PROJECT REPORT

ON

CROSS-BORDER MERGERS: DEVELOPMENT AND CHALLENGES IN INDIA

Submitted to:
Mr. Surya Raju
(Faculty: Corporate Law)

Submitted By:
Mani Yadav
Roll No: 81
Semester: X
Section: C
B.A. LL.B. (Hons.)

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR (C.G.)

i
 ACKNOWLEDGEMENTS

I feel highly elated to work on the topic ‘CROSS-BORDER MERGERS: DEVELOPMENT

AND CHALLENGES IN INDIA’ because it has significant importance.
I express my deepest regard and gratitude for Faculty of Corporate Law, HNLU, Raipur. His
consistent supervision, constant inspiration and invaluable guidance have been of immense
help in understanding and carrying out the importance of the project report.
I would like to thank my family and friends without whose support and encouragement, this
project would not have been a reality.
I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and through Internet.

Mani Yadav
Semester – X
Roll No. - 81
Section – C
B.A., L.L.B (Hons.)

ii
 TABLE OF CONTENTS

INTRODUCTION..........................................................................................................................2

RESEARCH METHEDOLOGY........................................................................................3

RESEARCH OBJECTIVE.................................................................................................3

SOURCES.............................................................................................................................3

NEED OF CROSS BORDER MERGERS.......................................................................................4

DEVELOPMENT OF CROSS BORDER MERGERS IN INDIA.........................................................8

LEGAL FRAMEWORK BEFORE 2017.....................................................................................9

INBOUND CROSS BORDER M&AS IN INDIA AND THE FEMA LAWS....................9

I. FDI Scheme..............................................................................................................13

III. Investment by NRIs/OCBs under the Portfolio Scheme..................................14

REGULATION OF OUTBOUND CROSS BORDER M&A TRANSACTIONS

UNDER FEMA LAWS......................................................................................................15

I. Direct Investment in a Joint Venture/Wholly Owned Subsidiary......................16

Sources for investment.....................................................................................................17

II. Investment in a foreign company by ADR/GDR share swap or exchange........17

III. RBI approval in special cases.............................................................................18

V. Transfer by way of sale of shares of a JV/WOS................................................19

VI. Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries.............20

VII. Obligations of the Indian Party..........................................................................20

LEGAL FRAMEWORK AFTER 2017.....................................................................................21

CHALLENGES OF CROSS BORDER MERGERS IN INDIA..........................................................25

CONCLUSION............................................................................................................................32

BIBLIOGRAPHY........................................................................................................................33

1
 INTRODUCTION
The corporate sector all over the world is restructuring its operations through different types
of consolidation strategies like mergers and acquisitions in order to face challenges posed by
the new pattern of globalization, which has led to the greater integration of national and
international markets. The intensity of such operations is increasing with the de-regulation of
various government policies as a facilitator of the neo-liberal economic regime. Earlier also
the firms were widely using consolidation strategies, but one of the striking features of the
present wave of mergers and acquisitions is the presence of a large number of cross-border
deals. The intensity of cross-border operations recorded an unprecedented surge since the
mid-1990s and the same trend continues (World Investment Report, 2000). Earlier, foreign
firms were satisfying their market expansion strategy through the setting up of wholly owned
subsidiaries in overseas markets (Jones, 2005), which has now become a ‘second best option’
since it involves much time and effort that may not suit to the changed global scenario, where
the watchword is ‘plaction’, that is plan and action together. Thus getting into cross-border
mergers and acquisitions became the ‘first-best option’ to the leaders and others depended on
the ‘follow-the-leader’ strategy.
The Indian corporate sector too experienced such a boom in mergers and acquisitions that led
restructuring strategies especially after liberalization, this is due to the increasing presence of
subsidiaries of big Multi-National Corporations (MNC) here as well as due to the pressure
exerted by such strategies on the domestic firms. Besides, many MNCs realized the fact that
the Indian market is a consumer base to meet their desired objectives. Thus the entry is
unavoidable. They found that resorting into mergers, acquisitions and similar strategies is an
easy way of entry into Indian market without much cost of time and money. In order to
facilitate globalization, Indian government also implemented various policies which marked a
paradigm shift in the operation of the domestic firms as it removed the patronage enjoyed by
the domestic firms under the assumptions like Infant Industry argument and opened them for
the free play of market forces. More importantly, globalization reduced the product life
cycles and the firms began to bring out new products quickly to the market as compared to
the past. Computer aided manufacturing helped to reduce the time needed for production.
Shortened product life cycles meant high R&D intensity and this has to be recouped before
the technology becomes obsolete, which becomes especially important if a rival firm ‘wins-
the-race’ to innovate a new generation product. These circumstances again prompted firms to
engage in various kinds of agreements to reduce the high risk associated with innovation and

2
to become successful through the sharing of tangible and intangible assets. Given this broad
context, the present study is an attempt to analyse the changing nature of foreign investment
in the form of mergers and acquisitions using a new database created, which prevented many
scholars from making detailed studies. In the second section we will be discussing why firms
are crossing borders and the global scenario of cross-border deals and its significance in
world Foreign Direct Investment, the third section will be dealing with the extent and nature
of mergers and acquisitions in India with special emphasis on cross border deals. The fourth
section is an attempt to explore the new pattern of internationalization of Indian firms in the
form of overseas acquisitions and the fifth section is concluding observations.

RESEARCH METHEDOLOGY
This study is partly doctrinal and partly non-doctrinal. It is doctrinal as it deals with the
provisions of Companies Act, 2013 and Companies Act, 1956 which is laid down by the
Ministry of Corporate Affairs and non-doctrinal as it deals with the challenges it has created.
Secondary sources have been largely used to collect and analyze data. Books, articles and
web pages have been referred to and footnotes have been provided wherever necessary.

RESEARCH OBJECTIVE
1. Introducing the need of Cross border mergers.
2. Analyzing the development of legal framework of Cross border mergers in India
3. Analyzing the challenges the present framework poses to the corporate world.
SOURCES
The researcher has studied from primary sources such as statutes, case laws, reports and
secondary sources including text books, research articles from various law journals and web
resources.

