Cross-Border M&A India: FEMA, Tax & Valuation Guide | Virtual Auditor

1. Overview of the Cross-Border M&A Regulatory Landscape in India

India’s regulatory framework for cross-border M&A is multi-layered. Unlike jurisdictions with a single foreign investment review mechanism, India requires compliance across multiple independent regulatory bodies, each with its own approval process, pricing rules, and reporting timelines. The failure to obtain any single approval — or to comply with any one set of rules — can jeopardise the entire transaction, create personal liability for directors, and result in penalties that are disproportionate to the regulatory breach.

The principal regulatory frameworks governing cross-border M&A are:

• FEMA (Non-Debt Instruments) Rules, 2019: Governs the pricing, entry route (automatic vs. government approval), sectoral caps, and reporting requirements for inbound investments. Administered by the Reserve Bank of India and the Department for Promotion of Industry and Internal Trade (DPIIT).
• Income Tax Act, 1961: Governs the taxation of capital gains arising from the transfer of Indian assets, Section 195 withholding obligations on payments to non-residents, and the applicability of Double Taxation Avoidance Agreements (DTAAs). Administered by the Central Board of Direct Taxes (CBDT).
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: The Takeover Code governs the acquisition of shares and control in listed Indian companies, prescribing trigger thresholds, mandatory open offer requirements, and pricing norms. Administered by SEBI.
• Companies Act, 2013: Governs corporate approvals for mergers, amalgamations, demergers, and schemes of arrangement. Cross-border mergers are now permitted under Section 234 read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. Administered by the Ministry of Corporate Affairs.
• Competition Act, 2002: The Competition Commission of India (CCI) reviews combinations that exceed prescribed asset and turnover thresholds to assess their impact on competition in the relevant market.
• Sector-specific regulations: Insurance (IRDAI), banking (RBI), telecom (DoT), defence (MoD), and other regulated sectors have their own foreign ownership restrictions and approval requirements that layer on top of the general FEMA framework.

At our practice, we handle the FEMA compliance, valuation, and tax structuring aspects of cross-border M&A transactions. We work in coordination with the client’s legal counsel (who handles Companies Act, NCLT, and CCI filings) to ensure end-to-end regulatory compliance. Our role typically begins at the structuring stage — well before the definitive agreement is signed — because the choice of acquisition structure has direct implications for pricing, taxation, and FEMA compliance.

2. Inbound M&A: Foreign Acquirer Acquiring an Indian Target

2.1 Deal Structures for Inbound Acquisitions

Foreign acquirers can acquire Indian targets through several structural routes, each carrying different regulatory implications:

Share Acquisition (Direct): The foreign acquirer purchases the shares of the Indian target company directly from the existing shareholders (residents or non-residents). This is the most common structure for private company acquisitions. The transaction triggers FEMA pricing rules (Rule 22 of NDI Rules for share transfers), FC-TRS reporting, and Section 195 withholding obligations on the purchase consideration paid to selling shareholders.

Share Subscription (Primary Issuance): The Indian target company issues fresh shares to the foreign acquirer. This dilutes the existing shareholders rather than buying them out. The transaction triggers FEMA pricing rules (Rule 21 of NDI Rules for share issuance), FC-GPR reporting, and does not directly create capital gains tax liability for existing shareholders (though dilution may have indirect tax implications in certain scenarios).

Asset Acquisition: The foreign acquirer (acting through an Indian subsidiary or branch) purchases specific assets or a business division of the Indian target, rather than acquiring the shares of the entity. Asset acquisitions avoid the transfer of contingent liabilities but may trigger GST on the transfer of assets and require individual consent for assignment of contracts. From a FEMA perspective, the initial capitalisation of the Indian subsidiary or branch must comply with FDI norms.

Scheme of Arrangement (Cross-Border Merger): Under Section 234 of the Companies Act, 2013, a foreign company can merge with an Indian company (or vice versa), subject to RBI approval and NCLT sanction. Cross-border mergers are limited to jurisdictions whose securities regulators are members of the International Organisation of Securities Commissions (IOSCO) or whose central banks are members of the Bank for International Settlements (BIS). This structure is used for full integration of operations and is more common in outbound M&A scenarios.

Slump Sale: The transfer of a business undertaking as a going concern for a lump sum consideration, without individual valuation of assets and liabilities. Under Section 50B of the Income Tax Act, slump sales are taxed as capital gains based on the net worth of the undertaking. From a FEMA perspective, if the buyer is a foreign entity operating through an Indian subsidiary, the subsidiary’s acquisition of the business undertaking is a domestic transaction, but the initial FDI into the subsidiary must comply with NDI Rules.

