Companies Act now permits cross border mergers by Meenakshi Lakshmanan

Cross border merger is not a novel concept in the corporate arena. This concept has taken shape stage by stage. The origin of the cross border merger started with the foreign trade which extended to branch establishments in the foreign territory and later merging with entities of the foreign country. When it comes it Indian scenario, the initial step towards cross border mergers was taken in 2005 by the JJ Irani committee. The need for widening the scope of business internationally and the necessity of ensuring compliance with law is a mammoth task for all the jurisdictions to balance.

Earlier, Indian companies were forced to set branches in the foreign territory so that they could merge with the foreign entity and grow bigger. Direct merger was not permitted in the erstwhile Act. There are many examples of global acquisition as well. A few noted examples are Tata motors acquiring Jaguar, Mittal steel acquiring Arcelor, Tata steel acquiring Corus. This can be elucidated by citing the facts of Tata steel acquiring Corus

  • In October 2006, Corus group announces it has accepted an $8.1 billion offer from Tata Steel at £4.55 per share
  • There was another competitive bid coming from other company but the deal was finalized January 30, 2007 with Tata motors outbidding other company at £6.08 per share vs £6.03 share
  • Later, in September 2010, Corus’s name changed to Tata Steel Europe

In the erstwhile Companies Act, 1956 the concept of cross border merger existed where the foreign company could merge with an Indian company but not vice-versa. Though there was no exclusive provision permitting such merger, it was understood from the explanation of the term transferee given under Section 394(4)(b) of Companies Act, 1956 that the foreign company could merge with an Indian company but not vice-versa.

The explanation of Transferee Company according to Section 394(4)(b) of Companies Act, 1956 is provided as under;

“transferee company” does not include any company other than a company within the meaning of this Act; but “transferor company” includes any body corporate, whether a company within the meaning of this Act or not.

The Companies Act, 2013 has paved a way for the merger of Indian company with the foreign company with a view of widening the scope of globalization. The ever increasing desire for tapping the global market and achieving the synergy effect spurts the cross border merger. Enabling of cross-border mergers is expected to provide benefits such as helping Indian companies in migrating of holding structure overseas, facilitating overseas listing of Indian entities and providing exit routes to investors in overseas jurisdictions.

Section 234 of the Companies Act, 2013 provides for amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of specific countries. This is an enabling provision but with certain restrictions on the jurisdiction. However, the new law remains silent on demerger.

Provision of Law:

Section 234 of the Companies Act, 2013 deals with Merger or amalgamation of company with foreign company

234(1) of Companies Act, 2013 provides that;

“The provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government: 

Provided that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section”

The section further states that, the purchase consideration to the shareholders of the merging company may be paid in the form of cash, or in depository receipts or partly in cash and partly in depository receipts depending on the scheme to be drawn up for the purpose.

Thereafter, the Central Government in consultation with the Reserve Bank of India has framed the rules with regard to cross border mergers. The rule for the same is brought in by inserting Rule 25A to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

According to the Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016; an Indian company may merge with a foreign company with the prior approval of Reserve Bank of India after complying with the provisions of sections 230-232 of the Act and the rules made thereunder provided, the foreign entity is a permissible jurisdiction as specified in the Annexure-B vide notification dated 13th April, 2017.

The following are the jurisdictions referred in clause (a) of sub-rule (2) of rule 25A

  • whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with SEBI, or
  • whose central bank is a member of BIS (Bank for International Settlements) and
  • a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as
  • a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
  • a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with FATF to address these deficiencies”

During the initial stages of discussion on the cross border mergers, there were also demands from minority shareholders that in such mergers, the government should appoint a valuer.

Now, the Rule 25A of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides that the transferee company shall ensure that the valuation is done according to the internationally accepted principles on accounting and valuation by the valuers who are members of a recognized professional body in the jurisdiction of the Transferee Company. A declaration giving effect to the valuation report shall be attached with the application made to the Reserve Bank for obtaining its approval for merger.

Since, the cross border transactions have the element of foreign exchange involved in it, any amendment to these rules shall be brought in only with the consultation of the Reserve Bank.

When we talk about Reserve Bank of India it is pertinent to understand what regulation of RBI is applicable to the cross border mergers. Typically in the case of merger, there will be transfer of shares from a resident to non-resident or vice versa and transfer of assets and liabilities from the transferor company to a transferee company. In that case, we already have the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 as amended from time to time and Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000. So far all the cases of foreign acquisitions have taken place by complying with these regulations since the regulations covers the major aspects relating to merger. The regulation relating to capital account transactions is classified as follows:

  1. Regulation 3 (1) (A); Schedule 1 deals with classes of capital account transactions of Persons resident in India
    • Investment by a person resident in India in foreign securities
    • Investment by a person resident in India in foreign securities
    • Maintenance of foreign currency accounts in India and outside India by a person resident in India
    • Remittance outside India of capital assets of a person resident in India
  1. Regulation 3 (1) (B); Schedule 2 deals with classes of capital account transactions of persons resident outside India
    • Acquisition and transfer of immovable property in India by a person resident outside India
    • Investment in India by a person resident outside India,
  • issue of security by a body corporate or an entity in India and investment therein by a person resident outside India

With the existing RBI regulations, the deals can take place to a certain extent but we are not sure if these regulations will ensure sufficient compliance and would cover all the aspects related to cross border merger.


The cross border merger is undoubtedly a great move by the Indian Government. This will bring umpteen opportunities for the Indian corporates to grow. As the adage says that there are always two sides of a coin, this move will also have certain pros and cons. This fact cannot be denied and we will witness the practicality of the subject matter once the merger of an Indian entity with a foreign entity happens.

However, we have evidenced from various Indian legislations that the framework does not leave any stone unturned to fill in the loopholes. Apart from the Companies Act, 2013, its rules other Acts like SEBI Act, 1992; Competition Act, 2002; RBI Regulations; Income Tax Act, 1961 etc; will have an impact on the cross border merger.


By:- Meenakshi Lakshmanan-

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