under Section 5 of the Act under circumstances where the amount of assets or turnover of the parties concerned meets a pre-determined level of domestic or international scale. Notification is mandatory prior to implementation, failing which parties may be penalised for gun-jumping.
Definition of Control: CCI takes a wide definition of the term control; it is comprised of both the de jure (legal) and de facto (practical) control. Even minority acquisitions may be deemed notifiable if the investor acquires affirmative rights, board representation, or veto power over strategic decisions.
Prohibition on Gun-Jumping: Implementation of a transaction prior to CCI clearance—through operational integration, strategic coordination, or management influence—constitutes gun-jumping and may attract penalties up to 1% of the total turnover or assets of the parties involved.
Green Channel Mechanism: Introduced in 2019, the Green Channel route permits automatic approval for combinations with no horizontal, vertical, or complementary overlaps. Upon self-declaration and filing, such transactions are deemed approved, significantly expediting the approval process.
3. Overlapping Jurisdictions
Cross-border M&A transactions often engage multiple regulatory bodies, necessitating concurrent compliance across frameworks.
Multi-Regulator Interface: In addition to the CCI, various sectoral and financial regulators such as the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), and the Insurance Regulatory and Development Authority of India (IRDAI) exercise jurisdiction over different aspects of M&A transactions. For instance, M&A involving an insurance entity would require clearances from IRDAI, RBI, and CCI.
Role of SEBI, NCLT, and Tax Authorities: SEBI oversees transactions involving listed companies, particularly under the SAST Regulations and insider trading norms. The National Company Law Tribunal (NCLT) serves as the approving authority for schemes of mergers and amalgamations under the Companies Act, 2013. The Income Tax Department may examine cross-border deals for implications under indirect transfer rules, capital gains provisions, and General Anti-Avoidance Rules (GAAR). Coordination with these bodies is crucial to ensure smooth and legally compliant execution.
Use of Legal Jargon
Ultimate Beneficial Ownership (UBO):
Refers to the natural person(s) who ultimately own or control a legal entity, whether directly or indirectly. Identification of UBOs is essential for compliance with KYC norms and anti-money laundering (AML) regulations.
Gun-Jumping:
A violation under competition law wherein parties begin executing aspects of a transaction before receiving formal approval from the CCI. This includes pre-closing integration of operations or exercising influence over the target company.
Green Channel Route:
A fast-track approval mechanism under CCI for combinations with no competitive overlap, allowing self-declared transactions to be deemed approved upon filing.
Downstream Investment:
It is the investment of an Indian company- which in itself has foreign ownership- in another Indian company. Such investments are treated as indirect foreign investment and must comply with applicable sectoral caps and FEMA norms.
Notifiable Transaction:
Merger, acquisition and merger or amalgamation and exceeds the asset or turnover limit prescribed in the Section 5 of the Competition Act, thus, need to be notified and consent of the CCI before they can meet.
The Proof
I. FEMA and Cross-Border M&A
1. Legislative Framework
Cross-border mergers and acquisitions involving Indian entities are primarily regulated under the Foreign Exchange Management Act, 1999 (FEMA). FEMA aims to manage and facilitate foreign exchange transactions and ensure orderly capital flows into and out of India. Key regulations relevant to such transactions include:
FEMA (Non-Debt Instruments) Rules, 2019: Governs foreign investment in equity instruments issued by Indian entities;
Foreign Exchange Management (Cross Border Merger) Regulations, 2018: Provides the legal mechanism for cross-border mergers involving Indian and foreign companies;
FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations: Lays down the conditions for issuance and transfer of securities involving non-residents.
Together, these instruments define the regulatory structure applicable to cross-border M&A transactions from a foreign exchange perspective.
2. Inbound Transactions
When a foreign company acquires or merges with an Indian entity, such transactions are treated as foreign direct investment and must comply with the applicable provisions under FEMA and the FDI Policy. Key requirements include:
Adherence to Sectoral Limits: Investment must be within the sector-specific caps notified by the government. Prohibited sectors, such as atomic energy and gambling, remain entirely off-limits, while others require prior approval.
Valuation Standards: Pricing of shares must follow approved valuation methods such as DCF or NAV, and be duly certified by authorised professionals. The valuation must be aligned with RBI’s pricing guidelines.
Filing and Reporting: The acquiring or issuing entity must comply with timely filing requirements through the FIRMS portal, including Form FC-GPR (for issuance of shares) and Form FC-TRS (for transfer of shares between residents and non-residents).
3. Outbound Transactions
In outbound M&A, where an Indian entity seeks to acquire a foreign business or merge with a foreign company, the transaction must conform to the Overseas Direct Investment (ODI) framework prescribed under FEMA. Salient considerations include:
Investment Limits: The total permissible financial commitment is currently capped at 400% of the Indian entity’s net worth, encompassing equity contributions, debt, and guarantees.
Approval Conditions: While most investments are permitted under the automatic route, transactions involving specific structures or jurisdictions may require prior RBI approval, especially where the foreign target is located in a non-compliant FATF jurisdiction.
Permitted Activities: Investments must be made in bona fide business activities and conform with the overall policy framework on overseas investments.