2.2 FEMA Compliance for Inbound Acquisitions

2.2.1 Entry Route Determination

The first step in any inbound acquisition is determining whether the target’s sector permits FDI and, if so, whether it falls under the automatic route or the government (approval) route. The FDI Policy, consolidated by DPIIT and given statutory force through FEMA NDI Rules Schedule I, classifies sectors into four categories:

• 100% automatic route: Most manufacturing, IT/ITeS, e-commerce (marketplace model), and services sectors. No prior government approval required.
• Automatic route with sectoral cap: Insurance (74%), defence (74% under automatic, 100% with government approval), telecom (100% with 49% under automatic and balance under approval), and others. FDI up to the sectoral cap can come in without government approval.
• Government approval route: Multi-brand retail (51% cap), broadcasting (49-100% depending on sub-sector), mining (certain categories), and investments from countries sharing a land border with India (Press Note 3 of 2020).
• Prohibited sectors: Lottery, gambling, chit funds, Nidhi companies, real estate (with exceptions for townships and SEZs), trading in transferable development rights, and manufacturing of cigars and tobacco products.

For acquisitions from countries sharing a land border with India (China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan), Press Note 3 of 2020 (now incorporated into FEMA NDI Rules) requires government approval regardless of the sector or the investment amount. This provision also applies to beneficial owners of the investing entity who are citizens of or located in these countries. This has significant implications for PE/VC funds with limited partners domiciled in these jurisdictions.

2.2.2 FEMA Pricing Rules

The pricing constraints differ based on whether the acquisition involves share issuance or share transfer:

Share Issuance to Foreign Acquirer (Rule 21): The price per share must be at or above the fair value determined by a SEBI Category I Merchant Banker or a Chartered Accountant using an internationally accepted pricing methodology on an arm’s length basis. For listed companies, SEBI ICDR pricing norms apply (typically a formula based on the volume-weighted average price over a specified period). A detailed FEMA valuation certificate is required.

Share Transfer — Resident Seller to Foreign Buyer (Rule 22): The transfer price must be at or above fair value (floor price). This ensures that Indian assets are not transferred to non-residents at below-market prices. The valuation certificate requirements are the same as for share issuance.

Share Transfer — Non-Resident Seller to Indian Buyer: The transfer price must be at or below fair value (ceiling price). This prevents overvaluation and round-tripping.

Our detailed guide on FEMA valuation for FDI and share pricing covers the pricing methodology in depth.

2.2.3 FEMA Reporting and Filings

The following FEMA reports must be filed through the AD Category I bank on the RBI’s FIRMS portal:

Late filing of any of these forms constitutes a FEMA contravention and may attract compounding penalties.

2.3 Income Tax Implications of Inbound Acquisitions

2.3.1 Section 195 — Withholding Tax on Payments to Non-Residents

Section 195 of the Income Tax Act, 1961 is the critical tax provision in inbound M&A where the selling shareholders are non-residents. The section requires any person responsible for paying to a non-resident any sum chargeable to tax in India to deduct income tax thereon at the rates in force.

In a share acquisition, the Indian buyer (or the Indian target company facilitating the transfer) must withhold tax on the capital gains component of the purchase consideration payable to the non-resident seller. The withholding rate depends on:

• Nature of the asset: Shares of an Indian company are deemed to be situated in India and are therefore taxable in India under Section 9(1)(i).
• Holding period: Shares held for more than 24 months (36 months for unlisted shares acquired before specific dates) are long-term capital assets; shorter holding periods result in short-term capital gains.
• Applicable DTAA: If the non-resident seller is a tax resident of a country with which India has a Double Taxation Avoidance Agreement, the DTAA provisions may reduce or eliminate the Indian tax liability. The seller must provide a Tax Residency Certificate (TRC) to claim treaty benefits.
• Section 195(2) or 197 certificate: The payer can apply to the Assessing Officer for a certificate determining the appropriate withholding rate, rather than withholding on the full payment at the maximum marginal rate.

In our practice, we assist both buyers and sellers in structuring the withholding tax compliance. For sellers, we prepare the computation of capital gains and assist in obtaining a lower withholding certificate under Section 197. For buyers, we ensure that the withholding is correctly computed and remitted, and that the necessary Form 15CA/15CB compliance is completed for the remittance.

