Statutory Foundation and Regulatory Authorities
The regulatory structure for inbound cross-border Mergers and Acquisitions (M&A) relies on four key legislative acts requiring synchronized compliance: the Companies Act, 2013 (CA 2013), the Foreign Exchange Management Act, 1999 (FEMA), the Competition Act, 2002, and the Income Tax Act, 1961 (ITA).
The CA 2013, specifically Sections 230 to 232 and Section 234, establishes the comprehensive judicial process for Schemes of Arrangement and Compromise, authorizing cross-border mergers involving Indian and foreign companies. FEMA, administered by the Reserve Bank of India (RBI), governs capital movement, with operational guidelines provided by the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (CBM Regulations) and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules).
The Competition Act, enforced by the Competition Commission of India (CCI), mandates compulsory notification for mergers that meet specified thresholds to prevent an Appreciable Adverse Effect on Competition. The ITA dictates tax consequences, including capital gains tax liabilities and the applicability of domestic anti-avoidance measures.
Key Regulatory Bodies and Jurisdictions
Compliance with these statutes necessitates interaction with multiple specialized regulatory authorities. The National Company Law Tribunal (NCLT) holds the judicial mandate to sanction the Scheme of Arrangement under Sections 230-232 of the CA 2013, ensuring fairness to all stakeholders. Its administrative counterpart, the Ministry of Corporate Affairs (MCA), oversees corporate procedural requirements and the expanding Fast-Track Merger regime under Section 233.
The RBI administers FEMA, exercising control over all capital account transactions, valuation methodologies, foreign investment entry routes, and the ultimate pricing mechanism for the securities issued. The CCI is solely responsible for reviewing “combinations” for potential detrimental impact on market dynamics. When listed Indian entities are involved, the Securities and Exchange Board of India (SEBI) provides crucial oversight, enforcing disclosure and listing regulations. Finally, the Income Tax Department (ITD) scrutinizes the fiscal structure, transfer pricing, and application of sophisticated anti-avoidance legislation.
Regulatory Liberalization and Compliance Shift
A significant structural alteration pertains to the RBI’s shift from mandating prior approval to facilitating deemed approval under Regulation 9 of the CBM Regulations, 2018. This liberalization streamlines the approval process by decreasing dependency on the NCLT and RBI.
The transaction entities must strictly adhere to all conditions set forth in the CBM Regulations. Management is required to submit a certificate to the NCLT affirming this compliance. If any condition under FEMA such as adherence to sectoral caps, pricing guidelines, or entry routes is violated, the deemed approval is immediately vitiated, necessitating specific prior approval from the RBI. This structural adjustment requires compliance review to be conducted with extreme rigor before the NCLT application, as the final judicial sanction relies fundamentally on flawless foreign exchange compliance.
Corporate Approval Pathways: CA 2013 and Procedural Streamlining
Standard Scheme of Arrangement (Sections 230-232, CA 2013)
For inbound mergers not eligible for the specialized administrative route, the Scheme of Arrangement must proceed under Section 234 of the CA 2013, read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Companies Rules). This procedure requires mandatory judicial sanction from the NCLT.
The NCLT’s role is supervisory; it reviews the scheme to safeguard the interests of all stakeholders, including minority shareholders and creditors. Due to the inherent judicial nature and the absence of prescribed review timelines for the NCLT, this standard route can be time-consuming and procedurally unpredictable. The scheme must provide for a fair valuation of assets and compensation to shareholders, executed by valuers recognized in the transferee company’s jurisdiction and adhering to internationally accepted principles on accounting and valuation.
The Fast-Track Merger (FTM) Regime (Section 233, CA 2013)
The MCA liberalized the FTM regime under Section 233 of the CA 2013, offering an accelerated, administrative alternative to the NCLT process. The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025 (CAA Rules 2025) significantly expanded this framework, reducing the NCLT’s judicial burden.
Crucially for inbound M&A, the FTM now explicitly includes mergers between a transferor foreign holding company and a transferee Indian wholly-owned subsidiary (WOS). This specific consolidation structure is included within Rule 25 of the Companies Rules, referencing Rule 25A(5). FTM eligibility mandates that aggregate outstanding loans, debentures, or deposits do not exceed INR 200 Crore, as per the CAA Rules 2025. The FTM’s primary procedural advantage is administrative clearance by the Regional Director, aiming for a 60-day timeline, replacing judicial sanction. Expanding the FTM scope drastically improves the predictability and speed for these intra-group consolidations, which previously faced prolonged NCLT processes.
Foreign Exchange Compliance: FEMA and Inbound Investment Requirements
The FEMA (Cross Border Merger) Regulations, 2018, provide the precise framework for inbound mergers, where a foreign company amalgamates with an Indian company.
The FEMA (Cross Border Merger) Regulations, 2018
The fundamental cornerstone of the streamlined process is the Deemed RBI Approval under Regulation 9 of the CBM Regulations. Transactions executed entirely according to the CBM Regulations are presumed to have the necessary prior RBI approval. Strict adherence is mandated: any non-compliance with the CBM Regulations nullifies the deemed approval, requiring the merging entities to seek explicit prior approval from the RBI. Companies must also ensure that any regulatory actions stemming from prior non-compliance or contraventions under FEMA are fully addressed and completed before the merger takes effect. The efficacy of the critical deemed RBI approval rests entirely upon strict FEMA adherence, making the management certificate of FEMA compliance furnished to the NCLT a requirement for rigorous scrutiny.
