India finally notifies Cross Border Merger Regulations

Previously, the provisions of the Companies Act, 2013 (Act) governing inbound and outbound mergers, amalgamations or arrangements between Indian companies and foreign companies (Cross Border Mergers) were notified by the Ministry of Corporate Affairs on April 13th, 2017. Subsequently, on April 26th, 2017, the Reserve Bank of India (RBI) issued draft regulations to govern Cross Border Mergers (Draft RBI Regulation).

We had published an earlier blog piece on this, discussing the key highlights of the Draft RBI Regulation, which is available here.

It has been close to a year since the Draft RBI Regulation and on March 20th, 2018, the RBI has finally notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulation). This article briefly analyses the key changes brought about in the Merger Regulation and its implications.

Key Changes and Implications for Inbound Mergers

  • In addition to inbound mergers requiring compliance with applicable foreign exchange regulations, the Merger Regulation further clarifies that for inbound mergers where the foreign company is an overseas joint venture (JV)/ wholly owned subsidiary (WOS) of an Indian company, such foreign company should comply with the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004) (ODI Regulation). Additionally, such JV / WOS should assess all obligations in the ODI Regulation applicable to ‘winding up’. Where inbound merger results in acquisition of a step down subsidiary of a JV / WOS, such acquisition must comply with conditions relating to total financial commitment, method of funding, etc., as set out in the ODI Regulation.
  • The Merger Regulation now provides a period of 2 years from the date of sanction of scheme to bring overseas borrowings which are being taken on by the resultant Indian company, in line with the borrowing regulations stipulated therein. It is also now expressly clarified that end use restrictions under Foreign Exchange Management Act, 1999 (FEMA) shall not apply to such overseas borrowings. However, no remittance for repayment of such overseas borrowings can be made during the 2 year period. While removal of end use restrictions is needed from a compliance perspective, the restriction on repayment of such overseas borrowings for 2 years may impact borrowing arrangements and could become a major hurdle for inbound merger transactions.
  • The timeframe to sell assets not permitted to be held or acquired under FEMA has been increased from 180 days to 2 years from the date of sanction of the scheme. However, it remains to be tested whether such increased timeframe would be sufficient for sale of foreign assets in light of compliance under foreign laws, pricing, tax concerns, foreign market conditions and other factors. Currently, the resultant Indian company would have to seriously evaluate the provisions of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015, to hold immovable property outside India.
  • The sale proceeds from sale of overseas assets is now expressly permitted to be used within the 2 year period, to extinguish any liability outside India which is not permitted to be held by the resultant Indian company.

Key Changes and Implications for Outbound Mergers

  • Whilst the guarantees or outstanding borrowings of the Indian company would become the liabilities of the resultant foreign company, the Merger Regulation stipulates that foreign companies shall not acquire liability in rupees payable to Indian lenders which are not FEMA compliant, and a no-objection certificate to this effect must be obtained from the Indian lenders. This restriction will need to be further analysed to understand its impact on regular rupee borrowings by Indian entities from Indian lenders, since such borrowings may not comply with FEMA. One can hopefully expect the RBI to issue further clarifications in this regard.
  • Pursuant to the Merger Regulation, the timeframe for sale of assets not permitted to be acquired or held by a foreign company under FEMA, has been increased from 180 days to 2 years from the date of sanction of the scheme. The sale proceeds from sale of such Indian assets is now expressly permitted to be used for repayment of Indian liabilities within the 2 year period.
  • A resultant foreign company is now permitted to open a Special Non-Resident Rupee Account in terms of the FEMA (Deposit) Regulations, 2016, for 2 years to facilitate any transactions pursuant to an outbound merger.

Other Considerations

Some common changes and issues applicable to both inbound and outbound mergers are as follows:

  • While the Merger Regulation maintains that Cross Border Mergers compliant with its provisions shall continue to benefit from deemed RBI approval, it does seem to add an indirect approval condition by stipulating that regulatory actions connected with non-compliance or contravention of FEMA shall be completed prior to the merger.
  • It has now been clarified that offices of the Indian company in India in case of an outbound merger and the office of the foreign company outside India in case of an inbound merger, shall be deemed to be a branch office of the resultant company. An Indian branch will be governed by the FEMA (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, and can only carry out permitted activities such as inter alia export / import, consultancy services, research, promoting technical or financial collaborations, representing the parent foreign company in India, etc. In case of an inbound merger, the overseas branch/office can undertake transactions permitted under the FEMA (Foreign Currency Account by a person resident in India) Regulations, 2015.Representing a foreign airline/shipping company.


RBI’s Merger Regulation is a positive and welcome step to provide a clearer and business friendly regulatory framework for Cross Border Mergers. Whilst some of the unaddressed issues in the RBI Draft Regulations now stand clarified, there remain some ambiguities that still need to be addressed, and we are hopeful the same will be dealt with by RBI through clarifications issued on a case to case basis. That said, the enthusiasm of India Inc. and foreign corporates to use Cross Border Mergers, as opposed to traditional modes of acquisitions, investments and joint ventures, remains to be seen. Hopefully, in time, success stories and case studies will emerge, giving both foreign and Indian players the confidence and commitment to utilize this new regime.

* The authors were assisted by Pooja Sable, Associate