2026 FEMA Amendment Advances Reverse-Flip Framework, Gaps Remain

The 2026 FEMA Amendment: Progress on India’s Reverse-Flip Framework, but Gaps Remain

Summary: On May 29, 2026, the Reserve Bank of India notified the Foreign Exchange Management Cross-Border Merger (Amendment) Regulations, 2026. The amendment replaces references to the National Company Law Tribunal (NCLT) with “Competent Authority” in Regulations 4, 5, 7 and 9 and defines Competent Authority as an authority empowered under the Companies Act, 2013 or subordinate legislation to approve a merger or amalgamation scheme. The change follows the September 2024 amendment to Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which permitted specified inbound mergers involving a foreign holding company and its wholly owned Indian subsidiary to use the fast-track route under Section 233, subject to prior RBI approval. The article explains the interaction between Sections 230 to 234 of the Companies Act, the CAA Rules and the FEMA (Cross-Border Merger) Regulations, 2018, and identifies the earlier mismatch created because the FEMA Regulations referred specifically to NCLT approval. It states that Regulations 4, 5, 7 and 9 consequently created uncertainty concerning asset and liability disposal, asset transfers, reporting obligations and deemed RBI approval where the fast-track route involved the Regional Director. The 2026 amendment replaces the institution-specific reference with the broader “Competent Authority” formulation. The article nevertheless identifies further structural issues, including the dissolution of the foreign transferor company, the drafting difference between Rule 25A(5)(iii), using “shall”, and Section 233(14), using “may”, and the absence of an express cross-border demerger pathway under Section 234. It proposes a re-domiciliation framework, textual alignment of Rule 25A(5)(iii) with Section 233(14), and extension of the cross-border framework to demergers.

Introduction

On May 29, 2026, the Reserve Bank of India notified the Foreign Exchange Management Cross-Border Merger (Amendment) Regulations, 2026, harmonizing company law and foreign exchange management regimes governing cross-border mergers. The amendment, across regulations 4, 5, 7, and 9, replaces the term ‘National Company Law Tribunal (NCLT)’ with the broader term “Competent Authority.” Competent Authority is defined as “anybody empowered under the Companies Act, 2013, or any subordinate legislation” made thereunder to approve a scheme of merger or amalgamation. It appears that the amendment is just a modest piece of regulatory housekeeping. In reality, this small change addresses a key gap in the 2024 reform.

Since September 2024, the amendment to Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, has allowed Indian-origin start-ups to use the fast-track inbound merger route. However, this fast-track route carried a hidden fault line: its procedure was anchored to the foreign exchange framework but made no provision for the body actually sanctioning these mergers. This 2026 Amendment is an important start as it closes one well-defined procedural loophole. It does not address the deeper structural gaps that still make India’s reverse-flip framework incomplete. To see why this procedural change matters and why further reform may be needed, it is important to first look at corporate domicile. As it is a concept which shapes the legal restrictions on changing a company’s place of incorporation.

What Is Reverse Flipping and Why Do Start-ups Do It?

The term “corporate domicile” refers to “the legal home or place of incorporation of a corporation”. It refers to the jurisdiction in which the company is incorporated and determines the law governing a corporation’s internal affairs, such as liability, shareholders’ rights, and corporate governance.

Historically, common law has treated corporate domiciles as strictly tied to their place of incorporation, thus making domiciles immutable. In the case of Kuenigl v. Donnersmarck and Another, the court held that a company has nationality of its country of incorporation and cannot change it in the same way as a natural person. The Indian Supreme Court also adopted a similar stance in Vodafone International Holdings B.V. v. Union of India (2012). Which means that, Indian law doesn’t allow company to shift its domicile to another country while retaining same legal identity. This process generally known as re-domiciliation. To overcome this limitation, Indian-origin companies resort to reverse flipping. In simple words, reverse flipping means moving a company’s holding structure back to its home country. Under Indian law, this is achieved through a cross-border inbound merger under Section 234 of the Companies Act, 2013.