2.3.2 Capital Gains Tax Computation

The capital gains arising to the non-resident seller are computed as follows:

• Full value of consideration: The actual sale price received (in Indian rupees or the INR equivalent of foreign currency received).
• Cost of acquisition: The original cost at which the shares were acquired. For shares acquired in foreign currency, the cost is converted to INR at the exchange rate prevailing on the date of acquisition.
• Indexation benefit: Available only for long-term capital gains on unlisted shares. The cost inflation index published by CBDT is used to inflate the cost of acquisition to account for inflation.
• Expenditure on transfer: Brokerage, legal fees, and other expenses incurred wholly and exclusively in connection with the transfer can be deducted.

Long-term capital gains tax rates for non-residents:

• Listed shares (with STT paid): 12.5% (under Section 112A, for gains exceeding INR 1.25 lakh, after Finance Act 2024 amendments).
• Unlisted shares: 12.5% without indexation (after Finance Act 2024 amendments that removed the indexation benefit for assets acquired after a specific date and unified the rate).

Short-term capital gains tax rates for non-residents:

• Listed shares (with STT paid): 20% (under Section 111A, after Finance Act 2024 amendments).
• Unlisted shares: At applicable slab rates or 30% (depending on the character of the income and the applicable treaty).

2.3.3 Indirect Transfer Provisions — Section 9(1)(i) Explanation 5

One of the most significant provisions affecting cross-border M&A is the indirect transfer rule. Under Explanation 5 to Section 9(1)(i), the transfer of shares of a foreign company is deemed to be transfer of a capital asset situated in India if the shares derive their value substantially from assets located in India. “Substantially” is defined as the Indian assets constituting at least 50% of the value of all assets owned by the foreign company.

This provision was introduced following the Vodafone case and applies to transactions where a foreign parent holding company’s shares are transferred, and the holding company’s primary asset is its shareholding in an Indian subsidiary. The tax implications extend to the buyer, who may be required to withhold tax under Section 195 even though the transaction is between two non-residents and involves shares of a foreign company.

For M&A transactions involving multi-layered holding structures, the indirect transfer analysis is critical. At our practice, we prepare detailed asset composition analyses to determine whether the 50% threshold is triggered and, if so, the quantum of capital gains attributable to Indian assets.

2.3.4 Section 56(2)(x) — Anti-Avoidance for Undervalued Transfers

If shares of an unlisted company are transferred at a price below the fair market value (as determined under Rule 11UA), the difference may be taxable as income from other sources in the hands of the acquirer under Section 56(2)(x). This provision acts as an anti-avoidance measure to prevent the transfer of assets at artificially low prices and applies to both domestic and cross-border transactions.

This creates an additional valuation pressure: the FEMA valuation (which sets a floor price for transfers from residents to non-residents and a ceiling for transfers from non-residents to residents) must be reconciled with the Rule 11UA fair market value to ensure that the transaction price does not trigger adverse tax consequences under either framework.

2.4 SEBI Takeover Code — Listed Target Acquisitions

2.4.1 Trigger Thresholds

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Code”) applies when a foreign acquirer targets a listed Indian company. The key triggers are:

• Initial trigger — 25% shareholding: An acquirer (along with persons acting in concert, or PACs) who acquires shares or voting rights that, taken together with existing holdings, reach or exceed 25% of the target’s total voting rights must make a mandatory open offer to acquire an additional 26% of the total shares from public shareholders.
• Creeping acquisition — 5% in a financial year: An acquirer (along with PACs) holding between 25% and 75% of the target’s shares/voting rights cannot acquire more than 5% additional shares/voting rights in any financial year without triggering a mandatory open offer.
• Control trigger: Regardless of the shareholding percentage, any acquisition of “control” over a listed company triggers a mandatory open offer. “Control” includes the right to appoint a majority of directors or to control management or policy decisions.

2.4.2 Open Offer Pricing

The minimum open offer price is determined by SEBI’s pricing formula, which takes the highest of:

• The negotiated price per share under the acquisition agreement.
• The highest price paid by the acquirer (or PACs) for shares of the target during the 52 weeks preceding the public announcement.
• The volume-weighted average market price during the 60 trading days preceding the public announcement.

For cross-border acquirers, the open offer price must be paid in Indian rupees, and the acquirer must arrange for the necessary foreign exchange inflow to fund the open offer. The escrow deposit (typically 25% of the total open offer consideration) must be deposited within specified timelines.

2.4.3 SEBI Exemptions Relevant to Cross-Border M&A

Certain cross-border transaction structures may qualify for exemptions under Regulation 10 or Regulation 11 of the Takeover Code:

• Inter se transfer between PACs: Transfers between members of the same promoter group or persons acting in concert are exempt from the open offer requirement, subject to conditions.
• Schemes of arrangement: Acquisitions pursuant to a scheme of arrangement under the Companies Act that has been sanctioned by the NCLT are exempt, provided the scheme is approved by public shareholders through a separate ballot.
• Preferential allotment: Allotment of shares under SEBI ICDR Regulations is exempt if it does not result in acquisition of control.