3
 NEED OF CROSS BORDER MERGERS
The corporate sector all over the world is restructuring its operations through mergers and
acquisitions in an unprecedented manner in order to successfully overcome the challenges
posed by globalization. One of the striking features of the present mergers and acquisitions
scenario is the presence of a large number of cross-border deals, which is an easier way of
internationalization comparing Greenfield mode of entry. Further, this is leading to a gradual
shift in the organic ways of foreign investment into inorganic means of brownfield
investment. In this context, the present study tries to understand the nature and extent of such
deals in India in the backdrop of global scenario. The present study also suggests that like the
overall FDI, there has been high national difference in attracting brownfield investment. Not
only the world FDI is moving in tandem with the incidence of cross-border mergers and
acquisitions, but also the service sector mergers and acquisitions are the major force driving
world FDI during the study period. Even though Indian merger scenario is still in a nascent
stage, a substantial proportion of FDI came through this route in recent period. With the help
of a firm level database on mergers and acquisitions we have observed three distinct phases
of merger activity in India. The pre mid 1990s merger scenario was dominated by domestic
deals, while there is an increasing presence of cross-border deals within India since the mid-
1990s. Finally, we witness another stage of overseas deals during the post 2000 period, which
shows that the overall macro-economic scenario over the years is shaping the motives of
merger. The study also tries to understand the nature, extent and structure of these deals in
India. In this paper we argue that the current surge in cross-border deals should be viewed in
a multi-factor dimension, which involves the push factors from home country such as market
constraint, need for low priced factors of production, increasing global competition as well as
the pull factors from foreign firms such as the wider market, technology and efficient
operation.
Jack Behrman (1972), distinguished four major types of foreign investors based on the
underlying motives, which later adapted and extended by Dunning1.
They are 1) Resource seekers, 2) Market seekers, 3) Efficiency seekers and 4) Strategic assets
or Capability seekers. Presently, firms have multiple objectives and they fall under more than
one of these categories. We shall discuss each of these categories and try to incorporate how
mergers and acquisitions enable to achieve the desired objectives of each of these categories
of investors2.
1
See Dunning (1993) for a detailed discussion.
2
Dunning also discussed about Escape Investment, Support Investment and Passive Investments.

4
1) The Resource Seekers (RS)
RS include the firms, which are investing abroad for obtaining specific resources at lower
prices. They are either prompted by the non-availability of these resources in home market or
lower prices prevailing in foreign locations compared to their home country. There may be
three types of Resource Seekers such as, seeking physical resources6, seeking skilled and
semi-skilled labourers at lower cost and those, which seek technological capability,
management or marketing expertise, and organizational skills. Under all these categories the
major motivation is to make the investing enterprise more profitable and competitive in the
market it serves or intends to serve than the previous levels.
2) The Strategic Asset Seekers (SS)
This group includes the firms, which try to sustain or enhance their international
competitiveness or weaken that of other firms through acquiring the assets of foreign
corporations. The major motive of SS is to add to the existing product portfolio of the firm
rather than to exploit the marketing and other type of synergies.

3) The Market Seekers (MS)

As the name suggest, these are firms, which seek new markets in order to expand and
strengthen their operations outside the home country. They invest in a particular country or
region to supply goods or services to market in these or adjacent countries. One of the major
reasons for the emergence of market oriented FDI is due to the need to “follow-the leader”
and to “exchange the threats”. This becomes more important under the present global
scenario, where most of the markets are characterized with oligopolistic behaviour. MNEs
may consider it necessary to have physical presence in leading markets served by its
competitors and construct production units and research centers there. This will enable them
to adapt their products to the local needs and to indigenous resource and capabilities, which is
essential to compete with the local firms. It is argued that local firms have better information
about the economic environment of their country than do foreign firms, and foreign firms
should possess countervailing capabilities in order to overcome this. Moreover, subsidiaries
in foreign locations will help to reduce the production and transaction cost to a great extent
compared to export from home market8.
4) The Efficiency Seekers (ES) or Rationalized FDI
These are firms, which try to operate more efficiently by deriving economies of scale and
scope and by reducing risk. This is essentially rationalizing the structure of the established
5
resource based and market seeking investment. They are mainly aiming to take advantage of
different factor endowments, cultures, institutional arrangements, economic systems and
policies and market structures by concentrating production in a limited number of locations.
There are two types of Efficiency Seekers. First is to take advantage of the availability and
cost of traditional factor endowments in different countries and the second is to take
advantage of economies of scale and scope. Generally, Rationalized FDI and Strategic Asset
Seekers are moving together to achieve their desired objectives.
When we look at the advantages of mergers and acquisitions as we discussed above, we can
see that most of these categories will be able to achieve their objectives through mergers and
acquisitions in a better way compared to Greenfield investment. The entry through mergers
and acquisitions will enable the firms to attain these critical resources in an easy way
compared to the Greenfield investment, which will take much more time and effort. The
Resource Seekers which are more interested in getting the physical and labour resources at
cheaper rates will be better off through mergers and acquisitions compared to Greenfield
investment since they will be able to use the already established resources of the partner firm.
They can access the local firm’s cheap labour and such other resources. The case of Strategic
Asset Seekers is almost the same as the Resource Seekers. They can very well strengthen or
diversify their product portfolio through acquiring the brands of their partner and make the
firm more competitive. The consolidated operation will again help to reduce the
competitiveness of their competitors.
Regarding the other two types of investors i.e. the Market Seekers and Efficiency Seekers,
the advantages of market power and efficiency creation through mergers and acquisitions is
well established. As we said earlier, both of these categories of firms are aiming at the
creation of economies of scale and scope and thereby market power. If they are following
Greenfield mode of entry, major advantages to them are the expansion of their market to a
foreign country and the availability of factors of production at cheaper rates. Whereas if they
are entering a foreign market through mergers and acquisitions, they can achieve these
objectives and more, with less cost and effort compared to fresh entry. They can access and
share the already established market and avail resources of an established firm in a better way
and avoid the problems of culture, language etc. Not only they can achieve the benefits of
large scale of operation but also the reduction of many expenses such as marketing,
advertisement, distribution, R&D etc through avoidance of duplicate expenses. The effect of
cutting R&D expenditure would be too high since it will save much time, effort and cost.
Moreover from a firm’s point of view, they can raise the market power to a large extent
6
through the reduction of number of firms in the industry and the expansion of operation,
which enable them to have a say in the determination of prices.

