TerraLex Cross-Border Guide to Cross-Border Merger & Acquisition Guide

Foreign Direct Investment (FDI) in India is permitted up to 100% in most sectors under automatic route without requiring prior approval of the government. However, in some sectors prior approval of the government is required for making an investment up to a certain limit or beyond a prescribed threshold. For example, in the telecom sector – FDI up to 100% is allowed, however, FDI beyond 49% requires prior approval of the Government of India. In Defence, Private Security Agencies, Healthcare (Brownfield), Pharmaceuticals (Brownfield), and Biotechnology (brownfield), FDI up to 100% is allowed, however, FDI up to 74% is allowed under automatic route and FDI above 74% requires prior approval of the Government of India.

Besides, there are nine sectors wherein FDI is prohibited. Such sectors inter-alia include lottery business, gambling and betting, Chit funds, Nidhi company, real estate business, and atomic energy/railway operations.

Foreign exchange in India is regulated by Foreign Exchange Management Act, 1999 and the regulations made thereunder and also the guidelines issued by the Reserve Bank of India from time to time. India also has money laundering laws.

A wide range of incentive schemes are made available to investors (both domestic and foreign) to provide fiscal and non fiscal benefits. However, no grants or incentives have been introduced specifically for foreign investors. Generally, these incentives are provided for locating units in certain designated areas or establishing units in certain sectors, e.g., power, infrastructure.

Benefits are available, both from federal and state governments, in the form of concessional taxes, both direct and indirect taxes, reduced cost of setting up of units in specified areas, etc.

Employees are not entitled to management representation. However, as the amalgamation/merger is required to be approved by the court, the court may look into the employees’ interest while approving the amalgamation/merger.

Further, labour legislation also provide that in case of transfer of ownership or management of any undertaking, the workmen of such transferred undertaking shall be entitled to retrenchment compensation, if their services are being terminated. Alternatively, they are entitled for no less beneficial terms and conditions of employment if they continue to be in employment post transfer of ownership or management of the undertaking.

Workmen are entitled to compensation in case of redundancies.

If the person whose services are being terminated is a “workman” who has had more than one year of continuous employment, then his services can only be terminated in accordance with the provisions of the Industrial Disputes Act, 1947, by giving him appropriate compensation and notice as provided under the Act. Further, if the undertaking whose workman is being retrenched has more than 100 workmen in employment, it will also have to obtain prior permission of the appropriate authority before retrenching any workman.

Further, if the employee is covered by the provisions of the Shops & Establishment Act, which is enacted by each state in India, the employee’s services can be terminated by giving him such notice as is provided under the provisions of the Shops & Establishment Act of the concerned state in which the undertaking is situated. In certain states the employees working in managerial or administrative capacity are excluded from the applicability of this legislation.

If an employee is not covered by the aforementioned legislation which is generally true for managerial and administrative employees, such employees are governed only by the terms of their employment contract and their services can be terminated in accordance with the terms and conditions of their employment contract. There is no labour legislation governing such employees and such contracts are governed by the provisions of the Indian Contract Act, 1872.

The retrenchment of a “workman” is governed by the Industrial Disputes Act, 1947. The retrenched (redundant) workmen are entitled to compensation as per the provisions of the Act. Lay-off of workmen is also governed by the provisions of the Industrial Disputes Act and they are paid wages at half the normal rate during the period of lay-off.

Sale of shares Depending upon the time period for which the shares were held before being transferred, the seller will be liable to pay capital gains tax. Shares of an unlisted company held for more than 24 months (twelve months for shares of a listed company) are considered as long-term capital assets and attract long-term capital gains tax. Shares held for 24 months or less (twelve months or less for shares of a listed company) are considered as short-term capital assets and attract short-term capital gains tax. If the seller is a non-resident, long- term capital gains tax at the rate ranging from 10.4% to 10.92% and short-term capital gains tax at the rate ranging from 41.6% to of 43.68% shall be charged.

Transfer of shares also attracts stamp duty on the execution of the share transfer instrument. The applicable rate of stamp duty on such instrument is 0.25% of the amount of consideration or fair value of the shares, whichever is higher. This rate is uniform all over the country. No share transfer duty shall be payable if shares are held in dematerialised form.

Sale of assets

Depending upon the time period for which the assets (other than shares) were held before being transferred, the seller will be liable to pay capital gains tax. If the asset is held for more than 36 months, it is considered a long-term capital asset and attracts long-term capital gains tax. Assets held for 36 months or less are considered to be short-term capital asset and attract short-term capital gains tax. If the seller is a non-resident, long-term capital gains tax at the rate ranging from 20.8% to 21.84% and short-term capital gains tax at the rate ranging from 41.6% to of 43.68% shall be applicable.

The transfer of assets further entails the payment of stamp duty on the execution of any conveyance deed. The applicable rate of stamp duty on such deed will differ in each state depending upon where the transferred assets are located.

Merger sale of shares/sale of assets

There is no capital gains tax on amalgamation/merger, if it complies with the specific conditions as provided in the Income Tax Act, 1961. If these conditions are not met, capital gains tax will be levied.

The scheme of amalgamation/merger is approved by the National Company Law Tribunal (“NCLT”). The NCLT order approving such a merger may or may not be chargeable to stamp duty depending upon the state in which the NCLT giving such order is situated.

Issue of shares

No income tax is payable on the issue of shares. However, the certificate evidencing the title of shares (share certificate) is liable for stamp duty at such rate as is applicable in the state in which the company issuing shares is located.