3. Outbound M&A: Indian Acquirer Acquiring a Foreign Target

3.1 FEMA Overseas Investment Framework

Outbound acquisitions by Indian entities are governed by the FEMA (Overseas Investment) Rules, 2022 and the FEMA (Overseas Investment) Regulations, 2022, which replaced the earlier FEMA (Transfer or Issue of Any Foreign Security) Regulations, 2004 (popularly known as ODI Regulations).

Key provisions governing outbound M&A:

• Financial commitment limit: An Indian entity can make overseas direct investment (ODI) up to 400% of its net worth as per the last audited balance sheet. This limit applies to the aggregate financial commitment across all overseas entities.
• Eligible investors: Any Indian company, LLP, partnership firm, body corporate, or resident individual can make ODI, subject to certain conditions. Resident individuals can invest up to USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS) for portfolio investment, but ODI by individuals is subject to different conditions.
• Prohibited sectors: Indian entities cannot invest in foreign entities engaged in real estate, banking (without RBI approval), or activities not permitted under Indian law.
• Step-down subsidiaries: The 2022 rules introduced specific provisions for investments through step-down subsidiaries, requiring the Indian entity to ensure that the ultimate use of funds is in compliance with FEMA norms.

3.2 Valuation Requirements for Outbound M&A

The foreign target must be valued by a SEBI Category I Merchant Banker, a practising Chartered Accountant, or a registered valuer. The valuation is submitted as part of the Form ODI filing with the AD bank. The acquisition price must be justified by the valuation — while there is no explicit floor or ceiling price (unlike inbound FDI), the RBI expects the price to be reasonable and on an arm’s length basis.

At Virtual Auditor, we regularly value foreign targets for outbound acquisitions. The valuation of a foreign entity requires access to the target’s financial statements (often prepared under IFRS or local GAAP, not Indian Accounting Standards), understanding of the target’s market and competitive positioning, and appropriate adjustment for country risk and currency risk. Our valuation reports for outbound M&A include a detailed bridge between the target’s local GAAP financials and the valuation inputs used in the DCF or market multiples analysis.

3.3 Tax Considerations for Outbound M&A

Outbound acquisitions involve the following Indian tax considerations:

• Remittance compliance: The acquisition consideration must be remitted through AD Category I banks, and Form 15CA (online) and Form 15CB (CA certificate) must be filed. The CA issuing Form 15CB must certify whether the remittance is subject to Indian tax and, if so, whether proper withholding has been done. Our guide on 15CA/15CB compliance covers this in detail.
• Transfer pricing: If the Indian acquirer and the foreign target are or become associated enterprises (which they will be post-acquisition), all subsequent transactions between them must comply with transfer pricing regulations under Sections 92 to 92F of the Income Tax Act.
• CFC rules: India does not currently have comprehensive Controlled Foreign Corporation (CFC) rules, but the GAAR (General Anti-Avoidance Rules) provisions under Sections 95 to 102 of the Income Tax Act can be invoked to deny tax benefits if the arrangement is found to have been entered into with the main purpose of obtaining a tax benefit.
• Double taxation relief: Dividends or capital gains received by the Indian entity from the foreign target may be eligible for double taxation relief under Section 90 (DTAA countries) or Section 91 (non-DTAA countries) of the Income Tax Act.

3.4 Cross-Border Mergers — Section 234 Framework

Section 234 of the Companies Act, 2013 permits cross-border mergers in both directions — an Indian company can merge into a foreign company (subject to RBI approval and the foreign jurisdiction being in a permitted list) and a foreign company can merge into an Indian company. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provide the procedural framework.

Key conditions for cross-border mergers:

• The foreign jurisdiction must be one whose securities market regulator is a member of IOSCO or whose central bank is a member of BIS.
• RBI prior approval is required, and the merger scheme must comply with all FEMA pricing and reporting norms.
• The resulting company (if Indian) must comply with all sectoral FDI limits and conditions.
• NCLT approval is required for the Indian leg of the merger.
• An IBBI-registered valuer must value the assets and liabilities of the merging entities for the purpose of the swap ratio determination.

4. Valuation in Cross-Border M&A

4.1 Multiple Valuation Requirements

A single cross-border M&A transaction may require multiple valuations for different regulatory purposes:

At Virtual Auditor, CA V. Viswanathan (IBBI/RV/03/2019/12333) is qualified to perform all of the above valuations — FEMA pricing valuation (as CA), Rule 11UA valuation (as CA), swap ratio valuation (as IBBI Registered Valuer under SFA class), and purchase price allocation (as a qualified valuer with extensive M&A experience). This single-point capability eliminates inconsistencies that can arise when different valuers produce different fair values for the same entity.

