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Rishabh Raj and Komal Aher are 4th year BALLB students at MPLC Aurangabad, Maharashtra
Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC) has significantly amplified the domestic restructuring process in the last two years. The key reforms under the IBC are cross-border insolvency recognition and the facilitation of foreign participation in the sale of distressed assets. Such changes open up new opportunities for foreign investors who are eyeing future expansion in India and make cross-border M&A a great entry strategy into the market, enabling foreign investors to effectively leverage India’s restructuring framework.
Sections 234 and 235 of the IBC facilitate cross-border cooperation and can be referred to as the pillars of cross-border insolvency. Section 234 of the Act empowers India to enter into bilateral arrangements for mutual cooperation with other foreign countries on the insolvency side. Section 235 gives the Indian authorities the right to move an order of assistance abroad for recovery of assets sitting abroad. Apart from this, the introduction of Part Z and following UNCITRAL’s Model Law on Cross-Border Insolvency have also helped make a way for foreign investors in India’s insolvency landscape under the IBC reforms.
The IBC has opened new doors, but with more legal complexity. It is at the crossroads of insolvency, foreign exchange regulations, competition law, and tax frameworks, making it an extremely delicate balance for the investor. This article plots the emerging opportunities that recent reforms to the IBC bring, regulatory complexities that are still thwarting cross-border transactions, and policy recommendations that could strengthen India’s position as a destination for global capital.
IBC Reforms and Their Impact on Cross-Border M&A
Part Z, the most significant reform, allows India to acknowledge cross-border insolvency procedures. It obliges the recognition of its own decisions outside; this is the reason why it becomes beneficial in very crucial multi-corporation companies’ activities. Because their assets or liabilities exist in more than one jurisdiction at a specific point in time, and this causes unpredictability with regard to cross-border claims.
Another significant reform is the addition of the pre-packaged insolvency resolution process for small and medium enterprises. The PPIRP framework (Sections 54A-54P) is more rapid and less contentious in providing resolutions to insolvency and is thus easier for foreign investors to negotiate deals before a company enters formal bankruptcy. The current reforms point to the fact that India wishes to harmonise its bankruptcy procedures with other interests of creditors, debtors, and acquirers in balance.
With the development of the IBC regime, a strong ground now exists for distressed M&A, especially for private equity funds, sovereign wealth funds (SWFs), and asset reconstruction companies (ARCs). With the offloading of NPAs by banks, there is an exposure of quality assets at depressed valuations to strategic investors. Certainty in IBC reforms make it easier for foreign investors to access distressed markets without fear of litigation for a prolonged period and uncertain results.
Navigating Foreign Exchange Regulations under FEMA
The Foreign Exchange Management Act, 1999, regulates inflow and outflow of foreign capital in India and is an important regulatory gateway for cross-border M&A. Although the RBI has relaxed some norms to permit FDI in distressed companies, especially within the IBC framework, there are still many regulatory hurdles. To the above complexities, Press Note 3 of 2020 added, requiring government approval for FDI by countries having a land border with India, without any exception to the sector, in consideration of national security and anti-hostile takeover concerns. The higher scrutiny involved makes these deals more cumbersome if the investor is from one of the countries concerned or when there is an indirect linkage in the beneficial ownership.
The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 have further curtailed the cross-border acquisitions to this extent: transactions cum distressed assets be concluded at fair market value under valuation by independent valuers. The said valuation requisition would thus limit an investor’s flexibility to acquire distressed or restructure companies on account of lesser costs involved and negotiate thereon. Moreover, the repatriation of profits by FEMA under Section 10(4) suffers from bottlenecks with RBI approval for repatriation of profits or capital gains.
Further complication in the regulatory landscape comes from the overlap of several frameworks, such as RBI guidelines on foreign investment, SEBI’s Takeover Code, and provisions of the Companies Act, 2013. Overlapping regulatory oversight leads to bureaucratic delays that are problematic for the time-sensitive nature of distressed asset sales under IBC. Each regulator will take its time according to its own timelines for approval, making the process cumbersome and not quite efficient. It will ultimately slow down the quick resolution of distressed companies and add to investor uncertainty.
Jurisdictional Conflicts and the Recognition of Foreign Insolvency Proceedings
Part Z of the IBC takes recourse to the UNCITRAL Model Law on Cross-Border Insolvency, thus easing the recognition of foreign insolvency proceedings and cooperation between courts. However, the absence of reciprocity agreements between India and many jurisdictions remains a major obstacle, since Indian courts generally invoke Sections 13 and 44A of the CPC, 1908, requiring reciprocity as a pre-condition to their enforcement of foreign judgments. While public policy exceptions could, in theory, block recognition of foreign insolvency judgments, the Indian courts have been judicious in invoking such exceptions to apply only where the enforcement would violate domestic legal principles or harm national interest.
Lack of reciprocity agreements and, thus, no parity between India and any of the countries to which insolvency proceedings were applied added to the complexities faced by courts abroad when it usually was difficult for them to take parallel proceedings against such assets or creditors when held abroad by Indian firms. Thus, resultant fragmentation had hindered cross-border restructuring, particularly for multinational firms holding portfolios of different sizes and maturity, thereby entailing further time lags and lesser realizations.
