The inbound Mergers and Acquisitions (M&A) regime has evolved immensely throughout the years. It has attracted global interest making India an emerging destination of choice for companies seeking to establish their supply chains or production hubs. India’s M&A success has been driven by various internal and external factors including the government’s “Make in India” campaign, multiple progressive reforms for ease of doing business in India, India’s rising tech prowess, robust base of skilled workforce, and domestic demand. Various amendments have been made in the regulatory landscape to simplify and facilitate cross-border Mergers and Acquisitions (M&A) in India. In August 2024, the Finance Ministry amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, to streamline FDI regulations regarding cross-border share swaps between Indian and foreign companies. These changes will enhance the global expansion capabilities of Indian businesses through mergers and acquisitions.
The settled position for M&A in India is that the shareholders and creditors approve the scheme of the merger and then file it in the National Company Law Tribunal (NCLT). NCLT then reviews the scheme of the merger to ensure that the interests of all stakeholders including minority shareholders, creditors, and employees are duly protected. There is no prescribed time limit for review within which the NCLT is required to provide its decision. This is the reason why inbound mergers can be time-consuming.
Further, Tax benefits for inbound mergers are available in those cases where all assets of the foreign merging company transfer to the surviving Indian company or a minimum of 75% of shareholders of the foreign company become shareholders of the Indian company. Tax exemptions include no capital gains tax on asset transfer for the merging company and no capital gains tax when receiving shares of an Indian company as consideration on the shareholders. In other words, Inbound mergers qualify for tax neutrality when all assets transfer to an Indian company with 75% shareholder continuity. Both the merging company and its shareholders are exempt from capital gains tax when consideration is in the Indian company's shares.
Recently, to further streamline the procedure and pave the way for ease of doing business, the Ministry of Corporate Affairs issued a notification [F. No. 2/31/CAA/2013 – CL.V Part] notifying certain changes to the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. These amendments dealing with the merger of a foreign company with its domestic subsidiary unit in India, will take effect from September 17, 2024.
According to the notification, Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 has been amended. It will now include a sub-rule after sub-rule (4) stating that where the transferor foreign company incorporated outside India is a holding company and the transferee Indian company is a wholly owned subsidiary company incorporated in India, enter into merger or amalgamation:
(a). Both the foreign transferor company and the Indian transferee subsidiary must secure prior approval from the RBI before proceeding with the merger or amalgamation.
(b). The transferee Indian company is mandated to comply with the provisions of section 233 of the Companies Act, 2013 which provides for a Fast-Track Merger Route for specific mergers, such as those between holding and subsidiary companies. Hence, they can bypass the National Company Law Tribunal (NCLT) approval route. This streamlines the merger process while maintaining transparency and regulatory oversight. It is suitable for transactions involving companies with straightforward financial and operational structures, such as wholly owned subsidiaries.
(c). The application must be made by the transferee Indian company to the Central Government under section 233 of the Act and provisions of rule 25 shall apply to such application. Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 outlines the process for mergers or amalgamations of certain companies. As per the rule, a notice has to be issued to seek objections/suggestions from authorities or any affected parties under Section 233 of the Companies Act whenever any merger is proposed. For the purpose of this rule, a scheme of merger or amalgamation under section 233 of the Act can be entered into between two or more start-up companies; or one or more start-up companies with one or more small companies.
Lastly, a declaration is required under Sub-Rule (4) of Rule 25. The declaration must accompany the merger application and include specific undertakings, such as compliance with the law and assurance that the scheme is not prejudicial to creditors, shareholders, or the public.
Removal of time-consuming clearance from the National Company Law Tribunal (NCLT) will lead to fast-track mergers and amalgamations, for example, between the merger of a start-up incorporated outside the country and its wholly owned Indian unit. In cases involving mergers with companies incorporated in countries that share a land border with India (for example, China), a declaration in Form No. CAA 16 has to be submitted to the Central Government. In light of these recent circumstances, the new rules require both the foreign parent company and its wholly-owned Indian subsidiary must first get approval from the Reserve Bank of India (RBI) for any mergers or amalgamations. Additionally, the Indian company involved in the merger must apply to the central government for approval, following the process outlined in Section 233 of the Companies Act and Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.
Both foreign holding companies (transferor) and their Indian subsidiaries (transferee) are required to secure prior approval from the Reserve Bank of India (RBI). This ensures compliance with foreign exchange and cross-border capital flow regulations but may add procedural complexity if clarity on "deemed approval" is not addressed. This may delay implementation. The fast-track process bypassing the NCLT will reduce the overall merger completion timeline from 8-12 months to a shorter period, enhancing operational efficiency for companies. Moreover, India is witnessing a trend of reverse flipping. Many Indian subsidiaries are merging with their foreign parent companies, particularly startups. India's IPO market is also at its peak. The rules align with India’s efforts to attract companies back into the country, particularly in light of its maturing IPO market and increasing investor confidence. In order to ensure that the regulation achieves its intended purpose of providing a conducive environment for M&A, it is pertinent to address certain flaws that might hinder the progress. The RBI and Ministry of Corporate Affairs (MCA) should issue detailed guidelines to ensure predictability and reduce procedural delays.