7
 DEVELOPMENT OF CROSS BORDER MERGERS IN INDIA

Cross-border mergers and acquisitions (hereinafter collectively referred to as "M&As") have

become increasingly prevalent across the world in recent years as a result of globalisation,
liberalisation, technological advances, and the resulting highly competitive market climate.
Companies have traditionally used mergers and acquisitions (M&As) to restructure their
businesses.
While numerous reasons for the exponential growth of M&As will be addressed later in this
article, the most significant of them all is that, as a result of intensified competition and
advanced technologies, it has become impossible for corporations and other businesses to
move forward, requiring them to join forces with other parties.
When looking back over the last 25 years, it's clear that there have been two big waves of
cross-border mergers and acquisitions. The first surge occurred in the late 1980s, and the
second, a large cross-border purchasing binge, occurred in the second half of the 1990s. 1st
It's worth noting that the global economy grew at a comparatively fast pace, with widespread
corporate restructuring.
Coming to India, for about ten years after independence, India was not open to foreign
investment for a variety of purposes.3 Following that, India became a closed economy as a
result of policy changes. As a result, inviting foreign investment, let alone investing abroad,
became virtually impossible for an Indian business company. Since the government adopted a
new economic strategy in 1991, the idea of mergers and acquisitions gained traction in India.4
 

INBOUND CROSS BORDER M&AS IN INDIA AND THE FEMA LAWS

 
When we speak of inbound cross-border M&As in India, we are referring to foreign
investment in the country. As stated earlier, foreign investment in India, i.e. investment in

3
Platt Gordon, CROSS-BORDER MERGERS SHOW RISING TREND AS GLOBAL ECONOMY
EXPANDS, available at http://findarticles.com/p/articles/mi_qa3715/is_200412/ai_n9466795/ .
4
Chaitanya K., INDIAN ECONOMY IN THE NEXT FIVE YEARS: KEY ISSUES AND CHALLENGES,
2005-2009, available at http://ideas.repec.org/a/eaa/aeinde/v4y2004i1_30.html

8
India by a “person resident outside India”, (hereinafter to be interchangeably used with
“nonresident”) 5 is governed by FEMA 20.6
 
Citizens of Bangladesh, Pakistan, and Sri Lankans living outside India, as well as entities
based in Bangladesh and Pakistan, are prohibited from purchasing shares or debentures
issued by Indian firms, or any other Indian protection, without first obtaining RBI
permission.7
 
Further, persons resident outside India are permitted to purchase shares or convertible
debentures offered on a rights basis by an Indian company 8 which satisfies the conditions
restated herein below9:
(i) “The offer on right basis does not result in increase in the percentage of foreign equity
already approved, or permissible under the Foreign Direct Investment Scheme in
terms of FEMA 20;

5
. The term “person resident outside India” is defined as meaning “a person who is not resident in India” under
Section 2 (w) of FEMA. Therefore, for understanding the meaning of the term “person resident outside India” it
is necessary to understand the meaning of the term ‘person’ and “person resident in India”. ‘Person’ is defined
under Section 2 (u) of FEMA as:
“(a) an individual,
(b) a Hindu undivided family,
(c) a company,
(d) a firm,
(e) an association of persons or a body of individuals, whether incorporated or not,
(f) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(g) any agency, office or branch owned or controlled by such person.”
 
Section 2 (v) of FEMA defines “person resident in India” as meaning:
“(i) a person residing in India for more than 182 days during the course of the preceding financial year but
does not include -
(A) a person who has gone out of India or who stays outside India, in either case -
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an
uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than -
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an
uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India.”
6
. i.e. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000.
7
. Regulation 5 (1), FEMA 20.
8
. Regulation 6 (1), FEMA 20.
9
. Regulation 6 (2), FEMA 20.
 

9
(ii) The existing shares or debentures against which shares or debentures are issued by the
company on right basis were acquired and are held by the person resident outside
India in accordance with FEMA 20;
(iii) The offer on right basis to the persons resident outside India is at a price which is not
lower than that at which the offer is made to resident shareholders;”
 
“The rights shares so acquired shall be subject to the same conditions regarding repatriation
as applicable to original shares.10 Further, under FEMA 20, an Indian company has been
permitted to issue shares to its employees or employees of its joint venture / subsidiary
abroad, who are non-resident, either directly or through a trust.”11
 
“Under Regulation 7 of FEMA 20, once a scheme of merger, demerger or amalgamation has
been approved by the court, the transferee company (whether the survivor or a new company)
is permitted to issue shares to the shareholders of the transferor company who are persons
resident outside India, subject to the condition that the percentage of non resident holdings in
the company does not exceed the limits for which approval has been granted by the RBI or
the prescribed sectoral ceiling under the foreign direct investment policy set under the FEMA
laws. If the new share allotment exceeds such limits, the company will have to obtain the
prior approval of the FIPB and the RBI before issuing shares to the non residents.”12
 
General permission has also been granted for transfer of shares / convertible debentures by a
non-resident as follows:13
(i) “Non-residents other than non-resident Indians (“NRIs”) or Overseas Corporate
Bodies (“OCBs”)14 may transfer shares / convertible debentures to any non-resident,
provided that the transferee should have obtained permission of the Central
Government, if he had any previous venture or tie-up in India through investment in
any manner or a technical collaboration or trademark agreement in the same or allied
field in which the Indian company whose shares are being transferred is engaged;

10
. Regulation 6 (3), FEMA 20.
11
. Regulation 8, FEMA 20.
12
. Proviso to Regulation 7 (1) (a), FEMA 20.
13
. Regulation 9, FEMA 20.
14
. ‘Overseas Corporate Body’ or OCB means a company, partnership firm, society and other corporate body
owned directly or indirectly to the extent of at least 60% by NRIs and includes overseas trust in which not less
than 60% beneficial interest is held by NRIs, directly or indirectly, but irrevocably. See, MASTER CIRCULAR
ON FOREIGN INVESTMENT IN INDIA, p. 4, Master Circular No.2/2009-10, dated 1 July 2009.