4.2 Valuation Methodologies for M&A

Cross-border M&A valuations typically employ a combination of methodologies:

Income Approach (DCF): Projects the target’s free cash flows, discounted at the weighted average cost of capital. For cross-border valuations, the WACC must reflect country risk premium (using models such as Damodaran’s country risk premium or Aswath’s ERP data), currency risk (if cash flows are in a different currency from the acquirer’s functional currency), and political/regulatory risk. The DCF model should also capture synergies if the valuation is for the purpose of determining the acquirer’s maximum willingness to pay (as opposed to standalone fair value for FEMA purposes).

Market Approach — Comparable Companies: Trading multiples (EV/Revenue, EV/EBITDA, P/E) of listed comparable companies in the same industry and geography. For cross-border M&A, the comparable set should include companies from the target’s home market as well as global peers, with appropriate adjustments for size, growth rate, profitability, and country risk.

Market Approach — Comparable Transactions: Multiples implied by recent M&A transactions involving similar targets. This method is particularly useful for cross-border M&A because it captures the control premium that acquirers have historically paid for comparable assets. The challenge is finding transactions that are truly comparable in terms of deal size, geography, sector, and vintage.

Asset Approach (NAV / Sum-of-Parts): Values the target based on its net assets adjusted to fair market value. For holding companies, conglomerates, or asset-heavy businesses, a sum-of-the-parts approach valuing each business segment or asset separately may be more appropriate. The asset approach is also relevant for determining the net worth of the undertaking in slump sale transactions under Section 50B.

4.3 Control Premium and Minority Discount

In M&A transactions, the acquirer is typically purchasing a controlling stake or the entire company. The fair value per share in a control transaction includes a control premium — the additional value that a buyer is willing to pay for the ability to control the company’s operations, strategy, and cash flows. Empirical data suggests control premiums in Indian M&A typically range from 15% to 40% above the pre-announcement trading price for listed companies.

Conversely, if the transaction involves a minority stake, a minority discount may apply. The interplay between FEMA pricing (which establishes fair value without specifying whether it should reflect control or minority value) and the actual transaction price requires careful analysis and documentation. Our valuation reports explicitly state whether the fair value reflects a controlling interest or a minority interest and any premiums or discounts applied.

5. Deal Structuring: Tax-Efficient Cross-Border M&A

5.1 Holding Company Jurisdiction Selection

The choice of holding company jurisdiction is one of the most consequential structuring decisions in cross-border M&A. The jurisdiction affects the withholding tax on dividends repatriated from the Indian subsidiary, the capital gains tax on any future exit from the Indian investment, and the availability of DTAA benefits.

Key considerations in jurisdiction selection:

• DTAA network: India has DTAAs with over 90 countries. The treaty rate on dividends, interest, royalties, and capital gains varies significantly. Post the MLI (Multilateral Instrument) amendments, many treaties now include a Principal Purpose Test (PPT) that can deny treaty benefits if the arrangement is primarily tax-motivated.
• Substance requirements: Following the BEPS initiative and India’s adoption of the MLI, holding companies must demonstrate economic substance in the chosen jurisdiction. Shell companies with no employees, no office, and no decision-making activity are unlikely to secure treaty benefits.
• Mauritius and Singapore: Historically, Mauritius and Singapore were the preferred holding jurisdictions for investments into India due to favourable DTAA provisions (capital gains exemption under the original treaties). The 2016 amendments to the India-Mauritius DTAA and the consequent amendment to the India-Singapore DTAA eliminated the capital gains exemption for shares acquired after April 1, 2017. Investments made before this date are grandfathered.
• Netherlands: The India-Netherlands DTAA provides a relatively favourable framework, but the Netherlands has implemented its own anti-conduit regulations requiring economic substance.

5.2 Deferred Consideration, Earn-Outs, and Escrow

Cross-border M&A transactions frequently involve deferred consideration, earn-out payments, and escrow arrangements. Each of these creates specific FEMA and tax compliance requirements:

Deferred consideration: Where part of the purchase price is payable at a future date (fixed amount), the FEMA valuation must cover the total consideration (including the deferred portion). The Section 195 withholding obligation arises at the time of each payment, not at the time of the transfer. The payer must determine the capital gains attributable to each instalment and withhold tax accordingly.

