Forex management in cross-border mergers

By Ravi Singhania and Arjun Anand, Singhania & Partners

India’s companies law currently allows Indian companies to merge with foreign companies and vice-versa. Further, on 20 March 2018, the government notified the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, which attempt to provide clarity regarding cross-border mergers from a foreign exchange law perspective. With that background, this article examines the key aspects of the merger regulation and its implications.

Ravi SinghaniaManaging partnerSinghania & Partners
Ravi Singhania
Managing partner
Singhania & Partners

Inbound mergers

An inbound merger is when an Indian company (IC) acquires the assets and liabilities of a foreign company consequent to a cross-border merger. In this regard, the merger regulations are allowing the transfer of securities to a foreign shareholder, subject to the compliance applicable to a foreign investor under the foreign direct investment (FDI) regulations.

This effectively means that such cross-border mergers must not result in any contravention of any restriction applicable to FDI into India as per the FDI regulations. Illustratively, an IC cannot issue shares, as a result of a cross-border merger, to a person resident outside of India if such IC is engaged in a sector prohibited for investment under the FDI regulations.

Similarly, the merger regulations have stated that a cross-border merger resulting in the transfer of securities of a joint venture (JV), or a wholly owned subsidiary of an IC, situated in a foreign jurisdiction, must be subject to compliance such as pricing of shares in a specified manner, any outstandings owed to the IC being clear prior to such transfer, etc., set out under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, (2004) (ODI regulations).

Further, the merger regulations mandate that if the cross-border merger results in the acquisition of a stepdown subsidiary (situated in a foreign jurisdiction) of the JV/wholly owned subsidiary, by an IC, then certain additional conditions laid down in the ODI regulations will need to be complied with.

One such conditions requires inter alia the IC to: (1) be regulated by a financial sector regulator; or (2) have earned net profit during the preceding three financial years from financial services activities, if such stepdown subsidiary (situated in a foreign jurisdiction) is engaged in the financial sector.

Arjun AnandPartnerSinghania & Partners
Arjun Anand
Singhania & Partners

The merger regulations have also stipulated certain compliances for ICs on overseas borrowings to be acquired by the IC in connection with such cross-border mergers. One such compliance requires the IC to ensure that the overseas borrowings of the foreign company that it proposes to take over are compliant with the provisions of the overseas borrowing regulations under Indian law within a period of two years from the date of sanction of the scheme pertaining to such cross-border merger by the relevant authority.

However, the IC cannot remit any money from India for repayment of such overseas borrowings, as part of ensuring compliance with the overseas borrowing regulations, during such a two-year period. It is to be noted that the overseas borrowing regulations inter alia stipulate specified interest rates, maturity, and end-use restrictions on borrowings from overseas by an Indian company. However, end-use restrictions are not applicable to an IC per the merger regulations.

While the intent is to ensure a smooth transition, it may possibly bring the relevant parties to the drawing board as the interest rates and maturity, etc., stipulated in the overseas borrowing regulations may not tie in with the commercial intent of such borrowings. Secondly, the restriction on repayment of such overseas borrowings during the two-year period may create hurdles for the cross-border merger.

Outbound mergers

An outbound merger is exactly the opposite of an inbound merger, i.e. a foreign company (FC) acquiring the assets and liabilities of an IC. While it is assumed that the law applicable in the jurisdiction where the FC is situated will regulate such a cross-border merger, the merger regulations also stipulate certain conditions such as guarantees or outstanding borrowings of the IC which must, as a result of such cross-border mergers, become guarantees or borrowings of the FC.

This, however, is subject to the FC not acquiring any such guarantee or outstanding borrowing in rupees payable to Indian lenders non-compliant with the relevant foreign exchange law in India. Considering rupee borrowings by Indian entities from Indian lenders may not always be compliant with applicable law, such a restriction will need to be examined by the FC from a balance sheet perspective.


This notification will help enable companies to consolidate and restructure their businesses in the most efficient and business friendly manner. However, the challenges discussed above may need to be ironed out by the relevant regulators.

Ravi Singhania is the managing partner and Arjun Anand is a partner at Singhania & Partners in New Delhi

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