10
(ii) NRIs or OCBs are permitted to transfer by way of sale, any shares or convertible
debentures of Indian companies to other NRIs or OCBs only;
(iii) Non-residents are permitted to transfer shares / debentures of any Indian company to a
resident by way of gift.”
  
For the purpose of FEMA 20, investment in India by a non-resident has been divided into the
following 5 categories and the regulations applicable have been specified in respective
schedules as under:
 
1. “Investment under the Foreign Direct Investment Scheme (“the FDI Scheme”).
2. Investment by Foreign Institutional Investors (“FIIs”) under the Portfolio Investment
Scheme (“the Portfolio Investment Scheme”).
3. Investment by NRIs/OCBs under the Portfolio Investment Scheme.
4. Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.
5. Purchase and sale of securities other than shares or convertible debentures of an
Indian company by non-residents.”
 The following are the prominent features of the schemes listed above:
 
 
REGULATION OF OUTBOUND CROSS BORDER M&A TRANSACTIONS UNDER
FEMA LAWS
 
As stated, any outbound cross border M&A involving an Indian company, i.e. foreign
investment by an Indian company in a foreign company is governed by FEMA and FEMA
19. There are only certain special circumstances under which an Indian company is permitted
to make an investment in a foreign company. An Indian party is not permitted to make any
direct investment in a foreign entity engaged in real estate business or banking business
without the prior approval of RBI.15
 
There are several routes available to an Indian company which intends to invest in a foreign
company, some of which are described herein below:
 

15
. Regulation 5, FEMA 19.
 

11
I. Direct Investment in a Joint Venture/Wholly Owned Subsidiary
RBI has been continuously relaxing the provisions relating to direct investment in a joint
venture or a wholly owned subsidiary. Owing to these relaxations the percentage of
investment by Indian companies in joint ventures and wholly owned subsidiaries abroad has
been continuously rising.
 
General conditions to be fulfilled for making an investment
An Indian company is permitted to make a direct investment in a joint venture or a wholly
owned subsidiary outside India, without seeking the prior approval of RBI subject to the
following conditions being fulfilled16:
1. The total financial commitment of the Indian party will be capped at USD 50 Million
or its equivalent in a block of 3 financial years including the year in which the
investment is made, except investment in a Joint Venture/Wholly Owned Subsidiary
in Nepal and Bhutan.
2. In respect of direct investment in Nepal or Bhutan, in Indian rupees the total financial
commitment shall not exceed Indian Rupees 1,200 Million in a block of 3 financial
years including the year in which the investment is made;
3. The direct investment is made in a foreign entity engaged in the same core activity
carried on by the Indian company;
4. The Indian company is not on the RBI’s caution list or under investigation by the
Enforcement Directorate.
5. The Indian company routes all the transactions relating to the investment in the joint
venture or the wholly owned subsidiary through only one branch of an authorized
dealer to be designated by it. However the Indian company is permitted to designate
different branches of authorized dealer for onward transmission to the RBI.
6. The Indian company files the prescribed Form ODA to the designated branch of the
authorised dealer for onward transmission to the RBI.
 
Sources for investment
The Regulations also prescribe that any direct investment (as discussed above) must be made
only from the following sources like EFFC account, Drawal of foreign exchange and
ADR/GDR proceeds etc17

16
. Regulation 6, FEMA 19.
17
. Regulation 6 (3), FEMA 19.

12
An Indian Party is also eligible to extend a loan or a guarantee to or on behalf of the Joint
Venture/ Wholly Owned Subsidiary abroad, within the permissible financial commitment, if
the Indian Party has made investment by way of contribution to the equity capital of the Joint
Venture.18
 
Under Regulation 10, RBI is required to allot a unique identification number for each Joint
Venture/Wholly Owned Subsidiary outside India and the Indian party is in turn required to
quote such number in all its communications and reports to the Reserve Bank and the
authorised dealer.19
 
II. Investment in a foreign company by ADR/GDR share swap or exchange
An Indian company can also invest in a foreign company which is engaged in the same core
activity in exchange of ADRs/GDRs issued to the foreign company in accordance with the
ADR/GDR Scheme for the shares so acquired provided that the following conditions are
satisfied20:
1. “The Indian company has already made an ADR/GDR issue and that such
ADRs/GDRs are currently listed on a stock exchange outside India.
2. The investment by the Indian company does not exceed the higher of an amount
equivalent to USD 100 Million or an amount equivalent to 10 times the export
earnings of the Indian company during the preceding financial year.
3. At least 80% of the average turnover of the Indian Party in the previous 3 financial
years is from the activities/sectors included in Schedule or the Indian Party has an
annual average export earnings of at least Indian Rupees1,000 Million in the previous
3 financial years from the activities/sectors included in Schedule 1 to FEMA 19;
4. The ADR/GDR issue is backed by a fresh issue of underlying equity shares by the
Indian company.
5. The total holding in the Indian company by non-resident holders does not exceed the
prescribed sectoral cap.
6. The valuation of the shares of the foreign company is done in the following manner:
a. If the shares of the foreign company are not listed, then as per the
recommendation of an investment banker, or
18
. Regulation 6(5), FEMA 19.
19
. Regulation 10, FEMA 19
20
. Regulation 8, FEMA 19.

13
 b. If the shares of the foreign company are listed then as per the formula
prescribed therein.”
 