Earn-outs: Where part of the consideration is contingent on the target achieving specified financial or operational milestones, the tax treatment is more complex. The earn-out payment may be treated as additional consideration for the share transfer (and taxed as capital gains) or as income for services rendered by the seller (taxed as business income or salary). The characterisation depends on the specific terms of the earn-out. FEMA compliance requires that the total potential consideration (including maximum earn-out) be covered by the valuation certificate.

Escrow: Funds held in escrow for indemnity claims or working capital adjustments are not taxable until released to the seller. However, the Section 195 withholding obligation may still apply at the time the funds are placed in escrow, depending on the terms. RBI has issued clarifications on the permissibility of escrow arrangements in cross-border transactions through AD Category I banks.

5.3 Share Swap Structures

In share swap transactions, the acquirer issues its own shares (or shares of a group entity) to the seller in exchange for the target’s shares, rather than paying cash. Share swaps are permitted under FEMA NDI Rules, subject to the following conditions:

• The swap ratio must be based on the fair valuation of the shares of both entities, determined by a SEBI Category I Merchant Banker or a Chartered Accountant.
• The shares issued by the foreign acquirer must be listed on a recognised stock exchange or, if unlisted, must be valued on an arm’s length basis.
• The Indian resident receiving foreign shares must comply with the Overseas Investment Rules for holding foreign securities.

From a tax perspective, share swaps may qualify for tax-neutral treatment under Section 47 of the Income Tax Act if the conditions of the specific exemption provision are met (such as merger/demerger provisions under Section 47(vi) and (vii)). However, cross-border share swaps that do not fall within the specific exemption categories will be taxable as capital gains, with the fair market value of the shares received being treated as the full value of consideration.

6. Regulatory Approvals Checklist for Cross-Border M&A

The following consolidated checklist covers the key regulatory approvals and compliance steps for a typical inbound cross-border M&A transaction:

6.1 Pre-Signing Phase

1. FDI entry route check: Confirm the target’s sector permits FDI and identify whether automatic route or government approval route applies.
2. Press Note 3 screening: Determine if the acquirer or any beneficial owner is from a country sharing a land border with India.
3. CCI notification assessment: Assess whether the combination exceeds the asset and turnover thresholds under Section 5 of the Competition Act, 2002.
4. SEBI Takeover Code assessment: For listed targets, determine if the acquisition triggers open offer requirements.
5. Sector-specific approvals: Identify any sector-specific approvals required (IRDAI, RBI for banking, DoT for telecom, etc.).
6. FEMA valuation: Obtain a FEMA-compliant valuation certificate from an eligible valuer.
7. Tax structuring: Determine the tax-efficient acquisition structure, holding company jurisdiction, and withholding tax obligations.

6.2 Signing to Closing Phase

1. CCI filing: File Form I (short form) or Form II (long form) with the CCI, along with the prescribed fee.
2. Government approval (if applicable): File with the Department for Promotion of Industry and Internal Trade (DPIIT) through the Foreign Investment Facilitation Portal (FIFP).
3. SEBI open offer (if applicable): File the public announcement, detailed public statement, and submit the draft letter of offer to SEBI.
4. Board and shareholder approvals: Obtain the required corporate approvals under the Companies Act.
5. Section 195 withholding certificate: Apply for a certificate under Section 195(2) or 197 for lower withholding on the purchase consideration.

6.3 Post-Closing Phase

1. FEMA reporting: File FC-GPR (for share issuance) or FC-TRS (for share transfer) within the prescribed timelines through the AD bank on the FIRMS portal.
2. Section 195 withholding and Form 15CA/15CB: Withhold tax, remit to the government, and file Form 15CA online and Form 15CB (CA certificate) before effecting the remittance.
3. Stamp duty: Pay applicable stamp duty on the share transfer. The rate varies by state (for physical shares) or is fixed at 0.015% for dematerialised shares under the Indian Stamp Act (as amended).
4. Annual FDI return: File the annual return on FDI (Form DI) by 15th July each year.
5. Transfer pricing documentation: Establish transfer pricing policies for ongoing transactions between the Indian entity and the foreign acquirer/group entities.
6. Purchase price allocation: Under Ind AS 103, allocate the purchase consideration to identifiable assets and liabilities of the acquired entity. Any residual is recognised as goodwill.

