AUTHOR- Srishti Batra, a student at Vivekananda Institute of Professional Studies
Abstract
Cross-border mergers and acquisitions (M&As) have emerged as a crucial element in India’s economic liberalization and globalization strategy. These transactions allow companies to access new markets, acquire strategic assets, and consolidate operations across jurisdictions. The legal and regulatory frameworks pertaining to cross-border M&As have changed dramatically as a result of India’s increasing involvement in international trade and investment flows. It also delves into procedural aspects, practical challenges, recent developments, and case studies involving major cross-border deals. By comparing India’s M&A framework with global best practices, the article highlights both the strengths and areas for reform in the Indian regulatory regime.
Introduction
Mergers and acquisitions are successful tactics for corporate expansion and strategic realignment. In the globalized era, cross-border M&As—where at least one party is foreign—are increasingly common. India has become both a significant destination and origin of cross-border M&A activity, thanks to a robust market, skilled workforce, and evolving regulatory environment.
Cross-border M&As involve complex legal and financial due diligence, approvals from multiple regulatory agencies, and compliance with both domestic and international legal standards. These transactions must be compliant with the Companies Act, 2013; the Foreign Exchange Management Act (FEMA), 1999; SEBI regulations; the Competition Act, 2002; and other sectoral laws depending on the nature of the business.
This article aims to explore these frameworks in detail, identify practical issues faced in implementation and assess how India aligns with global M&A practices.
Legal Framework Governing Cross-Border M&As in India
- Companies Act, 2013
The Act governs domestic and cross-border mergers. Section 234, introduced by the Companies (Amendment) Act, 2017, explicitly allows cross-border mergers between Indian companies and companies incorporated in notified jurisdictions.
Key features include:
- Approval by the NCLT is mandatory.
- The foreign entity must be from a country notified by the central government (i.e., those with reciprocal arrangements).
- Valuation must be conducted by recognized valuers.
- Foreign Exchange Management Act (FEMA), 1999
The FEMA framework governs capital flows across borders.
Key conditions include:
- Compliance with pricing guidelines.
- Reporting obligations post-transaction.
- Competition Act, 2002
Any cross-border transaction involving significant asset or turnover thresholds must obtain prior approval from the CCI under Sections 5 and 6 of the Act.
- SEBI Regulations
For listed companies, compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is critical. These regulations govern public disclosures, minimum public shareholding, and trigger points for mandatory open offers.
Regulatory Authorities and Their Roles
A number of authorities are essential to the approval and supervision of cross-border M&A:
- MCA & NCLT: Oversees approval of schemes and procedural mergers.
- RBI: Ensures FEMA compliance and capital flow control.
- MCA & NCLT: Oversees approval of schemes and procedural mergers.
- CCI: Grants or denies antitrust clearance.
- SEBI: Involved when listed entities are part of the transaction.
- Income Tax Department: Assesses tax neutrality and implications of the transaction.
The synergy and timeliness of approvals from these bodies are crucial for successful execution.
Procedural Steps in Cross-Border M&A
The procedure for cross-border M&As involves the following steps:
- Preliminary due diligence
- Negotiation and structuring
- Valuation
- Approval from Board and Shareholders
- Filing of Application with NCLT
- Regulatory permissions from sectoral regulators, RBI, SEBI, and CCI, as appropriate.
- Sanction from NCLT
- Making a ROC filing
Practical Challenges and Compliance Hurdles
- Multiplicity of Regulatory Approvals: Cross-border M&As in India involve simultaneous scrutiny by several regulatory bodies such as the RBI, CCI, SEBI, and NCLT. Each authority follows distinct procedural timelines and mandates. This leads to:
- Procedural bottlenecks due to overlapping jurisdictions.
- Delays in deal closure, as approvals are not centralized.
For instance, in the Sony–Zee merger, delays arose due to SEBI’s probe into promoter conduct even after CCI had cleared the deal.
- Complex Valuation Norms and Forex Fluctuation: Valuation becomes highly sensitive in cross-border deals because of:
- Different valuation methodologies (DCF vs. market multiples).
- Currency risk due to forex volatility, impacting deal pricing.
- Transfer pricing and fair market value (FMV) requirements can result in tax disputes.
- Sectoral Restrictions and Caps: Sectors such as Telecom, insurance, and defence have FDI caps (e.g., 49% in insurance without government approval).Transactions involving sensitive sectors require prior government approval, particularly where investments originate from countries sharing land borders with India (mainly China).
- Tax Uncertainty and GAAR: Cross-border transactions often attract scrutiny under General Anti-Avoidance Rules (GAAR) and Transfer Pricing Regulations. Past instances like Vodafone’s tax dispute underscore risks of retrospective tax demands.
- Restrictions on Outbound Mergers: Although FEMA (Cross Border Merger) Regulations, 2018 allow outbound mergers, practical implementation remains weak due to:
- Restrictions under ODI (Overseas Direct Investment) Regulations.
- Absence of clear frameworks on shareholder protection, creditor consent, and tax implications in the foreign jurisdiction.
- Limited notified jurisdictions (e.g., USA, UK, Germany, etc.) further restrict flexibility.
- Compliance Burden and Reporting Requirements: Post-merger reporting under FEMA, RBI, and SEBI is burdensome and often requires multiple filings within tight timelines. Any oversight can lead to penalties under FEMA and show-cause notices by regulators.
