This article was written by Priyam Sen, a student of Amity Law School.


The trend for merger and acquisition has become a global scenario in the present time due to technological advancement and globalization. It is most widely used form of cooperate restructuring in the present times  Merger and acquisition provides the involved companies a greater access to the international market and access to advanced technologies and other instruments. Merger is the consolidation of two or more corporate entity into a single entity, whereas an acquisition is the process of acquiring a particular targeted entity. Merger and Acquisition can be both domestic and cross-border. When M&A takes place between the corporate entities registered in the same country it is called domestic M&A while in Cross border M&A takes place when an enterprise from one country buys the assets or control of entity in another country.  Businesses today are not limited by the physical borders of the countries. Cross-border M&A is also considered as the subset of FDI as it ranges from 50% to 100% depending on the source and sector.  Some of the basic reasons for cross-border M&A can be- increase of consumer coverage and market access, requirement of new technologies, optimum use of natural resources, global information sharing, better use of assets and vertical integration. There are two broad categories of cross border merger in India one being outbound merger and the other is in bound merger.

Sections 230 to 240 in chapter XV of the Companies Act 2013 deal with compromise, Arrangements and Amalgamations. The process of merger and acquisition is also governed by this chapter of the Act. The companies Act 2013 do not strictly define the term the merger. But it can be understood as the process of combining two or more entities into one which involve the transfer of assets and liabilities from one to another. The central government through a notification dated 7th November 2016 provided for the enforcement of section 230-233, 235-40, 270-288 etc w.e.f December 15, 2016.

The study shall discuss about the issues faced during cross border M&A by companies in general with a special focus on India. It shall not deal with any specific sector but shall discuss the topic in general. Further, it will deal with the various challenges and risks involved in cross border mergers and what strategies can be devised by companies to mitigate the same. The study will also suggest certain recommendations in the cross border legal regime in India


The earlier law only permitted inbound merger which means that only foreign company was allowed to merge with Indian company and not vice versa. The Companies Act 2013 proposed to allow both forms of merger under section 234 of the act but was not notified.

The Act provides for the merger of an Indian company into the foreign company. It states that provisions related to merger and amalgamation shall apply mutatis mutandis to merger and amalgamation between companies registered under the companies act and those incorporated within the jurisdictions of the countries as are notified by the central government in consultation with the RBI.[1] the scope of the term foreign company has been increased by including such company or body corporate incorporated outside India whether they have a place of business in India or not.[2]

As under the definition clause the foreign company is defined as the company incorporated in any jurisdiction outside India that has a place of business in India whether by itself, through agent, physically or through electronic mode and conduct its business activity in India in any other manner.[3] The payment of consideration can be made to the shareholders of the merging companies either in cash or in the form of depository receipt.

The section 234 of the Act was notified by the Ministry of Corporate Affairs in consultation with the RBI with the corresponding rules vide notification dated 13th April 2017. The rules are titled as the companies (Compromise, Arrangement and Amalgamation) Amendment Rules, 2017 inserting Rule 25A and Annexure B in the companies (Compromise, Arrangement and Amalgamation) Rules, 2016 in relation with the operation of section 234. it provides that both the categories of merger i.e. inbound and outbound shall be subjected to prior approval of RBI and provisions of Companies Act  2013. For an outbound cross-border merger the foreign entity involved should be from a jurisdiction permitted by the central government in consultations with the RBI.

2.1 Jurisdictions for which outbound merger is permitted

“(i) The state whose securities market regulator is a signatory of bilateral Memorandum of Understanding with SEBI or International Organization of Securities Commission’s Multilateral MoU, or

(ii) Whose central bank is a member of Bank for International Settlements (BIS), and

(iii) In case of a jurisdiction, that has not been identified in the public statement of Financial Action Task Force (FATF) as being the following:

(a) Jurisdiction that has a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures usually apply; or

(b) Jurisdiction not having sufficient progress in dealing with the deficiencies or that has not committed to any action plan developed with the Financial Action Task Force to address the deficiencies.”[4]

  • Challenges arising as a result of having an incomplete picture of the target company– Obtaining information on a foreign target is one of the most common and over-looked challenges in cross-border M&A. Frequently, the data sources that an acquirer would normally use either differ or do not exist in the target’s country, a problem that can be impounded by dissimilar corporate-reporting requirements. Lack of reliable information can pose greater risks in rapidly developing economies and can lull acquirers into making false assumptions about the target’s financial situation, business model, organization, decision making style etc.[5]
  • Socio-political unrest

The socio-political unrest in the countries whose companies are involved in the transaction of M&A causes uncertainty and hinders the transaction. One of the most common reasons for not meeting the expected outcome is the political and social instability. Looking from the regional perspective, Latin American, Africa and the Middle East with 52% and 50% respectively, accounts for the highest risk of unidentified political or economic instability, when compared to the global average of 30%.[6]

  • collapse of communication and trust among the world leaders

A collapse of communication and trust among the world leaders will inexorably make a transaction more challenging. If it is allowed to soar, it can even lead to a deal’s failure. The breakdowns often begin due to ineffective communication strategies, lack of transparency, or cultural differences.[7]

  • Government Interventions

It has been observed that the government of many countries use protectionist approach in order to provide favour to their domestic industry. The system of government and its functioning is different in different country which acts as barriers during M&A. [8]

  • Difference in intellectual property Regime

As per the TRIPs agreement the member states have to comply with the general principles mentioned in it, but as mentioned part II of the agreement member states are free to incorporated measures which may be higher in standard than as are proposed in the agreement and at the same time are in consistence with the TRIPs agreement. This in turn leads to difference in intellectual property regime.[9]

  • Currency fluctuation

The currency fluctuation changes the valuation of the assets and liability of the companies involved. This in turn leads to instability.