7. Special Situations in Cross-Border M&A

7.1 Distressed Asset Acquisitions (IBC Framework)

The Insolvency and Bankruptcy Code, 2016 has created a significant pipeline of distressed asset acquisition opportunities for foreign investors. Under the Corporate Insolvency Resolution Process (CIRP), a resolution applicant (including foreign entities) can submit a resolution plan for the acquisition of the corporate debtor. Key considerations for foreign resolution applicants:

• The resolution plan must comply with FDI sectoral caps and entry route requirements.
• The resolution professional must ensure that the fair value and liquidation value are determined by IBBI-registered valuers.
• Section 29A of the IBC imposes eligibility conditions on resolution applicants, including restrictions on connected persons of the corporate debtor.
• Tax treatment: Under Section 79(2)(c) of the Income Tax Act, the restriction on carry-forward of losses on change in shareholding does not apply to changes in shareholding pursuant to an approved resolution plan.

7.2 Private Equity and Venture Capital Exits

Cross-border PE/VC exits from Indian portfolio companies involve selling shares of the Indian target to either a strategic acquirer (trade sale) or through a secondary sale to another fund. The FEMA compliance requirements are the same as for any share transfer from a non-resident to a resident (or non-resident, if the buyer is also foreign). The Section 195 withholding obligation applies to the capital gains realised by the exiting PE/VC fund.

Key considerations for PE/VC exits:

• DTAA benefits: PE/VC funds typically invest through Mauritius or Singapore SPVs. The availability of treaty benefits depends on the vintage of the investment (pre or post April 2017 for Mauritius), the substance of the SPV, and the satisfaction of the Principal Purpose Test under the MLI.
• Safe harbour for foreign portfolio investors: FPIs registered with SEBI benefit from the safe harbour under Section 115AD, which provides specific capital gains tax rates.
• Drag-along and tag-along rights: The exercise of drag-along rights by a majority shareholder selling to a foreign acquirer triggers the same FEMA pricing and reporting requirements for all shareholders being dragged along.

7.3 Management Buyouts with Foreign Funding

When the management team of an Indian company acquires the company using funding from a foreign PE fund or leverage from foreign lenders, the transaction involves both FDI (from the PE fund) and potentially ECB (from foreign lenders). The FEMA compliance is layered — the equity component must comply with NDI Rules, and the debt component must comply with the ECB framework (Master Direction on ECBs). The management team’s acquisition of shares from existing shareholders must comply with the insider trading provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015 if the target is listed.

7.4 Reverse Flip Structures

Indian startups that previously flipped their holding structure offshore (creating a US Delaware C-Corp or Singapore holding company as the parent, with the Indian entity as a subsidiary) sometimes reverse the structure — bringing the parent back to India. This “reverse flip” involves the transfer of shares of the foreign parent to the shareholders of the Indian subsidiary (or a new Indian holding company), and the foreign entity becoming a subsidiary of the Indian entity.

The reverse flip triggers multiple FEMA and tax compliance requirements:

• The transfer of foreign shares by Indian residents requires compliance with Overseas Investment Rules.
• The issuance of shares of the Indian entity to non-resident shareholders (if any) of the foreign parent requires FEMA NDI compliance.
• Capital gains may arise on the swap of foreign shares for Indian shares, depending on the specific structure.
• If the foreign parent had issued stock options (such as 409A-valued options for US entities), these need to be converted or extinguished, creating additional tax and valuation considerations.

8. Documentation and Due Diligence Considerations

8.1 FEMA Due Diligence

In addition to standard legal, financial, and tax due diligence, cross-border M&A transactions require a specific FEMA due diligence stream covering:

• Historical FEMA compliance: Review all past FDI filings (FC-GPR, FC-TRS), share allotments to non-residents, and ODI filings to identify any historical contraventions that may require compounding before or as a condition to closing.
• Downstream investment compliance: If the target has made downstream investments, verify that each downstream investment was reported and complied with the applicable pricing and sectoral conditions.
• ECB compliance: Review all external commercial borrowings for compliance with end-use restrictions, all-in-cost ceiling, minimum average maturity, and Form ECB-2 reporting.
• Share capital structure: Verify that the target’s share capital structure is FEMA-compliant — including the conversion terms of any convertible instruments and the compliance of any bonus or split with FEMA norms.

8.2 Tax Due Diligence for Cross-Border M&A

The tax due diligence should specifically address:

• Transfer pricing exposure: Review the target’s international transactions with associated enterprises for compliance with Sections 92 to 92F, including the adequacy of transfer pricing documentation.
• Withholding tax compliance: Verify that all payments to non-residents have been made with proper Section 195 withholding and Form 15CA/15CB compliance.
• Permanent establishment risk: Assess whether the target’s activities create a permanent establishment (PE) for any foreign group entity in India, which would create an Indian tax liability for that foreign entity.
• Pending tax assessments: Identify all open tax assessments, appeals, and litigation, with a quantification of the potential tax exposure.