4. Cross-Border Mergers
The legal framework for cross-border mergers is encapsulated in the Cross Border Merger Regulations, 2018, read with the Companies Act, 2013. These provide for:
Inbound Mergers: Where a foreign company merges with an Indian company, the resultant entity must comply with all FEMA conditions, including sectoral caps and valuation guidelines.
Outbound Mergers: Permitted subject to RBI’s prior approval, and contingent upon compliance with ODI norms and conditions applicable to foreign investment structures.
Deemed Approval Clause: If a merger meets all regulatory conditions under FEMA and corporate law, RBI approval is presumed, simplifying the procedural burden and facilitating cross-border restructuring.
II. Competition Law and M&A
1. Regulatory Framework
Such combinations which have the likelihood of impacting the competition in India are governed by the Competition Act, 2002. The Competition Commission of India (CCI) has exclusive jurisdiction to assess and approve mergers, acquisitions, and amalgamations that qualify as “combinations” under Section 5 of the Act. Thresholds for notification are based on the combined asset value or turnover of the parties involved. These are not only on domestic and international scale put together any such combination which exceeds the limits is to be reported and be approved by the CCI before it goes operational. “Control” under the Act is interpreted expansively to include both legal and factual control. Transactions involving acquisition of strategic rights, board representation, or veto powers—even if minority in shareholding—may trigger mandatory notification.
2. Notification and Clearance Process
The CCI has prescribed two notification forms:
Form I: Default form for straightforward transactions involving no or limited competitive concerns;
Form II: Required in cases involving significant overlaps or potential market concentration.
For certain qualifying transactions, the Green Channel route offers a fast-track mechanism through deemed approval, provided the parties declare no competitive overlap in horizontal, vertical, or complementary markets.
3. Gun-Jumping Enforcement
Under Section 43A, any act of implementing a combination without prior CCI approval—termed “gun-jumping”—is penalised. This includes premature integration of operations, sharing of sensitive business information, or any control over the target entity. The CCI is even able to impose a percentage of up to 1 percent of turnover or assets of the concerned parties. Enforcement of gun-jumping violations has seen greater scrutiny in recent years, with penalties imposed in several high-profile transactions, reinforcing the obligation of strict pre-merger compliance.
4. Exemptions and Carve-Outs
To reduce regulatory burden, the Competition Act provides for certain exemptions:
De Minimis Exemption: Targets with assets below INR 350 crore or turnover below INR 1,000 crore in India are exempt from mandatory notification, regardless of the acquirer’s financial size.
Ordinary Course Investments: Passive financial investments or acquisitions made without acquisition of control—such as share subscriptions or minority stakes by institutional investors—may also be exempt, subject to conditions.
Case Laws
Sun Pharma–Ranbaxy Merger (2014)
The CCI approved the merger but imposed conditions including divestiture of certain overlapping products. The decision highlighted the Commission’s focus on preserving market competition through structural remedies.
Schneider Electric–L&T Electrical & Automation Business (2019)
This transaction raised competition concerns due to the parties’ market share in the low-voltage switchgear segment. CCI’s conditional approval underscored the scrutiny applied in sector-specific transactions.
Etihad Airways–Jet Airways (2013)
Despite acquiring only a 24% stake, Etihad’s board representation and affirmative rights were held to constitute “control,” making the transaction notifiable. This case broadened the understanding of control under Indian competition law.
HDFC Ltd–HDFC Bank Merger (2023)
One of the largest mergers in the Indian financial services sector, this transaction was approved under the Green Channel route, illustrating how structured and overlap-free deals can benefit from expedited regulatory treatment.
Ultratech Cement–Jaypee Group (2015)
The CCI approved the acquisition with the condition that Ultratech divest cement plants to avoid undue market concentration, reinforcing the importance of competitive balance in high-concentration sectors.
Conclusion
While India has liberalized its FDI regime and restructured merger control regulations to attract global investments, cross-border M&A remains a complex exercise involving multi-layered approvals. FEMA’s compliance landscape, including sector-specific caps and pricing norms, must be navigated with precision. Simultaneously, M&A transactions must pass through the antitrust scrutiny of CCI, especially where market concentration is a concern.
A comprehensive due diligence process, strategic transaction structuring, and timely legal filings are crucial. With increasing regulatory sophistication and clarity, India is steadily becoming a more attractive destination for cross-border deal-making, provided stakeholders adopt a legally compliant, well-informed approach.
FAQS
Q1: What is the time frame for obtaining CCI approval?
A: CCI normally works simple combinations in 30 working days. Complex cases may take up to 210 calendar days.
Q2: Do all cross-border M&A require RBI approval?
A: No. Transactions falling under the automatic route with sectoral and pricing compliance are deemed approved. Others need RBI’s prior approval.
Q3: Is a minority acquisition notifiable by the Competition Act?
A: Yes, if the acquisition confers ‘control’ or crosses asset/turnover thresholds, it may trigger mandatory filing.
Q4: What does the ‘Green Channel’ in the competition law refer to?
A: Introduced in 2019, it allows automatic approval for combinations with no overlaps, ensuring speed and ease.
Q5: Is it possible that a foreign firm can merge with an Indian firm?
A: Yes, under the FEMA Cross-Border Merger Regulations, inbound mergers are permitted with RBI’s deemed approval if they comply with prescribed norms.
