The principal legislation governing the foreign exchange aspects of all cross-border transactions is The Foreign Exchange Management Act, 1999 (FEMA). The applicable regulations for inbound transactions, i.e. cases where a foreign company acquires a local company or merges with one, are the FEMA (Non-Debt Instruments) Rules, 2019. But outbound transactions where an Indian company purchases a foreign company, are regulated by the Foreign Exchange Management (Overseas Investment) Rules 2022 which replaced the earlier TIFS Regulations from August 2022.
For cross-border mergers, the RBI came out with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018. These regulations distinguish a merger as either inbound or outbound and specify the conditions in each case. An inbound merger is one where a foreign company merges into an Indian company and the former ceases to exist. The new Indian company may hold foreign assets owned by the foreign company before, but it must adhere to the FEMA regulations within two years from the merger date. But, in an outbound merger, a local company merges with a foreign company and the former ceases to exist. The shareholders of the Indian company receive shares or cash from the foreign company that survives.
The fundamental compliance issue is the price. As per FEMA, share transfers and acquisitions in a cross-border transaction are subject to pricing guidelines prescribed by the Reserve Bank of India. The valuation has to be at arm’s length using recognized valuation methods, and the consideration has to be per FEMA rules for capital account transactions. Share swaps form the most important part of cross-border deals and the recent changes in 2024 to the FEMA Non-Debt Instruments Rules have provided a clear regulatory path for such transactions but their structure is still required very cautiously to avoid any compliance problem.
In 2024, the RBI revised a Master Direction on Foreign Investment in India which consolidates all the previous circulars and notifications into a single reference document. This step was highly appreciated to lower the regulatory uncertainties.
Competition Law Clearance
Before September 2024, merger control in India was generally asset- and turnover-based. Only transactions which crossed certain thresholds for assets or turnover in India would require a filing to the Competition Commission of India (CCI). That left quite a few cross-border deals, mainly the acquisition of tech companies which had very little turnover in India but a huge market presence, getting through without the CCI’s scrutiny.
With the Competition (Amendment) Act, 2023 and the entry into force of its merger control provisions on 10 September 2024, this scenario changed. The most significant addition is the deal value threshold (DVT). Per this threshold, any transaction with a total deal value over INR 2,000 crore (around USD 238 million) will have to be submitted to the CCI for approval if the target has “substantial business operations” in India. For digital services, a target is considered to have “substantial business operations” in India when 10% or more of the target’s total global business users or end users are located in India. This threshold is designed to capture acquisitions of nascent competitors of digital sector players or targets who have major user bases but slight local revenues.
The 2024 amendments also revised the CCI’s review timelines. The Commission now has 30 calendar days (down from 30 working days) to form a prima facie opinion on whether a transaction is likely to cause an appreciable adverse effect on competition.
The de minimis exemption exempts transactions where the target company has assets of up to INR 450 crore or turnover of up to INR 1,250 crore in India. Besides, the recent amendments clearly lay down the grounds of exemption for minority acquisitions, intra-group restructuring, and acquisitions by financial intermediaries in some situations. The so-called green channel filings, which provide deemed approval for the combinations without the horizontal, vertical, or complementary overlaps have also been officially codified.
One of the changes affecting international deals is that the standstill obligation, which prevents closing before issuance of approval by CCI, extends worldwide. This way even if the transaction is structured and signed outside India it cannot be closed without CCI clearance if the Indian thresholds are crossed.
Sectoral Restrictions and Investment Caps
Only a few sectors in India are fully open to foreign ownership. The Consolidated FDI Policy with FEMA Non-Debt Instruments Rules define sector-wise caps and entry routes.
Switching between automatic route and government approval route drastically alters the approval procedure. Foreign investment up to sectoral cap under the automatic route doesn’t require government approval; the investor just has to report the transaction to RBI within the time limit set by the law. But the government approval route means prior clearance from the ministry concerned is a must before the investment can be done.
There still remain some sectors that are deemed sensitive about FDI. Defence manufacturing with FDI of 74% for companies still under the industrial licensing regime is allowed through the automatic route but higher FDI would require government approval. In digital news media, the FDI cap of 26% and the requirement of government approval.
However, some sectoral caps have been increased as part of the Government’s liberalisation agenda. For example, the FDI in insurance sector was raised to 74% under the automatic route in 2021 and the Union Budget 2025-26 announced a further increase to 100%, subject to the condition that the entire premium collected by the company is invested within India. Besides, the telecom sector now allows 100% FDI under the automatic route. In fact, these changes are a clear proof of the Government’s policy inclination towards liberalisation of sectors where capital and technology are required. If there is a foreign acquirer who wants to take over the leadership of an Indian company in a restricted sector, the sectoral cap will determine the maximum amount.
Practical Considerations for Cross-Border Deal Structuring
Cross-border M&A transactions in India are rarely straightforward because of the regulatory touchpoints involved. Even a deal structurally allowed may get stuck if the sequence of obtaining regulatory approvals is not handled properly. FEMA compliance and CCI notification are not one after the other; the two could run side by side, and a delay in one may impact the other.
For inbound transactions, the buyer needs to check the relevant sector cap; identify if the deal is under automatic or government approval route; price the deal in compliance with FEMA; and also check if CCI notification is needed. For outbound transactions, Indian companies have to comply with the overseas investment rules that prescribe the conditions for structuring and reporting such investments. Companies Act 2013 Section 234 permits cross-border mergers subject to the prior approval of RBI.
While India’s regulatory structure for cross-border M&A has been significantly improved, it is still such that legal, financial, and regulatory due-diligence need to be conducted together. Amendments in competition law in 2024 in particular bring about a major change for deal teams handling transactions involving high-value digital or technology targets. Parties should incorporate in their plans the possibility of long regulatory timelines, and engage the concerned authorities early, mainly in cases where transactions are in sectors requiring government approval or where deal value is close to the new CCI threshold.
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Prerna Bhakoria is a skilled Legal Associate at LEGALLANDS LLP, in the field of Corporate Law. She holds a BBA LLB degree with a specialization in Banking and Finance from the University of Petroleum and Energy Studies (Batch 2018-2023).
Her areas of practice in Corporate Law include drafting of legal agreements, corporate compliance, client management.
