Legal Chronicle

April 2025

Index

Legal and Commercial Aspects of Global Trade for Indian Businesses in Cross-Border Transactions and Mergers & Acquisitions

1	Introduction
2	Overview Of Cross-Border Transactions
3	Applicable Laws and Regulations For Cross-Border Transactions In India
4	Types Of Cross Border Transactions
5	Commercial Aspects and Challenges For Indian Businesses In Global Trade Associated With Cross-Border Transactions
6	Legal and Regulatory Considerations in Cross-Border Mergers and Acquisitions
7	Conclusion
8	Disclaimer
9	About Us
10	Our Team

Dear Reader,

The Legal Department at UJA is delighted to impart certain legal knowledge as construed under the Legal Chronicle to keep the readers aware of the recent updates and developments that revolve around various aspects of the law. Our goal is to enable our readers to develop a sense of familiarity with the complexities of Indian as well as International law.

In this edition of Legal Chronicle, we examine the critical legal and commercial considerations Indian businesses must address when participating in global cross-border transactions and mergers & acquisitions. This article will provide valuable insights to help businesses manage risks and seize opportunities in the global business landscape.

We hope that this edition creates a sense of enthusiasm for our readers and successfully delivers the plethora of legal knowledge as intended. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at legal@uja.in

Introduction

Cross-border transactions, global trade, and mergers & acquisitions (M&A) presents unique legal and commercial challenges for Indian businesses seeking to expand Internationally. These activities require careful consideration of diverse legal frameworks, regulatory requirements, and cultural nuances across multiple jurisdictions. For Indian companies, understanding the complex interplay of domestic and International laws, such as foreign exchange regulations, tax implications, competition laws, and intellectual property protections, is critical to ensuring smooth operations. Additionally, commercial strategies must align with the evolving global business landscape, balancing risk management, market access, and operational efficiency. This makes it essential for Indian businesses to address both legal and commercial considerations effectively to maximize opportunities while mitigating potential risks in cross-border dealings.

Overview Of Cross-Border Transactions

Cross-border transactions involve the exchange of goods, services, or capital between entities located in different countries. For businesses in India, these transactions present substantial opportunities for growth, market expansion, and access to global resources. They occur between individuals, companies, and financial institutions, facilitating International trade and investment. As globalization continues to reshape the business environment, Indian businesses are increasingly participating in cross-border transactions. Moreover, the value of these transactions is projected to reach nearly $250 trillion by 2027, highlighting the rapid growth potential of this sector.

Applicable Laws and Regulations for Cross-Border Transactions in India

In India, several key legislations must be complied with for cross-border transactions. These include the Foreign Exchange Management Act, 1999 (FEMA), The Companies Act, 2013, Competition Act, 2002, Income Tax Act, 1961, The Customs Act, 1962, Reserve Bank of India (RBI) Guidelines, Prevention of Money Laundering Act, 2002 (PMLA), and the Foreign Trade (Development and Regulation) Act, 1992. These regulations collectively govern aspects related to foreign exchange, corporate governance, competition, taxation, customs, financial transactions, and International trade. Compliance with these laws is essential for ensuring the smooth and legal conduct of cross-border business activities in India.

Types Of Cross Border Transactions

Export and Import Transactions
Mergers, Acquisitions, Amalgamations
Joint Ventures and Strategic Alliances
International Licensing and Franchising
Foreign Direct Investment
Cross-border Financing

Commercial Aspects and Challenges for Indian Businesses in Global Trade Associated with Cross-Border Transactions

All businesses involved in cross-border transactions must mandatorily conduct thorough due diligence. This is essential to assess all legal, financial, and strategic aspects. Additionally, this process helps identify potential risks, liabilities, and deal breakers that could impact the ongoing transaction.

This includes aspects such as:

Mitigation of Risks:
This process helps identify any hidden liabilities, such as pending litigation, environmental issues, or employment-related disputes. It ensures that potential financial or reputational risks to the acquiring company are thoroughly disclosed and addressed.
Trade Agreements and Tariffs:
India has entered into various bilateral and multilateral agreement as well. They are “Free Trade Agreements (FTAs)”, “Preferential Trade Agreements (PTAs)” and some regional agreements as well which have an impact over the cross-border transactions. Further, there are the Indian customs regime, which include import duties and taxes. So, the duty structure can vary based on the goods being traded. Hence, all businesses must be aware of all exemptions and incentives that are applicable.
Market Entry Strategies:
Indian businesses frequently enter joint ventures or strategic alliances with foreign entities to gain local market knowledge and mitigate entry risks. These agreements must be carefully structured to comply with Indian Foreign Direct Investment (FDI) regulations. Additionally, franchising and licensing agreements are commonly used by businesses seeking to expand their operations in India. Such agreements must also adhere to local laws and regulations to ensure compliance with the country’s legal framework.
Currency Regulations:
All businesses engaged in cross-border transactions must manage currency fluctuations, as changes in exchange rates can significantly impact profitability and transaction costs. To mitigate these risks, businesses must implement strategies to manage and hedge against potential adverse currency movements.
Accuracy of Valuation:
This is the stage where the financial health of the target companies have to be evaluated, primarily to ensure that the valuation presented in the deal accurately represents the company’s true value. This evaluation typically involves a deep dive into the company’s financial statements, cash flow projections, profitability, liabilities, and overall market position. The goal is to ensure that both parties involved in the transaction are aligned with the true financial standing of the target company, reducing the risk of mispricing and helping to establish a fair and equitable deal structure.
Obligations Associated with Contracts:
In cross-border transactions, obligations associated with contracts are critical to ensure that all parties fulfill their responsibilities under the agreed terms. These obligations typically include adherence to payment schedules, delivery of goods or services, compliance with applicable regulations, and protection of intellectual property rights. Given the complexity of operating across different legal systems, it is essential for businesses to clearly define the contractual terms, including dispute resolution mechanisms, governing law, and enforcement procedures. Ensuring that contracts are structured to comply with both local and international laws minimizes the risk of legal conflicts and financial losses, while fostering trust and cooperation between the parties involved in the transaction.