9. Competition Law Aspects

The Competition Commission of India (CCI) must approve any “combination” that exceeds the thresholds specified in Section 5 of the Competition Act, 2002. A combination includes mergers, amalgamations, and acquisitions of shares, voting rights, assets, or control.

The current thresholds (as revised from time to time) consider the combined assets and turnover of the parties in India and globally. Combinations below the de minimis target exemption (where the target’s assets in India do not exceed INR 450 crore or turnover does not exceed INR 1,250 crore) are exempt from CCI filing requirements.

The CCI review process involves:

1. Pre-filing consultation (optional): The parties can seek an informal pre-filing consultation with the CCI to discuss the transaction and the appropriate filing form.
2. Form I filing (short form): Used for transactions that are not likely to cause an appreciable adverse effect on competition. The CCI provides a prima facie order within 30 working days.
3. Form II filing (long form): Used for complex transactions with potential competition concerns. The CCI has 210 days to complete its review. If no order is passed within 210 days, the combination is deemed approved.
4. Phase I and Phase II review: The CCI may approve the combination in Phase I, approve it with conditions (remedies), or proceed to a detailed Phase II investigation.

For cross-border M&A, the CCI assessment considers the combined market position of the acquirer and target in the relevant Indian market. Global transactions that do not have a significant nexus with India may still require CCI filing if the threshold is met, but are typically cleared in Phase I.

10. Practical Timeline for a Cross-Border M&A Transaction

Based on our experience advising on cross-border M&A transactions at Virtual Auditor, the following is a representative timeline:

Total timeline from pre-deal to post-closing filings: typically 4 to 9 months for a mid-market transaction. Listed company acquisitions involving SEBI Takeover Code compliance can extend to 6 to 12 months. Contact us to discuss your transaction timeline.

Frequently Asked Questions

What approvals are needed for a cross-border M&A transaction in India?

Cross-border M&A in India requires compliance with FEMA NDI Rules (RBI pricing and reporting), Companies Act (board and shareholder approvals, NCLT for schemes), SEBI regulations (Takeover Code for listed targets), CCI approval (if the combination exceeds thresholds under Section 5 of the Competition Act), Income Tax (Section 195 withholding and capital gains), and sector-specific approvals. The exact set depends on whether the deal is inbound or outbound, whether the target is listed, and the sector involved.

How is valuation determined for cross-border share acquisitions under FEMA?

Under FEMA NDI Rules, the valuation must be determined using an internationally accepted pricing methodology on an arm’s length basis by a SEBI Category I Merchant Banker or Chartered Accountant. Common methodologies include DCF, comparable company multiples, and comparable transaction analysis. For listed companies, SEBI pricing guidelines apply. Our FEMA valuation guide covers the methodology in detail.

What is Section 195 withholding tax in cross-border M&A?

Section 195 of the Income Tax Act requires any person making payment to a non-resident that is chargeable to tax in India to deduct tax at source. In cross-border M&A, this applies to payments for share purchases, capital gains distributions, deferred consideration, and earn-outs. The buyer must obtain a lower withholding certificate under Section 195(2) or 197 and complete Form 15CA/15CB compliance before remitting funds.

Does SEBI Takeover Code apply to cross-border acquisitions?

Yes. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 apply to any acquirer — Indian or foreign — acquiring shares or control of a listed Indian company. Crossing the 25% threshold triggers a mandatory open offer for an additional 26% of the target’s shares. The minimum offer price is determined by SEBI’s pricing formula.

What is the role of CCI in cross-border M&A?

The Competition Commission of India must approve any combination where the parties’ combined assets or turnover exceed the thresholds specified in Section 5 of the Competition Act, 2002. CCI clearance is mandatory before consummation of the combination. The CCI can approve unconditionally, approve with conditions (remedies), or reject the combination. The review process takes 30 working days for Form I filings and up to 210 days for detailed Form II review.

How much does cross-border M&A advisory cost?

At Virtual Auditor, cross-border M&A valuation and FEMA compliance advisory starts at INR 1,50,000 for straightforward share acquisitions. Complex transactions typically range from INR 3,00,000 to INR 10,00,000. See our pricing page for details.

Virtual Auditor — AI-Powered CA & IBBI Registered Valuer Firm
Valuer: V. VISWANATHAN, FCA, ACS, CFE, IBBI/RV/03/2019/12333
Chennai (HQ): G-131, Phase III, Spencer Plaza, Anna Salai, Chennai 600002
Bangalore: 7th Floor, Mahalakshmi Chambers, 29, MG Road, Bangalore 560001
Mumbai: Workafella, Goregaon West, Mumbai 400062
Phone: +91 99622 60333 | Email: support@virtualauditor.in
Book a Free Consultation