India may enter into bilateral insolvency treaties or mutual recognition frameworks with its most important trading partners so as to become similar to the EU Insolvency Regulation ensuring perfect coordination through the automatic recognition of insolvency proceedings throughout the member states. Cooperation in such a way will enhance predictability and efficiency in cross-border insolvencies because Indian companies and foreign investors will be managing risks concerning insolvency in a more efficient manner.
Tax Implications and Asset Transfers in Insolvency-Driven M&A
Tax is one of the most crucial factors that can make the feasibility of a cross-border M&A transaction involving distressed companies challenging. The Income Tax Act, 1961, provides for carry-forward of losses under Section 72A, but the stringent conditions of continuing the acquired business for five years, maintaining 75% shareholder continuity, and achieving profitability thresholds often make such benefits impractical for acquisitions through insolvency under the IBC, where the business is typically non-operational or unprofitable. Besides, under Sections 45 and 50 of the Act, selling assets or transferring any such incurs taxes called capital gains tax both whiles being in the process and afterwards when the restructuration of those assets takes place and keeps the bidders at a distance. Such buyers find their assets subjected to tax if any is disposed or the process of restructuring post-acquisition in mergers. It weakens the financial viability of that buy.
The government can introduce specific tax incentives, such as a lower capital gains tax on sales of assets after acquisition or a tax holiday for sectors such as infrastructure and technology, besides relaxing the stringent conditions of Section 72A of the Income Tax Act 1961 in insolvency-related acquisitions. Reforms such as these would bring the tax regime in line with the goals of the IBC, and distressed acquisitions will look much more attractive to foreign investors.
Competition Law Scrutiny: Balancing Market Power and Resolution Speed
Obtaining clearance from CCI in cross-border M&A involving distressed companies under the IBC can be accompanied by great delays, particularly when such a transaction triggers market concentration risk. In the IBC, Section 12 prescribes a time-bound insolvency resolution that has to be made by an authority that would not take more than 330 days. Litigation apart, an acquirer might need to wait for the CCI to give its nod; at that time, the whole-time plan goes for a toss. Section 6(2) of the Competition Act, 2002 provides that combinations involving assets or turnover meeting certain thresholds require prior approval of the CCI before being completed. A review may drag on if the CCI initiates a Phase II investigation under Section 29 for it can take as long as 210 days.
The resolution plan would be threatened with further decimation through lack of business activity, customer flight, and damage to reputation for the distressed assets in question, which is during this timeframe. Such delays in resolutions should be diminished under fast-track approval by the CCI as concerns IBC-related transactions such that the timeline of a resolution remains preserved. One may include provisional clearance based on an initial appraisal with detailed scrutiny and conditions applicable post-transaction, as permitted under Section 31 (about CCI’s powers to approve mergers with or without modifications). This will balance the competition concerns with the urgency of resolving the matter leading to less friction while acquiring distressed companies.
Noteworthy Cross-Border Deals in India’s IBC Regime
Recent cross-border M&A transactions in India reveal opportunities and challenges under the Insolvency and Bankruptcy Code (IBC). ArcelorMittal’s acquisition of Essar Steel is an example of how the IBC empowered a global investor to acquire distressed assets despite legal battles with domestic creditors. Promoter resistance and legal hurdles required intervention from the NCLT and Supreme Court, but the deal ultimately strengthened investor confidence.
The Jet Airways case proves how regulatory bottlenecks can delay time-sensitive resolutions. Having secured a winning bid as of October 2020, prolonged approvals by the NCLT, NCLAT, and then the Supreme Court, along with requirements from agencies such as DGCA and CCI, held up this transfer of ownership and slowed down revival efforts. After nearly five years without any form of operational progress, the Supreme Court ordered liquidation on 7 November 2024. Alone, this is indicative of how regulatory bottlenecks can hamper timebound implementation of cross-border resolution.
All of these cases show the immediate need for harmonising the IBC framework with sector regulation to tap full potential in cross-border M&A. Smoothed approval, coordinated regulatory procedures, and quicker resolution are imperative steps toward making India an attractive destination for global investors for seamless transactions.
Conclusion: Crafting a Balanced Regulatory Approach for Cross-Border M&A
Cross-border M&A with IBC reforms has opened up huge opportunities for foreign investors and Indian companies, but for such transactions to be successful, it will require some form of harmonisation of regulatory frameworks in insolvency, foreign exchange, tax, and competition laws. Although several foundations are laid under the auspices of IBC reforms, there is still a pressing need for policies on jurisdictional disputes, regulatory delays, and stakeholder interests.
It would propose innovative measures such as a dedicated IBC-FDI cell, bilateral insolvency treaties, and fast-track competition approval, all vital in creating an environment that is decidedly friendlier to investors, thereby making India the first-choice destination for cross-border restructuring and acquisitions.
Balancing regulatory policies will be required to be managed when navigating through the process of global economic integration. Reforms here, if undertaken appropriately, will unlock new avenues for growth in cross-border M&A under the IBC, with India leading the emerging markets space in corporate restructuring.