  • Sufficient Prior Information Gathering– It is vital to recognize that information gathering on a foreign market is more difficult, more time consuming, and more complex than domestic markets. Acquirers should allow additional time to collect the necessary information and to do up-front due diligence and integration planning. There is no substitute for visiting, seeing and experiencing the target company’s market. This should be further complemented by interviews with other players in the market, such as customers and suppliers carried out by either external advisors with good local knowledge or in-house resources. Their knowledge and experience are another key source of information.
  • Navigation of Political and Regulatory Issues- Political and regulatory issues including antitrust considerations and employment law often have a pivotal impact on the effectiveness of cross border mergers. Hence, these issues are required to be assessed at the very outset. Some key questions include-
  1. How does the regulatory approval process in the target’s country work?
  2. What is the nature of employment laws and how rigorous are they?
  3. What is the likely degree of government influence?

Systematically assessing, understanding and answering these questions can contribute to a successful cross border merger and post-merger integration.

  • Cross-cultural training and consultancy- In order to address the key cultural related issues involved in cross-border integrations the companies must incorporate cross-cultural training and consultancy in their curriculum. it helps in developing cultural sensitivity and relativity among the staff, managing cultural change, reduce misunderstanding and improve client and supplier satisfaction. To avoid conflict, the acquirer needs to fully understand the target’s culture. Specifically, the following three main questions can be addressed-
  1. How are decisions made in Target Company?
  2. How does the target company conduct meetings? Are meetings open forums in which employees can freely discuss, challenge and resolve issues? Or does the decision making take place behind closed doors and then the meetings are intended to approve the ‘done deal’?
  3. How does the target company communicate with its employees? What is the most preferred means of communication?

Further, lack of transparency and ignorance can result in mistrust, anxiety and often prejudice, especially in cross-border mergers involving companies from culturally and geographically diverse markets. It is leads to a fear of foreign power which adversely affects the company’s productivity. To dispel such fears and counterproductive assumptions, companies must encourage openness and transparency.  For e.g. when a Japanese supplier of digital office equipment was considering acquiring a complementary software business in the US in 1980s, the Japanese company was presented with the in-depth financial and strategic analyses of different business models. The Japanese were not at all interested in the same. Rather, a delegation was sent to the target company’s site and it spent long hours of discussion about its management, nature of business etc. This convinced the Japanese that both companies were in the same technological domain and the deal went forward.[10]

  • Availability of finance– Most scrutiny of finance occurs during the deal agreement phase, where financial modelling takes place and funders and business leaders agree payment terms. Companies should determine at the onset whether it will be able to meet the financial requirements and ensure that it understands target company’s working capital arrangements. In some areas such as Middle East, availability of finance can involve risks driven by factors such as complexities of Islamic banking system. These factors must be considered beforehand.

  • Amendments are required to be made in the existing laws containing the relevant provisions like the Income Tax Act, Exchange Control Regulations etc. For e.g. The Indian Income Tax Act exempts a transaction of amalgamation, where the transferee company is an Indian company. Where, in case an Indian company merges into a foreign company, it would be a taxable transaction. Hence, such provisions need to be revised to make the process uniform.
  • In order to maintain uniformity the RBI should law down a detailed regulatory framework prescribing the eligibility criteria and other factors which shall be considered by the RBI while considering the matter of cross-border M&A.
  • Section 394 of the earlier Act applied to merger as well as demerger but section 234 refers to merger and amalgamation only without any mention of demerger. Also if we interpret the provision literally it would mean that demergers are disallowed. This highlights a lack of clarity in the issue whether the demerger is permitted or not. [11] Hence, it is important for the Government of India to come out with further clarifications and amendments keeping in mind the practical implications of a cross border merger.
  • Outbound mergers would also be required to comply with the provisions in the Indian Companies Act governing compromises, arrangements and amalgamations, and these provisions may need to be revisited revised in order to sync with the newly notified provisions on outbound mergers, especially on applicability to foreign companies. For instance, there is an absence of clarity in addressing the eventuality of any conflict between the Indian merger framework and the laws of the resultant foreign company in case of outbound mergers.[12]
  • The need of the hour is to align all the cross border merger transactions with requirements mentioned in Indian foreign exchange laws.
  • As per Rule 25A which provides for compliance with section 230 to 232 of the Act only hence making it mandatory for the transferee company to obtain permission from NCLT. The rule clearly exempts applicability of section 233 in case of cross-border mergers. As a result of which a wholly owned foreign subsidiary company cannot merge to its Indian holding company or vice versa by availing the benefit of fast track merger.
  • The competition act should be properly implemented in case of cross-border M&A in order to ascertain that the transaction is not undertaken to eliminate competition.

In India notification of provision related to cross-border merger is in consonance with the concept of ease of doing business but there remain few issues which need to be addressed for efficient transaction. Under the new cross border regime, the path to pursue group restructuring exercises and to make Indian companies more globally relevant and competitive is clearer than before. Bringing into force a roadmap and structure to govern out bound mergers is indeed a welcome that provides regulatory inviolability to such transactions.  The objective should be to improve the accessibility of the companies in foreign market. The need is to minimise the difficulties in cross-border merger and acquisition particularly related to cultural and regulatory differences between various jurisdictions. The government of India has to come out with various amendments and clarifications by taking into consideration the practical aspect of such transactions.

[1] Section 234, Companies Act 2013.

[2]  Explanation, Section 234, Companies Act 2013

[3] Section 2(42), Companies Act 2013.

[4] Annexure B, MINISTRY OF CORPORATE AFFAIRS NOTIFICATION,  New Delhi, the 13th April, 2017









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