Within 30 days from the date of issue of ADRs/GDRs in exchange of acquisition of shares of
the foreign company, the Indian company is required to submit a report in Form ODG with
RBI.21
 
III. RBI approval in special cases
In the event that the Indian company does not satisfy the eligibility conditions under
Regulations 6, 7 and 8, as stated hereinabove, it may make an application to RBI for special
approval.22[33] Such application for direct investment in Joint Venture/Wholly Owned
Subsidiary outside India, or by way of exchange for shares of a foreign company, is to be
made in Form ODI, or in Form ODB, respectively. In considering the application, the RBI
may take into account the following factors23:
1. Prima facie viability of the joint venture/wholly owned subsidiary abroad.
2. Contribution to external trade and other related benefits.
3. Financial position and business track record of the Indian company and the foreign
company; and
4. Expertise and experience of the foreign company in the same or related line of activity
of the joint venture or the wholly owned subsidiary abroad.
 
IV. Direct investment by capitalization:
As per Regulation 11, an Indian Party is also entitled to make direct investment outside India
by way of capitalization in full or part of the amount due to the Indian Party from the foreign
entity as follows:-
(i) Payment for export of plant, machinery, equipment and other goods/software to the
foreign entity;
(ii) Fees, royalties, commissions or other entitlements of the Indian party due from the
foreign entity for the supply of technical know-how, consultancy, managerial or other
services, however where the export proceeds have remained unrealized beyond a
period of 6 months from the date of export, such proceeds cannot be capitalized
without the prior permission of RBI.
21
. Regulation 8(2), FEMA 19.
22
. Regulation 9, FEMA 19.
23
. Ibid.

14
 
 
V. Transfer by way of sale of shares of a JV/WOS
 
No Indian party is entitled to sell any share or security held by it in a Joint Venture or Wholly
Owned Subsidiary outside India, to any person, except as otherwise provided in FEMA laws
or with the permission of RBI.24
 

VI. Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries

 
Further, FEMA 19 permits an Indian party to transfer, by way of pledge, shares held in a
Joint Venture or Wholly Owned Subsidiary outside India as a security for availing of fund
based or non-fund based facilities for itself or for the Joint Venture or Wholly Owned
Subsidiary from an authorized dealer or a public financial institution in India.25
 
VII. Obligations of the Indian Party
 
Under Regulation 15, an Indian party which has acquired foreign security by way of direct
investment in accordance with FEMA 19, is obliged to:
(i) Receive share certificates or any other document as an evidence of investment in the
foreign entity to the satisfaction of RBI within 6 months, or such further period as
RBI may permit, from the date of effecting remittance or the date on which the
amount to be capitalized became due to the Indian party or the date on which the
amount due was allowed to be capitalized;
(ii) Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty,
technical fees etc., within 60 days of its falling due, or such further period as RBI may
permit;
(iii) Submit to RBI every year within 60 days from the date of expiry of the statutory
period as prescribed by the respective laws of the host country for finalization of the
audited accounts of the Joint Venture/Wholly Owned Subsidiary outside India or such
24
. Regulation 16, FEMA 19.
 
25
. Regulation 17, FEMA 19.

15
 further period as may be allowed by Reserve Bank, an annual performance report in
Form APR in respect of each Joint Venture or Wholly Owned Subsidiary outside
India set up or acquired by the Indian party and other reports or documents as may be
stipulated by RBI.26

26
. Regulation 15, FEMA 19.

16
 LEGAL FRAMEWORK AFTER 2017
A foreign business could combine with an Indian company under the previous Companies
Act, 1956 (sections 391-394), but an Indian company could not merge with a foreign
company. This was required to ensure that the corporation that existed after the acquisition
was still an Indian company under the supervision of Indian regulatory authorities. This work
offer was also embraced by the courts27.
“Importantly, Indian companies can only merge with foreign companies in certain specified
jurisdictions. These are (i) jurisdictions whose securities regulator is a member of IOSCO or
has a bilateral memorandum of understanding with SEBI, (ii) those whose central bank is a
member of the Bank for International Settlements (BIS), and (iii) those who have not been
identified in the public statement of the FATF as regards certain specified matters. These
details are contained in Annexure B of the Rules.
The notification of section 234 marks an important step, and will certainly provide greater
flexibility towards cross-border M&A and restructuring. However, , several other matters
such as taxation must fall in place before one can expect a market for cross-border mergers to
develop.”
The Ministry of Corporate Affairs notified section 234 of the Companies Act, 2013, as well
as revisions to the Companies (Compromises, Arrangements, and Amalgamations) Rules,
2016 in the form of Rule 25A on April 13, 2017, marking a watershed moment in India's
cross-border merger system. When read together, they cause an Indian company to combine
with a foreign company, resulting in a new entity.
However, the successful implementation of a cross-border merger between an Indian
company (“I”) and a foreign company (“F”) is fraught with a number of difficulties. For
example, say ‘I’ is the transferor company, F is the transferee company and ‘G’ is the
resultant entity, which is foreign, what happens to the ownership of assets in India? Issues
such as management and administration of assets in India by a foreign entity pose a number
of compliance hurdles. Against this milieu, I attempt to analyse the existing provisions on
foreign exchange laws and regulations.
The Companies Act, 2013
1. Section 234 now authorises mergers of an Indian company with a foreign company,
with the resultant entity being either Indian-controlled or foreign-controlled.
2. Sections 230 to 232 apply similarly to cross-border mergers, irrespective of whether
the resultant entity is Indian or foreign.
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Andhra Pradesh High Court in re Moschip Semiconductor Limited.

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 3. Section 234(2) further provides that the scheme of merger may include payment of
consideration to the shareholders of the merging company in cash, or in Depository
Receipts, or partly in cash and partly in Depository Receipts, as the case may be. In
the event the company decides to adopt the Indian Depositary Receipts route, the
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015 will be
applicable.