In recent years, the reverse flipping has become a common route for Indian-origin companies looking to relocate their holding structure back to India. Notable Indian start-ups such as Meesho, Flipkart, and Zepto have completed or announced reverse flips. This shift shows a growing preference for domestic capital markets, which offer deeper liquidity and broader investor participation, making the domestic IPO market more attractive. But if the 2024 amendment already gave start-ups a fast-track route for inbound cross-border mergers, why is this regulatory amendment important, and what still needs fixing? The answer lies not in the Companies Act, 2013 but in the foreign exchange framework.

Inside the Merger Mechanism: FEMA, the Companies Act, and the Gap Between Them

Cross-border mergers involving Indian entities are primarily governed by the Companies Act, 2013 (“Companies Act”) and the FEMA Regulations, 2018. Together, these legal instruments establish two approval pathways for cross-border mergers. Sections 230 to 232 of the Companies Act provide the conventional NCLT-supervised route, while Section 233, read with Rule 25A of the CAA Rules, provides an alternate fast-track merger route for specific types of companies, such as a parent company and its wholly owned subsidiary. Under this procedure, the Central Government sanctions the scheme through the Regional Director within 60 days.

The FEMA Regulations, 2018, define the foreign exchange mechanism for cross-border mergers and amalgamations involving Indian and foreign entities. These regulations identify two types of cross-border mergers: inbound and outbound. An inbound merger involves merging a foreign firm with an Indian firm, with the Indian entity as the resultant company. An outbound merger, by contrast, entails merging an Indian firm with a foreign firm, where the resulting firm is the foreign firm.

Before September 2024, the CAA Rules confined inbound cross-border mergers exclusively to the NCLT route. The amendment to Rule 25A of the CAA Rules, effective 17 September 2024, introduced a material change by permitting inbound mergers to proceed through the fast-track route, subject to prior RBI approval. This change accelerated fast-track reverse flips, enabling Indian-origin companies to relocate their offshore holding companies. The amendment also confirmed this shift by expressly adding such mergers to the catalogue of permitted fast-track mergers under Rule 25 of the CAA Rules.

Despite the 2024 reform, the amendment exposed an immediate structural misalignment. The FEMA (Cross-Border Merger) Regulations, 2018, were drafted on the assumption that the NCLT would remain the sole sanctioning authority for cross-border mergers. Consequently, every operative provision of those regulations was expressly conditioned upon NCLT approval. This means that although the Regional Director’s sanctioning authority is now recognised under the Companies Act, it finds no corresponding recognition within the exchange control framework. The consequence is immediate and severe: on a literal reading, the FEMA Regulations constrain several key aspects of cross-border mergers unless approved by the NCLT. This literal reading affects Regulation 4’s asset and liability disposal timelines, Regulation 5’s asset transfer framework, Regulation 7’s post-merger reporting obligations, and Regulation 9’s deemed approval mechanism.

Despite this structural mismatch, several fast-track flips still proceeded. Razorpay and Dream Sports are great examples of companies that relied on the purposive interpretation of FEMA Regulations rather than their literal wording. While these mergers were legally defensible, they introduced interpretive uncertainty. Compounding this uncertainty, Rule 25A(5)(iii) of the CAA Rules uses the word “shall”, which appears to mandate the fast-track route. On the other hand, Section 233(14) of the Companies Act uses the permissive “may,” which further compounds this uncertainty.

The 2026 Fix: Bridging the FEMA and Companies Act Divide

The 2026 amendment harmonizes the FEMA Regulations with the CAA Rules governing fast-track inbound cross-border mergers by replacing the term NCLT with the broader expression of ‘competent authority’ across FEMA Regulations. Competent Authority is defined as “any authority empowered under the Companies Act, 2013 or any subordinate legislation made thereunder to approve a scheme of merger or amalgamation”. The definition encompasses the NCLT, the Regional Director, and any future successor authority. As a result, the FEMA Regulations become future-proof, eliminating the need for repeated amendments whenever the company law framework shifts. It also clarifies the compliance timeline and resolves procedural inconsistencies between the two merger routes.