Foreign Direct Investment Compliance
Every inbound merger inherently constitutes a foreign investment into the Indian company, mandating adherence to the Consolidated Foreign Direct Investment Policy and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. The surviving Indian company must comply with specified sectoral limits (sectoral caps) governing foreign participation.
The merger must be assessed against the permissible entry route for that sector either the Automatic Route or the Government/Approval Route and prior approval is compulsory if the resulting foreign shareholding exceeds the sector’s prescribed cap. Since the merger involves the transfer of shares of the foreign company in exchange for securities in the Indian company, this transaction must comply with the NDI Rules relating to transfers pursuant to corporate amalgamation.
Competition Law Thresholds: CCI Combination Control
Inbound M&A transactions that meet specified jurisdictional thresholds must comply with the Competition Act, 2002, requiring mandatory prior notification to the CCI.
Revised Mandatory Notification Triggers (2024/2025 Updates)
The Competition Act introduced the Deal Value Threshold (DVT), supplementing the traditional asset/turnover test. Notification is now mandatory if two conditions are met:
- The transaction value exceeds INR 20 billion (approximately USD 240 million).
- The target enterprise must have “substantial business operations in India” (SBO).
The DVT ensures high-value acquisitions, especially in technology and digital services, are reviewed even if the target’s financial metrics are low. This fundamentally alters the due diligence process and closing timelines for strategic deals involving specialized Indian technology or e-commerce companies.
Notification Procedure and Exemptions
Transactions that meet the thresholds must be filed with the CCI prior to closing. For cases where there are no overlapping business activities, parties can utilize the Green Channel Route, an accelerated procedure resulting in automatic approval. Certain acquisitions of minority shareholding (less than 10% of total shares or voting rights) are exempt from notification, provided the acquirer has no right to participate in the management or affairs of the target.
Taxation Implications: ITA 1961 and Anti-Avoidance Scrutiny
Inbound M&A structures are influenced by the Income Tax Act, 1961, which provides tax neutrality for qualifying amalgamations while retaining power to challenge arrangements structured primarily for tax reduction.
Capital Gains Tax Neutrality (Section 47, ITA 1961)
Section 47 of the ITA grants specific exemptions from Capital Gains Tax (CGT) for qualifying schemes of amalgamation. The transfer of assets by the merging foreign company to the surviving Indian company is exempt from CGT. Additionally, the transfer of shares held by the foreign company’s shareholders in exchange for securities of the surviving Indian company is also exempt from CGT. However, this exemption is contingent upon a critical requirement: the entire consideration received by the foreign shareholders must be comprised of equity instruments (securities) in the surviving Indian company.
General Anti-Avoidance Rule (GAAR)
The General Anti-Avoidance Rule (GAAR) grants tax authorities the power to disregard or recharacterize a transaction if they determine that the arrangement was structured primarily to obtain a tax benefit and lacks genuine commercial justification. This emphasizes commercial substance over mere legal form.
For inbound restructurings, the potential for GAAR application is high, necessitating comprehensive documentation establishing non-tax drivers as the primary defense. GAAR may override benefits granted under Double Taxation Avoidance Agreements (DTAAs) if the arrangement is deemed abusive. Furthermore, GAAR may be invoked in cases of abusive or artificial arrangements, even if Specific Anti-Avoidance Rules (SAAR) like Transfer Pricing are applicable.
Ancillary Tax Considerations
All transactions between associated enterprises (AEs), including inter-company settlements related to the merger, must adhere to the arm’s length principle under Transfer Pricing (TP) regulations. While the transfer of shares resulting in capital gains is subject to Withholding Tax (TDS), the specific exemption granted under Section 47 for inbound mergers mitigates this liability provided the conditions are met. Restructuring of Employee Stock Option Plans (ESOPs) demands care: cash payouts for terminated options are taxable income subject to withholding tax, whereas the grant of new options is generally not taxable until exercise.
Conclusion
The regulatory framework for cross-border mergers and acquisitions in India is highly structured, defined by an interdependence of corporate, foreign exchange, and competition laws. The system strategically focuses on streamlining compliance for standard transactions while maintaining stringent oversight for complex or high-risk deals.
Recent legislative developments, particularly the CAA Amendment Rules, 2025, and the RBI’s 2025 Master Direction, have improved the speed and commercial viability of inbound M&A. The inclusion of foreign holding company mergers into Indian wholly-owned subsidiaries under the Fast-Track Merger route (Section 233 of the CA 2013) drastically reduces reliance on the time-consuming NCLT judicial process. Concurrently, the clarification on deferred payment mechanisms provides necessary commercial flexibility for structuring consideration, aligning India’s foreign exchange norms with global M&A practices.
However, this liberalization increases the onus on transactional parties to ensure absolute compliance with FEMA pricing guidelines and sectoral caps to maintain the benefit of deemed RBI approval. While tax neutrality is achievable under Section 47 of the ITA, the application of the Deal Value Threshold under the Competition Act, 2002, and the overriding risk posed by the General Anti-Avoidance Rule (GAAR) demand meticulous due diligence focusing on transaction value and commercial substance, respectively, particularly for acquisitions in the digital economy. Structuring an inbound M&A as an intra-group consolidation of a foreign holding company into a well-capitalized Indian WOS represents the optimal path for speed and certainty, provided all regulatory requirements are met upfront.