The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules,

2017
1. The newly introduced Rule 25A allows for a merger between a foreign company and
an Indian company after:
(a) procuring approvals from the Reserve Bank of India; and
(b) complying with sections 230 to 232 of the Companies Act, 2013 and the
Companies (Compromises, Arrangements and Amalgamations) Rules,
2016.
2. Regarding valuation, the transferee company shall ensure that it is in accordance with:
(a) the valuation conducted by a valuer who is a member of a recognised
professional body in the jurisdiction of the transferee company; and
(b) Internationally accepted principles on accounting and valuation.
3. However, an Indian company may only merge with foreign companies from the
following jurisdictions:
(a) whose securities market regulator is a signatory to the International
Organization of Securities Commission’s Multilateral Memorandum of
Understanding (Appendix A Signatories) or a signatory to a bilateral
Memorandum of Understanding with the Securities and Exchange Board
of India (“SEBI”), or
(b) whose central bank is a member of Bank for International Settlements
(BIS) AND one which is not identified in the public statement of Financial
Action Task Force (FATF) as:
(i) a jurisdiction having a strategic Anti-Money Laundering or Combating the
Financing of Terrorism deficiencies to which counter measures apply; or

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 (ii) a jurisdiction that has not made sufficient progress in addressing the
deficiencies or has not committed to an action plan developed with the
Financial Action Task Force to address the deficiencies.

The Foreign Exchange Management Act, 1999 (‘FEMA’)

1. From the example set out earlier, ‘G’ will be considered a ‘foreign company’ as it
qualifies as a person resident outside India in accordance with section 2(u) read with
section 2(w) of FEMA.
2. In accordance with section 6(5) of FEMA, a foreign company can hold, own,
transfer or invest in Indian currency, security or any immovable property situated in
India if such currency, security or property was acquired, held or owned by such
person when he was resident in India or inherited from a person who was resident in
India.
3. FEMA, therefore, allows for a foreign company to hold assets in India.
4. The Foreign Exchange Management (Cross Border Merger) Draft Regulations, 2017
(the ‘Draft Regulations’).
Interestingly, within 13 days of the notification of section 234 and Rule 25A, the Reserve
Bank of India had published draft regulations to deal with the implementation of cross border
mergers. These Draft Regulations were open to public comments until May 9, 2017. The final
version of these regulations is yet to be notified.
To answer the question posed earlier, Draft Regulation 5 lends some credence. It pertains to
outbound mergers between an Indian company and foreign company where the resultant
company is foreign. Sub-regulation (c) of the draft allows for the resultant foreign company
to acquire and hold any asset in India, which it is permitted to acquire under the provisions of
FEMA and the Rules or Regulations framed thereunder. Furthermore, the assets can be
transferred in any manner for undertaking a transaction permissible under the FEMA, Rules
or Regulations.
As per sub-regulation (d) of the draft, if the asset or security is not permitted to be acquired or
held by the resultant foreign company under FEMA, Rules or Regulations, it shall sell such
asset or security within a period of 180 days from the date of sanction of the scheme of cross
border merger, and the sale proceeds shall be repatriated outside India immediately through
banking channels.

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It is interesting to note that sub-regulation (c) authorises the holding of any asset while sub–
regulation (d) of the draft creates a dichotomy between a resultant foreign company holding
an asset and a security. It is unclear why this dichotomy exists. Perhaps the final version of
the Regulations will remedy this anomaly.
Master Direction dated January 1, 2016 on the Acquisition and Transfer of Immovable
Property under FEMA
A Master Direction proceeds to compile and consolidate rules, regulations and circulars
framed by the Reserve Bank of India pertaining to various foreign exchange issues and
transactions. Clause 6, Part II of this Master Direction deals with the acquisition of
immovable property by a person resident outside India for carrying on a permitted activity.
Here I analyse the impact of this Master Direction on cross-border mergers.
Only a branch or office in India established by a person resident outside India, other than a
liaison office, may acquire immovable property in India which is necessary for or incidental
to the activity carried on in India by such branch or office. Therefore, this necessarily means
that the resultant foreign company has to set up a branch office to administer the assets in
India, which means complying with the FEMA Master Direction on Establishment of Branch
Office (BO)/ Liaison Office (LO)/ Project Office (PO), or any other place of business in India
by foreign entities, issued on January 1, 2016.

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 CHALLENGES OF CROSS BORDER MERGERS IN INDIA

1. Status of Subsidiary Private Companies in India.

The Ministry of Corporate Affairs’ (“MCA”) recent issuance of a notification providing for
exceptions, modifications and adaptations in the application of the Companies Act, 2013 (the
“2013 Companies Act”) to “private companies” has revived the debate in India on the status
of Indian incorporated private companies, especially those that are subsidiaries of foreign
bodies corporate. The key issue is this: do such “private companies” retain their incorporation
status for all purposes of the 2013 Companies Act; or do they become “public companies”
under the 2013 Companies Act? 
The issue, thus framed, might appear to present a purely legal debate, or one of semantics. 
The need for clarity on which companies fall into the bucket of “private companies” (and,
conversely, which don’t and are to be treated as “public companies”) has now come to
acquire great significance given the exceptions or exemptions provided to those companies
regarded as “private companies”.  For instance, “private companies” do not now need to
follow the strict differentiations between equity and preference share capital (and their
respective segregated economic and, in particular, voting rights), which has a direct impact
on the range, scope, efficacy and enforceability of a wide range of such economic and other
rights attaching to investors’ share capital.
Upon a review of the applicable legal provisions and the current state of the law, it would be
fair to conclusively conclude – it is argued in this post – that a private company subsidiary in
India of an overseas body corporate holding company will continue to be a “private
company” for purposes of the 2013 Companies Act, and such a private company is not
caught-up in those provisions of the 2013 Companies Act deeming it to be a “public
company”.  

The reasoning is as follows:

A)        Under the 2013 Companies Act [proviso to Sec. 2(71))], a “company” which is
a subsidiary of a company, not being a private company(emphasis added), is deemed to be a
public company for the purposes of that Act, even where such subsidiary company continues
to be a private company by its articles. In this post, for ease of reference, this provision is
called as the “deeming provision”.