Job Half Done: The Structural Loopholes That Remain

Although the 2026 Amendment resolves the principal regulatory misalignment, several structural deficiencies remain within India’s reverse-flipping framework.

Dissolution of the Foreign Transferor Company

First, India’s inbound merger framework requires the complete dissolution of the foreign transferor company. Such dissolution carries significant legal consequences, including non-assignable contracts, sector-specific regulatory licenses, and obligations personal to the transferor company. These do not vest automatically in the Indian resultant company. Comparable regimes, such as the Scottish re-domiciliation framework (Cross-Border Mergers Regulations, 2007 (UK)) and Singapore’s Part XA of the Companies Act, address this issue.

Drafting Conflict Between Rule 25A and Section 233

Second, the drafting conflict persists between Rule 25A(5)(iii) of the CAA Rules, which uses the word ‘shall’ in a mandatory sense, and Section 233(14) of the Companies Act, which uses the word ‘may’ in a permissive sense. This leaves uncertainty regarding whether the fast-track procedure is mandatory or optional. Although the 2026 Amendment brings uniformity between the practical outcomes of both merger routes, it leaves this drafting inconsistency unresolved.

Absence of an Express Cross-Border Demerger Pathway

Lastly, Section 234 of the Companies Act does not explicitly cover cross-border demergers, meaning that there is no defined statutory pathway for companies wishing to repatriate only part of their offshore holding.

Completing the Reform

These structural flaws are neither inherent nor unavoidable. Each flaw requires targeted legislative and regulatory action.

Adopt a Re-Domiciliation Framework

First, India should adopt a proper re-domiciliation framework, modelled on Singapore’s Part XA of the Companies Act. It would provide for the transfer of incorporation to India with full continuity of legal personality. Such a regulatory framework should ensure that the non-assignable contracts, statutory obligations, and regulatory licenses that are personal to the foreign transferor company automatically vest in the resultant Indian company by operation of law. This would eliminate the need for separate approvals, making the process of the inbound cross-border mergers regime easier in India.

Align Rule 25A(5)(iii) with Section 233(14)

Second, the Ministry of Corporate Affairs (MCA) should make an amendment to Rule 25A(5)(iii) of the CAA Rules, replacing the word ‘shall’ with ‘may ’, aligning this section with the permissive language of Section 233(14) of the Companies Act. This correction is purely a textual amendment without any policy change, and it should have accompanied the 2026 FEMA amendment.

Extend the Framework to Cross-Border Demergers

Lastly and most importantly, Section 234 of the Companies Act should be amended, or the MCA should issue a specific circular extending the cross-border merger framework to demergers. It mentions the applicable FEMA treatment, the conditions for deemed RBI approval, and the compliance timelines for cross-border demerger transactions. The domestic demerger framework is well-defined under sections 230 to 232 of the Companies Act, and its extension to the cross-border demerger regime requires adaptation rather than invention.

India Is Getting There, But the Road Is Still Long

The 2026 Amendment marks a significant step in India’s evolving cross-border corporate restructuring framework by harmonizing the Companies Act and FEMA Regulations. By replacing the institution-specific reference to the NCLT with the broader expression ‘Competent Authority’, the amendment removes a critical procedural asymmetry that undermined the legal certainty of corporate cross-border mergers. Most Indian startups are looking to re-domicile to access domestic stock markets, to raise capital in India and align their legal structure more closely to their place of operation. In that context, legal certainty and regulatory efficiency become essential to positioning India as a preferred jurisdiction for corporate restructuring and public listings.

Nevertheless, this amendment should not be seen as the final step, as several important structural loopholes and challenges remain in the Indian regulatory framework. These include the absence of a regulatory framework for re-domiciliation, uncertainty around the dissolution of foreign entities, and the unresolved drafting conflict between Rule 25A of the CAA Rules and Section 233 of the Companies Act. Ultimately, the 2026 amendment is a stepping stone in fulfilling the reform agenda, and there is still a long road left for further reforms.

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Author Harshjot Singh is 1st Year Law Student, University Institute of Legal Studies (UILS)