Legal and Regulatory Considerations in Cross-Border Mergers and Acquisitions

Legal due diligence in cross-border mergers and acquisitions is a detailed and thorough process that involves a comprehensive review of the target company’s legal framework and operations.

a) Organizational Structure and Governance Framework:

The target company’s incorporation documents must be verified, along with its bylaws and shareholder agreements. Additionally, a thorough examination of the board structure, voting rights, and internal policies should be conducted to ensure compliance with applicable corporate laws. Finally, it is essential to assess any restrictions on foreign ownership and any limitations related to changes in control.

b) Regulations of FDI

Understanding the Differences Between the Automatic and Government Routes for FDI:
There are two routes under the Foreign Direct Investment (FDI) policy: the Automatic Route and the Government Route, both of which must be complied with. Under the Automatic Route, an investor is allowed to invest directly in a business without prior approval from the Indian government, as long as the investment complies with sectoral caps and conditions. On the other hand, the Government Route requires foreign investors to obtain approval from the Indian government before making any investments. Sectors like aviation, defense, broadcasting, and multi-brand retail are among those that typically require government approval due to national security concerns or strategic interests.

Neighboring Countries Facing Restrictions on Investments
Press Note 3 (2020) mandates that entities from countries sharing a land border with India must obtain government approval for any investment made in Indian businesses, either directly or indirectly. This regulation applies to investments in sectors where foreign investments are allowed, ensuring that such investments do not compromise national security or strategic interests. The approval process is intended to scrutinize foreign investments from neighboring countries to prevent any adverse impact on India’s economic and security framework. This measure came into effect following geopolitical concerns and aims to maintain control over the influx of foreign capital from neighboring regions.

Sectoral Caps and Conditions in FDI Policy:
Investors and businesses involved in foreign direct investment (FDI) in India need to stay updated with notifications from the Department for Promotion of Industry and Internal Trade (DPIIT), as they provide guidance on the policies and regulations governing FDI. Additionally, businesses must comply with the FDI policy outlined under the Foreign Exchange Management Act (FEMA), 1999.

c) Compliance with Competition Law

In India, businesses and investors must comply with the Competition Act, 2002, which governs the regulation of combinations, including mergers, acquisitions, and amalgamations. As per this regulation, it is essential for businesses and investors to ensure that they do not exceed the prescribed financial thresholds. Additionally, prior approval from the Competition Commission of India (CCI) is required before proceeding with any such transactions. Furthermore, the (CCI) reviews these transactions to determine if they could potentially lead to an appreciable adverse effect on competition within the relevant market. This involves a detailed analysis of the market structure, the competitive dynamics between the parties, the potential for market dominance, and how the transaction may impact consumers, suppliers, and competitors.
If the CCI finds that the proposed transaction could result in reduced competition or other anticompetitive effects, it may impose conditions or even prohibit the transaction. Therefore, businesses and investors must conduct thorough due diligence to ensure their transactions align with the requirements of the Competition Act.

d) Taxation

The Indian tax framework plays a pivotal role in structuring cross-border mergers and acquisitions, primarily to mitigate double taxation and optimize tax efficiency. To support this, India has entered into various agreements, including Double Taxation Avoidance Agreements (DTAAs), limited agreements for double taxation relief, Tax Information Exchange Agreements (TIEAs), and Social Security Agreements (SSAs). Furthermore, it is essential to evaluate the implications of capital gains tax, transfer pricing regulations, and indirect taxes in the overall tax strategy.

e) Compliance with Companies Act, 2013

Under the Companies Act, 2013, approval from the Board of Directors and shareholders is mandatory for all M&A transactions. In addition, for cross-border mergers involving an Indian company, approval from the National Company Law Tribunal (NCLT) is required, as stipulated by the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. This NCLT sanction is a necessary step in the process.

f) Ensuring Compliance with Employment and Labour Laws:

It is crucial to evaluate relevant Indian labour laws, including the Industrial Disputes Act, 1947, the Employees’ Provident Fund Act, 1952, and the Payment of Gratuity Act, 1972, in order to fully understand the potential workforce liabilities that may arise post-acquisition.

g) Dispute Resolution and Litigation:

A comprehensive review of the target company is essential to ensure there are no pending litigations or ongoing arbitration proceedings. Additionally, it is important to assess the dispute resolution clauses within contracts, particularly those that prioritize international arbitration over litigation in Indian courts.

Conclusion

In conclusion, navigating cross-border transactions, global trade, and M&A activities presents both opportunities and challenges for Indian businesses aiming for International expansion. A thorough understanding of the complex legal, regulatory, and cultural landscapes, alongside well-aligned commercial strategies, is essential for success. By effectively addressing legal and commercial considerations, Indian companies can maximize growth opportunities while mitigating risks, ensuring a seamless and strategic entry into the global market.

Disclaimer

This document is intended to provide general information and is not intended to be substituted for any legal or professional advice. This document is meant exclusively for informational purposes and not for advertising or solicitation. UJA has made significant efforts to ensure that the information contained in this document is accurate and reliable. However, the information herein is provided “as is” without warranty of any kind. UJA hereby disclaims all responsibility and liability, whether stated or implied, for the accuracy, validity, adequacy, reliability, or completeness of any information provided under this document. In no event shall UJA be held liable for any losses or damages whatsoever incurred as a result of using this document.

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