The threshold tests are:

• Where the parties have domestic presence:

  • at least INR 100 billion (US$ 1.17 billion approx.) in terms of assets or INR 300 billion (US$ 3.53 billion approx.) in terms of turnover on a group-wide basis, or
  • at least INR 25 billion (US$ 294 million approx.) in terms of assets or INR 75 billion (US$ 882 million approx.) in terms of turnover on an entity-wide basis.

• Where the parties have cross-border presence:

  • globally, at least US$ 5 billion with at least INR 12.5 billion (US$147 million approx.) in India in terms of assets or US$15 billion with at least INR 37.50 billion (US$441 million approx.) in India in terms of turnover on a group-wide basis, or
  • at least US$1.25 billion with at least INR 12.50 billion (US$147 million approx.) in India in terms of assets or US$3.75 billion with at least INR 37.50 billion (US$441 million approx.) in India in terms of turnover on an entity-wide basis.

Exemptions The government has exempted an enterprise, whose control, shares, voting rights, or assets is being acquired, has assets of the value of not more than INR 4.50 billion or turnover of not more than INR 12.50 billion (US$147 million approx.) in India from the provisions of section 5 of the said Act for the period up to 6th March 2026.

It depends upon the transaction. Generally, the transaction documents include Share Purchase Agreement, disclosures by the seller, resignation from the outgoing key management personnel, closing board minutes, shareholders’ meeting minutes, if required, approving the transfer of shares and other closing activities and other transactional documents such as escrow agreement, asset transfer agreement, if assets are proposed to be transferred.

No mandatory gap between signing and closing is required to be followed. It depends upon the modalities of each transaction.

There is no mandatory requirement to deposit monies with the third party; the same depends upon the intention of the parties to the transaction.

It is a standard practice for the parties to (i) provide a certified board resolution approving the transaction and authorising a person, normally a director, to execute the transaction documents where the party is a company, (ii) provide a duly executed and notarised special power of attorney authorising to execute the transaction documents where the party is an individual and is not present at the closing. Depending upon the circumstances, the proof of identity may also be requested.

Generally, the transaction documents, which are in the nature of agreements/contracts, are executed on appropriate value of stamp paper and also witnessed by two witnesses for each signing party. In case of specific nature of documents such as share transfer deed, the same is required to be appropriately stamped through special adhesive stamps.

Further, certain documents, such as power of attorney, are required to be duly notarised as a general practice.

The company is required to pass a board resolution authorising a person, normally a director, to execute the documents on the company’s behalf. In some specific transactions, e.g. sale of undertaking, the company, in addition to the board’s approval, may also be required to obtain shareholders’ approval as per requirements of the Indian Companies Act.

An individual may enter into a contract either orally or in writing except where the transaction or the Indian law requires the execution of document/contract in writing. The person may either execute the document himself or authorise some other person through a power of attorney to execute the documents/contracts on his behalf. Execution is generally witnessed by a minimum of two witnesses as a practice.

Generally, the board resolution of the foreign company is required to execute documents on its behalf. If certain documents are required to be filed with the registrar of companies in India, the board resolution of foreign company whose registered office is located in a country, which is a member to the Hague Convention, is required to be apostilled in the home country. However, if the registered office of the foreign company is located in a country which is not a member to the Hague Convention, then board resolution of such company is required to be consularized by the Indian embassy in that country.

Only power of attorney, if any, is required to be notarised.

A notary cannot change the terms of the transaction as the only role the notary performs is to validate the execution of contracts/documents which are signed in his presence.

The fee of a notary is very nominal but depends on the nature of the document being notarised. However, the instrument-wise threshold of fee is prescribed under the Indian law.

Generally, no impact.

New stockholders and directors require approval of the Board of Directors. In some cases, approval of the shareholders at a general meeting may also be required for appointment of directors. Other officers are generally appointed by any director/management personnel so authorised by the Board of Directors in this regard.

The share transfer deed, duly stamped, is required to be executed both by the transferor and the transferee and delivered to the company along with the share certificates. The company will approve the transfer of shares and record the transfer in its registers and endorse the transferee details on the share certificate, and return it to the transferee.

Where shares are held in dematerialized form, the delivery instruction slip, relating to shares, signed by the transferor is required to be deposited with Depository Participant where transferee is maintaining his demat account. Thereafter, shares will be credited in the demat account of the transferee.

Yes, both the company and the individual can appoint a third party to execute documents on their behalf at the time of signing/closing. The company will be required to pass a board resolution authorizing a person to sign on its behalf. However, an individual is required to execute a duly notarised power of attorney in favour of a person authorised to sign on his behalf.

The powers of the attorney are limited by the terms and conditions contained in the power of attorney.

Yes, a faxed/e-mailed document could be admissible in a court of law as evidence of due execution subject to the condition that the party submitting it as evidence has the original document in possession.

Yes, digital signatures are permitted.

Yes, documents may be executed in counterpart.

Lawyers generally do not give “undertaking” in India.

Everything depends on the intentions of the parties. Generally, a transaction closing is subject to fulfillment of certain formalities or events which may be set as conditions precedent as required by the buyer or the seller. The parties to the transaction can organize the closing in the manner as convenient to them. Equally, there may be certain conditions agreed upon as conditions subsequent to the closing.

Generally, no further formalities are required to be carried out after closing, but sometimes, depending upon agreement, further actions may be necessary post-closing.

It is common for parties to seek legal opinion to ensure that the documentation required to be executed is in order and complies with the closing formalities (representation and warranties on part of the buyer). But there are no specific rules or legislation governing the same.

The time frame for sale of asset and shares entirely depends on the parties and the complexity of the transaction.

Non-competes may be enforceable provided restriction is for a reasonable period. Generally, restrictions for a period from one to two years may be considered reasonable depending on the nature of business.