Recent Judicial and Regulatory Developments
- Sony–Zee Merger Approval and Corporate Governance Scrutiny (2023)
The goal of the merger was to widen and conglomerate entertainment services in India. SEBI initiated a probe into financial irregularities and fund diversion by the Zee promoters.
The National Company Law Tribunal (NCLT) initially withheld final sanction despite prior CCI approval. SEBI’s interim order barred Zee’s CEO from holding directorship, affecting post-merger leadership plans.
This Illustrates and shows how SEBI’s powers under the LODR Regulations and SCRA are now significantly influencing M&A outcomes, even in post-CCI approval stages and demonstrates growing interplay between governance concerns and merger clearances. This highlights the need for alignment between corporate governance and merger regulation.
- HDFC Ltd–HDFC Bank Merger (2023)
The biggest financial sector merger in Indian history, valued at $40 billion, produced a multinational banking giant. RBI provided exemption to merged entity from Cash Reserve Ratio (CRR)/SLR obligations temporarily.
RBI’s practical approach reflects a facilitative shift in M&A regulation for systemic entities. This set up as a precedent for regulator coordination in mega-mergers.
- Updates to FEMA Merger Guidelines (2023)
RBI issued clarifications easing compliance:
- Relaxed valuation norms where no cash consideration is involved (share swap only).
- Greater clarity in reporting timelines and repatriation of assets and liabilities post-merger.
- Competition (Amendment) Act, 2023
Introduced a deal value threshold of INR 2000 crores to cover acquisitions of startups and digital assets not covered under existing turnover-based thresholds. It aimed at regulating global digital players acquiring Indian tech startups (e.g., Facebook–Jio, Amazon–Future Group).
Case Studies
- Amazon.com NV Investment Holdings LLC v. Future Retail Ltd. (2021–2022)
Cross-border investment by Amazon in Future Coupons, linked to Future Retail, and indirect restriction on the latter’s merger with Reliance. Legal Issue involved was whether Amazon’s agreement had veto rights that could block Future-Reliance deal.
The Supreme Court ruled in Amazon’s favour, holding the SIAC emergency award enforceable under Indian Arbitration and Conciliation Act, 1996.
- Piramal Enterprises Ltd v. NCLT Mumbai (2023)
Piramal’s merger with Dewan Housing Finance Corporation Ltd (DHFL) was challenged on the ground that creditors were misclassified and paid unfairly.
The decision reinforces the autonomy of creditors in approving M&A deals during IBC resolution and provides judicial support for merger-driven insolvency resolution plans
- Walmart–Flipkart Deal (2018)
The deal was to purchase 77% stake in Flipkart for $16 billion. CCI cleared the acquisition, but SEBI monitored exit options and minority rights. However, FDI restrictions in multi-brand e-commerce were debated. It reinforced the role of CCI in protecting consumer interest and ensuring fair play in tech-based cross-border M&As.
Emerging Global Trends and India’s Position
- Rise of ESG Due Diligence: M&A deals globally now incorporate Environmental, Social, and Governance (ESG) metrics. Investors demand sustainability audits, especially in sectors like energy and manufacturing.
- Use of AI and Digital Tools in Due Diligence: AI-driven contract analysis and compliance tracking are becoming the norm. India’s legal tech sector is growing, but still lags behind in automation of legal workflows during M&A.
- Regulatory Focus on Tech and Startups: Global regulators are adopting ex-ante competition rules for Big Tech (e.g., EU’s Digital Markets Act). India’s Digital Competition Bill aims to regulate self-preferencing and monopolistic behavior in digital acquisitions.
- SPAC Structures and Cross-Border Listings: Indian companies increasingly seek overseas listing via reverse merger or SPACs, though regulatory clarity is awaited from SEBI and MCA. However, India needs to reform its laws to enable easier dual listings and participation in global capital markets.
- Bilateral Investment Treaty (BIT) Reform: India has terminated several old BITs and introduced a Model BIT (2016 focused on balancing investor protection with state sovereignty. M&A investors are now structuring deals through countries with active BITs (e.g., Singapore, Netherlands).
- India’s Position Globally: India is seen as a growing M&A destination, especially in:
- Pharma (post-COVID consolidation)
- Fintech and e-commerce
- Green energy (international climate finance backing.
However, India still ranks lower in ease-of-doing-business when it comes to exit policies, tax clarity, and court delays.
Conclusion
In my opinion Cross-border mergers and acquisitions serve as essential instruments for corporate restructuring, foreign investment, and strategic expansion. While the legal structure is largely conducive, there remain practical challenges that must be addressed to make the ecosystem truly seamless and investor-friendly. Streamlining multi-agency approvals, modernizing valuation norms, and easing outbound M&A compliance will go a long way in positioning India as a global M&A hub. For law students and professionals alike, understanding the nuances of these transactions is vital to thrive in a corporate legal career.
FAQs
Q1: What is a cross-border merger?
A cross-border merger is a merger involving at least one foreign company and one Indian company. It can be inbound (foreign into Indian) or outbound (Indian into foreign).
Q2: Do all M&As need approval from the Competition Commission of India (CCI)?
Only if they exceed the asset or turnover thresholds specified under the Competition Act, 2002.
Q3: Are arrangements for share swaps permitted in cross-border mergers?
Yes, but they must comply with FEMA regulations and pricing guidelines and receive RBI approval where necessary.