Cross-border M&A transactions have been the primary drivers of Foreign Direct Investment (FDI) inflow in India in the last financial year, regardless of global factors such as the conflict between Russia and Ukraine, sanctions on Russia and rising oil prices, etc. In spite of the promising trends, there continue to be certain critical concerns associated with FDI in India. We provide below certain points for consideration related to cross-border M&A involving inbound investments into India. 

FDI in an Indian Entity

The Indian regulations that govern investments by foreign investors in India are the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) issued under the Foreign Exchange Management Act, 1999 (FEMA). As per the NDI Rules, the limits on FDI by foreign investors are as follows: 

(i) 100% FDI is allowed under the automatic route 

(ii) FDI is allowed under the automatic route up to a sectoral cap 

(iii) FDI is allowed but requires prior government approval 

(iv) FDI is not allowed at all

FDI in an Indian entity engaged in a sector that requires prior government approval would require the application for such approval to be routed through the concerned ministry through the Indian government’s ‘Foreign Investment Facilitation Portal.’ The time period for receipt of approval shall be three months, subject to questions and clarifications sought by the Indian government. Therefore, in cross-border transactions in sectors that require government approval, the parties need to factor this in the overall timeline of the transaction.

Investment by persons or entities situated in India’s land bordering nations 

 Press Note 3 of 2020 ("Press Note") issued by the Department for Promotion of Industry and Internal Trade’ (DPIIT) (and later incorporated in the NDI Rules), requires prior approval of the Indian government for (a) FDI by any person or entity situated in any of India’s land bordering nations or (b) the beneficial ownership of investment into India is with a person or entity situated in any of India’s land bordering nations or (c) the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership. 

This requires due diligence on the investor to confirm if, at any level, it has persons from India’s land bordering countries that could be considered beneficial owners of the Indian entity’s shares. The onus of compliance with Press Note restrictions lies with the Indian investee entity. Thus, the Indian entities may ask for appropriate warranties and indemnities from the foreign investor relating to any non-compliance under Press Note 3 of 2020, and this becomes a major negotiation point.

FDI Related Performance Conditions in Certain Sectors

After determining whether the Indian entity’s business falls in the automatic or approval route, it is worthwhile to examine whether there are any ‘FDI-linked performance conditions’ under NDI Rules with respect to the M&A transaction.

Some sectors, such as e-commerce, retail trading, wholesale trading, construction, development, etc., specify conditions that the Indian investee company has to comply with from a business and operations standpoint after receiving foreign investment. For example, in the e-commerce sector (other than ‘Business-to Business’ transactions), an Indian company cannot own or control the inventory of products after receiving FDI in inventory-based e-commerce. 

It is important to check the applicability of performance-linked conditions, and their impact after the transaction needs to be assessed by the investor to mitigate any post-deal business issue.

Deferment of Consideration

Deferred consideration structures are very common in M&A transactions the world over. Under FEMA, earlier deferment of consideration was not allowed automatically. However, RBI has liberalized this, and now deferment of consideration is allowed for up to twenty-five percent of the total consideration for a time period of eighteen months from the date of the agreement under the NDI Rules. This presents two risks: 

(i)             As the NDI Rules have prescribed the eighteen month’s time period from the ‘date of the share purchase agreement’ and not the ‘closing’ of the share purchase agreement, effectively, the time period of deferment shall be reduced if there is a significant time gap between signing and closing of the agreement; and 

(ii)           deferment is allowed only up to twenty-five percent of the total consideration. Deferment beyond eighteen months’ time period or in excess of twenty-five percent of the consideration requires RBI approval which may not be easily granted. 

Round Tripping Risks 

In cross border M&A transaction, the foreign investor should look at its holding structure to check if it has Indian resident shareholders in it, as any investment by the foreign investor (having Indian shareholders) in an Indian entity would have the chance of triggering the ‘round tripping restriction’. 

Any transaction that triggers a round-tripping restriction requires prior approval from the Reserve Bank of India (RBI). RBI’s standpoint is that any funds remitted outside India and brought back into India through FDI may be a device for tax avoidance. 

Share Swaps 

FDI transactions involving share swaps earlier required prior government approval even if the Indian entity’s business sector fell under the automatic route. This was later on liberalised by the Indian government and now, share swaps involving an Indian company in an automatic route does not require prior government approval. However, the valuation of the shares of both the entities involved in a share swap transaction should be done by a merchant banker.

Share swaps would involve an overseas direct investment limb; therefore, the Indian exchange control restrictions applicable to overseas investments must be complied with. The authorised dealer banks in India, shall require details of the transactions such as number of shares received / allotted, premium paid / received, etc., and also give a confirmation to the effect that the inward limb of transaction has been approved by DPIIT (if applicable) and the valuation has been done as per the procedure laid-down and that the foreign company’s shares are issued / transferred to the Indian investing company. This places constraints in structuring M&A transactions through share swaps. 

Pricing and Exit Concerns 

The Indian government has imposed controls in relation to inflow and outflow of money into and from India. Consequently, pricing norms have been prescribed under the NDI Rules that are required to be complied in case of FDI transaction.

 In case of issue of shares by an Indian company to a foreign resident or transfer of shares by an Indian resident to a foreign-resident, the floor price at which the issuance or transfer can take place is the fair market value of shares of the Indian company that shall be determined by a chartered accountant or merchant banker or cost accountant according to internationally accepted pricing methodology on an arm’s length basis. On the other hand, when a foreign-resident investor seeks to sell its shares to an Indian resident, the fair value of the Indian company’s shares becomes the ceiling price. 

Thus, at the time of entry of a non-resident investor, the fair market value is the ‘floor’, whereas as the time of foreign-resident investor’s exit (at the hands of Indian residents), the fair value is the ‘ceiling’. This places restriction on structuring exits for foreign investor through put/call options as these options are bound by the pricing norms due to which the foreign investors are constrained by the ‘ceiling’ price. For the exit, the RBI has stated that the foreign investor can not be guaranteed any confirmed exit price at the time of its entry and the exit has to be at the prevailing fair market value of shares of the Indian company. Thus, the exit mechanisms under the transaction documents need to be carefully drafted to ensure that the exit stipulated by RBI is not violated.


Indemnities are amongst the most important parts of M&A and mostly take a substantial time to negotiate. The limits as per the NDI Rules also add to the complexity of indemnity negotiations in M&A transaction. As per the NDI Rules, in a cross-border M&A transaction, an indemnity holdback can only be up to twenty five percent of the purchase consideration for a maximum time period of eighteen months. Recovery of any indemnity payment from a resident in favour of a foreign-resident may either require an approval from the RBI or require an arbitral award or court order to be enforced in India, both of which shall be time consuming. 

Every cross border M&A transaction has its own set of risks that depends on the facts as well as the objectives of the buyers and sellers. Foreign investors should keep the above-mentioned risks/concerns in mind while structuring an M&A transaction in India. It is always advisable to retain the services of experienced M&A lawyers to assist in all aspects of the M&A transaction.