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In other words, the incorporation status in India of a “company” (which term refers only to
those companies incorporated in India under applicable Indian law at the relevant time [Sec.
2(20)]), is irrelevant when it comes to deeming any such Indian private company as an Indian
public company on the basis of it being a “subsidiary” of a “company, not being a private
company”.
This word (“subsidiary”) and this phrase (“company, not being a private company”), as used
in this context, are important to analyze, as follows:
B)        A “company, not being a private company” must be taken to be a reference only to an
Indian company – as the definition of “company” [Sec. 2(20)] and “private company” [Sec.
2(68)] make expressly clear, these provisions and this phrase are restricted in operation under
Indian law only to those entities, thus described, as incorporated in India and having the
necessary features under Indian law.  
The Companies Act, 1956 (the “1956 Companies Act”) [Sec. 3(1)(iv)(c)] had the same
provision – a “public company” covers even a private company which is a subsidiary of a
company which is not a private company – where the coverage of the term “public company”
in the holding – subsidiary matrix did not extend to overseas holding companies.  A fine
counter argument in this behalf as to inclusion of “bodies corporate” (i.e., entities
incorporated overseas) within the ambit of the holding -subsidiary relationship is dealt with in
point # (D) below.
C)        The interpretation of the term “subsidiary” used in the above deeming provision, can,
therefore, only mean be in reference to an Indian holding company, as the phrase “company,
not being a private company” clearly demonstrates.  
In other words, the focus shifts from purely an interpretation of just the term “subsidiary”, to
an appreciation that the deeming provision only kicks in when the nature or type of the
holding company is clear – that holding company must be one which is a “company, not
being a private company”.  
And, it is manifest that that phrase and the reference to “company” and “private company”
therein, covers only Indian incorporated holding companies; thereby, meaning that the
deeming provision is only triggered in the Indian subsidiary – holding context, and not in the
overseas holding context. 
This conclusion is further corroborated if one were to examine the legislative background
leading up to the 2013 Companies Act. The deeming provision language in the concept paper
in 2004 on the draft Companies Bill issued by the MCA stipulated that an Indian company
subsidiary of an overseas body corporate incorporated outside India (which would be a public
22
company within the meaning of Indian law, if incorporated in India), shall be a public
company.  
In other words, the proposal as contained in the concept paper was to do away entirely with
the benefit of Sec. 4(7) of the 1956 Companies Act, and include ALL overseas body
corporate-held subsidiaries (including wholly owned ones) within the rubric of “public
company” in India on such deemed basis.  It may be mentioned in passing that there are
striking similarities in this position with that of a discussion recorded by the Companies Act
Amendment Committee of 1957 that preceded the insertion of Sec. 4(7) into the 1956
Companies Act, which stated:
“As regards the treatment of private companies, the entire share capital of which is
owned by one or more foreign bodies corporate, it is a matter of economic and
financial policy for Government to decide, having regard to the position of foreign
investments in this country generally, whether or not such private companies should
continue, as at present, to remain outside the restrictions imposed on private
companies which are subsidiaries of Indian public companies or whether they should
henceforth be made subject to these restrictions.  If an alteration of law in this
respect is considered desirable, a provision should be inserted in section 4 to the
effect that “a private company, which is registered in India and which is
a  subsidiary of a foreign public company, shall be deemed to be a subsidiary of a
public company for all purposes of this Act”
So it seems that, despite the passage of almost fifty years (as in 2000), the Government of
India (or, at least, some parts of the Government) was still willing to go by the economic
logic of a vastly different, much earlier era, in our nation’s development; and that too a view
which, ultimately, came to be rejected by the Government of the day, as evident in Sec. 4(7)
of the 1956 Companies Act.
However, this proposal as in the concept paper was dropped (and no further discussions on
this topic were elicited in the various subsequent committee reports that redrafted the law)
and instead, the provision as now enacted simply referenced “a subsidiary of a company, not
being a private company” – meaning thereby that the legislative intent, as can be discerned
from a plain reading of the statute, is also demonstrated (or underscored) by the way in which
the current provision found itself onto the statute books.
D)        As a result, it is not surprising to find – and, indeed, on the basis of points (B) and (C)
above and in order to read the statute harmoniously – that the reference in the definition of
“subsidiary” [Sec. 2(87)] to cover the holding relationship even qua an overseas “body
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corporate” is only for purposes of that clause(and not for the entire 2013 Companies Act),
which does not, therefore, extend to the deeming provision; and which this author believes
(regardless of whether this is a drafting error or an oversight), to be a restrictive stipulation
that needs to be interpreted correctly in context, as regards its applicability to the entire 2013
Companies Act.  This analysis does not even then need to examine the issue as to whether
that particular provision in Sec. 2(87) has to be read into the deeming provision, as even the
basis for such reading together does not arise, if the scheme separating the deeming provision
and 2(87) is properly appreciated in the case of an overseas body corporate holding company.
In other words, since Sec. 2(87) includes a substantive provision that enables the Government
to prescribe such class or classes of holding companies that will not have layers of
subsidiaries beyond a number they can prescribe (a provision not yet notified to be in force),
it is for such prescriptive requirements that the overseas holding – subsidiary relationship
falls within the definition of “subsidiary”; not with a view to impinge on the status of the
Indian private company subsidiary of such overseas holding body corporate in such cases,
which is a deeming requirement entirely in the Indian holding context as properly interpreted
in point #s (B) and (C) above. It is pertinent to note that the 1956 Companies Act also had a
similar stipulation – that the expression “company” in this section (i.e., Sec. 4) includes any
body corporate; although, the 1956 Companies Act did have the benefit of Sec. 4(7).
So, to address those who would seek to interpret an incorporation of “body corporate” into
the term “company” for purposes of the deeming provision, there is actual legislative force as
to why Sec. 2(87) makes such inclusion only for purposes of that clause – and for no other
provision of the 2013 Companies Act.  Consequently, there can be no reason not to follow the
principle of giving effect to such express words of Sec. 2(87) (especially where no other
conflict with other provisions arise); meaning, thereby, that the position of an India
incorporated private company subsidiary of an overseas body corporate is untouched by the
deeming provision and, as a result, for all consequent purposes of the 2013 Companies Act.
The clarification issued by the MCA admittedly affirms this position; but, its analysis is
incomplete and does not do full justice to the scheme of the 2013 Companies Act, as
explained above.  To the extent its conclusion may be regarded as matching the above
analysis, this circular may be considered (although merely persuasive in effect), with reliance
being better placed on a proper appreciation of the harmonious working (and proper
comprehensive reading of the wording) of the appropriate provisions of the 2013 Companies
Act itself lending greater credibility to the conclusion this article makes – to reiterate, that

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private company subsidiary in India of an overseas body corporate holding company will
continue to be a “private company” for purposes of the 2013 Companies Act. 

