Harsh Bhuta
India’s Outbound M&A Has Come of Age. The Exchange-Control and Tax Rulebook Is Still Catching Up.
A decade ago, cross-border M&A involving India was overwhelmingly a story of inbound capital — foreign strategics buying into a fast-growing consumer market. It now runs both ways. Per RBI data, India’s overseas direct investment reached roughly USD 37.68 billion in calendar 2024, up about 17% year on year, led by Singapore, the United States and the UAE. Outbound cross-border M&A value rose from USD 5.1 billion in 2024 to USD 13.7 billion in 2025 — close to a threefold jump — even as overall volumes moderated. Monthly RBI commitment data are volatile, but the direction is unmistakable: Indian promoters now sit on the buy-side of international deals as a matter of course.
The rationale is no longer scale for its own sake. Building capability organically takes years; acquiring an established business buys immediate access to technology, registered IP, regulatory approvals, talent and customers. In sectors where the competitive clock runs in quarters — pharma, enterprise software, auto components and energy transition — that time arbitrage is often the entire thesis. Dr Reddy’s purchase of Haleon’s global nicotine-replacement portfolio for about USD 633 million is representative: capability bought, not built.
The commercial deal is usually the easy part. The friction begins when the structure must be fitted into India’s exchange-control and tax architecture — and that architecture, for all its recent modernisation, was not designed around how cross-border deals are actually negotiated today.
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Exchange control: a modern regime built on legacy assumptions
The Foreign Exchange Management (Overseas Investment) Rules, Regulations and Directions, 2022 superseded the 2004 foreign-security regulations and brought genuine clarity: a clean ODI/OPI distinction, a defined “control” test (an entitlement to 10% of voting rights), unified WOS/JV treatment, liberalised guarantees, and a deemed NOC where a lender or regulator stays silent for 60 days. Welcome reforms — but their operating assumptions still sit a step behind market practice.
- The binding constraint is the balance sheet, not the business case. Financial commitment is capped at 400% of the Indian entity’s net worth (last audited balance sheet), aggregating equity, debt and guarantees; OPI is capped at 50%. Any commitment above USD 1 billion in a financial year needs prior RBI approval, while the two-layer subsidiary cap and round-tripping restriction (Rule 19(3)) constrain holding-structure design.
- Commitment crystallises on signing, not remittance. It is deemed to arise when a binding obligation is created — on execution of the acquisition documents — not when funds move. With conditional SPAs, long-stop dates and staged closings, that triggers a reporting and ceiling-consumption event well before any consideration is paid.
- Earn-outs and escrow fit awkwardly. The OI Directions treat deferred consideration as a non-fund-based financial commitment, reported in Form FC with valuation required upfront — fine for a fixed deferral, but a poor fit for a genuine earn-out whose quantum is contingent and unknown at signing. Indemnity holdbacks and escrow must be reverse-engineered into realisation and repatriation timelines that assume payment on closing. Share-swap and rollover consideration are permitted, and the August 2024 Non-Debt Instruments Rules amendments streamlined cross-border swaps — but pricing must still clear an arm’s-length test backed by a registered-valuer report.
- The compliance tail is now enforced. Annual Performance Reports are due by 31 December and FLA returns by 15 July; delays attract Late Submission Fees in place of the old compounding route, and the RBI’s May 2025 directive requires entities with historic ODI reporting lapses to regularise them before making fresh commitments.
Tax: the complexity multiplier
On 1 April 2026 the Income-Tax Act, 2025 replaced the six-decade-old 1961 Act, compressing 819 sections into 536. The drafting is cleaner; the substantive cross-border scheme is largely carried forward, and the live issues for an outbound acquirer remain unforgiving.
- Withholding and characterisation. Where consideration flows to a non-resident seller and the target’s value touches India, the Indian payer carries a Section 195 withholding obligation, with Form 15CA/15CB mechanics and tax exposure if the rate or characterisation is wrong.
- Indirect transfer. The post-Vodafone regime (Explanation 5 to Section 9(1)(i), Finance Act 2012) deems foreign-company shares situated in India where they derive substantial value from Indian assets — Indian-asset FMV exceeding INR 10 crore and at least 50% of total value, with a carve-out below 5% and without control. The Taxation Laws (Amendment) Act, 2021 withdrew only the pre-28 May 2012 retrospective limb; the prospective provisions remain operative, and the Indian concern’s Form 49D obligation is routinely missed in offshore-to-offshore steps.
- Treaty access and anti-abuse. Holding-structure choices run into the Principal Purpose Test under the MLI (in force for India since 1 October 2019), GAAR (Chapter X-A, from 1 April 2017, INR 3 crore benefit threshold) and a hardening beneficial-ownership standard. The Income-tax Rules, 2025 make the treaty-benefit disclosure mandatory even where the Tax Residency Certificate is complete; the Supreme Court’s Tiger Global decision and the CBDT’s 31 March 2026 clarification confirm that pre-2017 comfort can no longer be assumed.
- Transfer pricing, PE and substance. The acquired value chain becomes a permanent transfer-pricing obligation, while acquirer involvement in operations and the place of effective management of the holding company can create PE and residence exposure. The encouraging counterpoint is a maturing APA programme — a record 219 agreements signed in FY26, with an expanding bilateral roster offering forward certainty.
The common thread is the global shift from form to substance: regulators increasingly want to see why a structure exists, not merely that it is technically valid.
More regulators, longer clocks
The transaction clock is increasingly set by regulators, not negotiators. The Competition (Amendment) Act, 2023 introduced a deal-value threshold, in force from 10 September 2024: notification to the CCI is required where deal value exceeds INR 2,000 crore and the target has “substantial business operations in India” (for digital targets, 10% or more of global users in India), subject to a de minimis exemption (Indian assets up to INR 450 crore or turnover up to INR 1,250 crore). The CCI forms its prima facie view within 30 calendar days, against a 150-day outer limit. Add foreign-investment screening abroad (CFIUS and its analogues), sector regulators and financing conditions, and execution certainty depends on several regulatory systems moving in parallel across continents.
Better regulation, not less
This is no longer a large-cap story — mid-market and founder-led businesses are now active acquirers, and for them prolonged uncertainty is a deal-breaker rather than a line item to staff around. None of this argues for lighter scrutiny: cross-border deals move capital and engage international obligations, and robust review is appropriate. The objective is better regulation — predictability alongside flexibility. The next phase could target execution friction: codifying the treatment of earn-outs, rollover equity and escrow within the OI Directions so that mainstream mechanics no longer require bespoke interpretation; aligning the financial-commitment timing rule with staged closings; introducing genuine deemed-approval timelines and a binding advance-ruling mechanism for FEMA characterisation; and continuing to compress clearance windows.
India has shown — across corporate law, insolvency, taxation and overseas investment — that it can modernise. Indian companies are no longer tentative participants in international M&A; they are confident acquirers pursuing assets that seemed implausible a generation ago. The next decade will be measured not by how many overseas deals they close, but by whether the framework lets them compete with speed and certainty. The ambition is already visible in boardrooms across the country. The rulebook now needs to keep pace.