2. Capital Gains Tax.

The cross-border merger regime is not a new concept under Indian corporate law provisions,
as the erstwhile Companies Act also contained enabling provisions for inbound mergers (i.e.
merger of a foreign company into an Indian company). In fact, the income-tax laws already
prescribe a tax neutral status to inbound mergers for the merging company as well as its
shareholders where specified conditions are met, viz. transfer of all assets and liabilities and
continuity of shareholders holding minimum 75% shares.
The sale of any capital asset in India is usually liable to capital gains tax under Section 47(vi)
of the IT Act. However, under Indian tax law, some forms of mergers are tax-neutral in terms
of capital gains payments, as discussed below.
Inbound Mergers are a form of merger that occurs when two companies merge. A
multinational corporation merges with an Indian company in an inbound transaction, and the
resulting organisation is an Indian company. In terms of transfer payments, amalgamation is
tax-neutral, meaning that both the amalgamating corporation moving assets and the owners
transferring their interests in the amalgamating company are tax-free. To ensure tax neutrality
for the amalgamating entity moving properties, the amalgamated company must be an Indian
company, and the merger must be done according to Section 2 (IB). Both the assets and
liabilities of the merged companies immediately before the amalgamation shall become the
properties and liabilities of the amalgamated group, and 75 percent of the shareholders of the
merging companies must still remain shareholders of the amalgamated company, according
to Section 2(IB) of the IT Act. Furthermore, the whole consideration should be composed of
shares of the amalgamated company to maintain tax neutrality for the amalgamating
company's owners.
An outbound merger occurs when an Indian corporation merges with a foreign company,
resulting in a foreign entity. Currently, the IT Act exempts mergers from taxes if the
transferee is an Indian corporation, but it does not accept cases in which the transferee is an
international company. As a result, as a result of the 2013 Act's implementation of cross-
border mergers, corresponding improvements have occurred.
Mergers on a global scale. A global merger happens when a foreign company with a majority
interest in an Indian company (more than 51 percent) merges with another foreign company,
25
resulting in the transition of the Indian company's stock to the other foreign company. If 25%
of the shareholders of the amalgamating company remain shareholders of the amalgamated
company, the arrangement is tax-free in India, and the transition is not subject to capital gains
tax in the region where the amalgamating company is incorporated. Although inbound
mergers have historically been carried out for consideration in the form of shares, recent
corporate law laws now provide for payment of consideration in the form of depository
receipts or currency. When merger consideration is paid in the form of depository receipts or
currency, the merger will not be tax-free.
There is a belief that, similar to inbound mergers, outbound mergers should be given tax
neutral status to ease and encourage corporate reorganisation. On the opposite, provided that
an outbound merger causes the Indian company's valuation and potential earnings to be
transferred to a foreign jurisdiction, an amendment to Indian tax laws to provide a tax-neutral
regime would be beneficial.
In addition to meeting the requirements for a merger to be tax neutral, such as the transition
of all properties and liabilities and the continuity of shareholders owning at least 75 percent
of the shares, such conditions may include a provision that shareholders of the merging
company be Indian citizens (as of now, any merger to be tax neutral, the combined company
must be required).
In the absence of any particular exception, taxation of outbound mergers may be more
complicated than taxation of inbound mergers, since the inbound merger defence – that the
merging entity is not an Indian company or that the owners are not Indian citizens – may not
be applicable for outbound mergers. Non-resident owners of the combined Indian company,
though, may be a problem.
While it might be impossible to foresee all future tax problems resulting from cross-border
mergers at this time, it would be important to see if the income-tax laws are amended to
accommodate for the taxation of both inbound and outbound mergers.

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 CONCLUSION

Since the early 1990s, India's government has introduced legal and financial changes that
have resulted in strong economic development. The most significant shift in trade and
investment policy and the regulatory climate in the last decade has undoubtedly been the
lifting of limits on international investment and acquisitions, as well as the deregulation and
privatisation of many sectors, has certainly been the significant catalyst for the growth of
cross border M&A transactions involving India.
One can therefore conclude that theoretically Indian law allows for cross border mergers.
However, in practice, one notices that implementation of a cross-border merger with the
resultant entity being foreign is fraught with difficulty. This is due to complicated issues that
may arise regarding ownership and management of Indian assets by a resultant foreign
company. Furthermore, if the resultant entity is foreign, having to set up and run an Indian
branch office will only add to transaction costs and may render this type of a merger less
attractive. In this regard, India’s foreign exchange laws may have to be updated to reflect the
new liberal intention of the government in allowing quick, seamless and easy cross-border
mergers and acquisitions involving Indian companies.
The Indian economy is proving to be incredibly accommodating to foreign investment.
Though government policies promoting foreign investment have sparked renewed interest
among foreign investors and resulted in a flow of funds into India, the resulting domestic
economic growth has allowed Indian entrepreneurs to step out and seek global market
opportunities. I assume that India will continue to sign cross-border M&As and restore its
status as the "Golden Bird."

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 BIBLIOGRAPHY

Books
1. A Ramaiya, Guide to the Companies Act; Lexis Nexis, Butterworths Wadhwa,
Nagpur
2. K R Sampath, Law and Procedure on Mergers/Amalgamations, Takeovers, Joint
Ventures, LLPs & Corporate Restructure Snow White Publications
3. S. Ramanujam, Mergers et al, LexisNexis Butterworths Wadhwa Nagpur
4. Ray, Mergers and Acquisitions Strategy, Valuation and Integration, PHI

Websites
1. www.indiacorplaw.in
2. www.corporate.cyrilamarchandblogs.com
3. www.corporatelawreporter.com
4. www.corporatelaws.taxmann.com

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