How a Foreign Investor Acquires an Indian Company: Guide

Why Foreign Acquisitions of Indian Companies Are Accelerating

Cross-border M&A activity in India has entered a sustained growth phase. In FY 2024-25, inbound deal volume reached approximately USD 48 billion, driven by China-plus-one supply chain diversification, India's expanding consumer market, and the government's progressive liberalisation of foreign direct investment policy. Over 90% of sectors now permit 100% FDI under the automatic route, making acquisitions structurally simpler than they were even five years ago.

But acquiring an Indian company involves regulatory layers that do not exist in most Western markets. The Foreign Exchange Management Act (FEMA) governs how money enters and exits India. The Competition Commission of India (CCI) reviews deals above prescribed thresholds. The Reserve Bank of India mandates specific valuation methodologies and reporting timelines. And the Companies Act, 2013, imposes procedural requirements that affect everything from board resolutions to stamp duty.

This guide walks through every step of the acquisition process — from target identification to post-closing compliance — with specific forms, timelines, costs, and regulatory references current as of March 2026.

Step 1: Define the Acquisition Structure

The first strategic decision is how you will structure the acquisition. Each structure has different tax, regulatory, and operational implications.

Share Purchase

In a share purchase, you acquire the equity shares of the target company from its existing shareholders. The company itself — with all its assets, liabilities, contracts, licences, and employees — continues to exist. You simply become the new owner.

• Advantages: Faster execution, contracts and licences typically continue without novation, employees remain employed by the same entity
• Disadvantages: You inherit all liabilities (including contingent and undisclosed ones), tax history transfers with the company
• FEMA treatment: Transfer of shares between a non-resident and a resident requires FC-TRS filing within 60 days

Asset Purchase

In an asset purchase, you acquire specific assets (plant, machinery, IP, customer contracts) rather than the company itself. The seller retains the corporate shell and any liabilities you do not expressly assume.

• Advantages: Cherry-pick assets, avoid unknown liabilities, cleaner entry
• Disadvantages: Requires novation of each contract, transfer of each licence, potential GST implications on asset transfer, employees may need to be re-hired
• Tax impact: GST applies on transfer of individual assets (not on transfer of a going concern if the entire business is transferred as a slump sale)

Scheme of Arrangement (Merger/Amalgamation)

A court-approved scheme under Sections 230-232 of the Companies Act, 2013, where the target company merges into the acquiring entity (or a newly created Indian subsidiary). This route is used for complex reorganisations and offers stamp duty advantages — the rate is 0.005% of the value of shares issued under a scheme, versus 0.25% for physical share transfers.

The scheme route involves NCLT approval, typically takes 6-12 months, and requires approval from 75% of shareholders and creditors by value.

Slump Sale: A Tax-Efficient Alternative

A slump sale under Section 2(42C) of the Income Tax Act involves the transfer of an undertaking as a going concern for a lump sum consideration, without assigning individual values to assets and liabilities. From the buyer's perspective, slump sales can be more efficient than share purchases in specific scenarios:

• Tax benefit: The seller pays capital gains tax on the difference between the slump sale consideration and the net worth of the undertaking. For buyers, the assets acquired can be recorded at fair market value, creating higher depreciation shelter
• Liability ring-fencing: Only liabilities of the transferred undertaking transfer — unlike a share purchase where the entire company (with all liabilities) is acquired
• GST treatment: Transfer of a going concern as a whole is not subject to GST (as clarified by CBIC), making slump sales more cost-efficient than individual asset purchases

However, slump sales require the transfer of an identifiable "undertaking" — a business unit capable of being carried on independently. Cherry-picking specific assets from multiple divisions does not qualify.

Cross-Border Holding Structures for India Acquisitions

Foreign investors often route acquisitions through intermediate holding companies. The choice of jurisdiction affects tax efficiency, treaty benefits, and future exit flexibility.

Singapore Route

Singapore is the most popular holding jurisdiction for India investments, accounting for approximately 25% of cumulative FDI into India. The India-Singapore DTAA provides 10% dividend withholding tax (versus 20% domestic rate), no capital gains tax on share sales if the Limitation of Benefits (LOB) conditions are met (the investor must have spent at least SGD 200,000 in the two years preceding the gain), and treaty shopping protections are moderate compared to other jurisdictions.

Netherlands Route

The India-Netherlands DTAA provides favourable dividend withholding (10%) and a participation exemption in the Netherlands for onward dividend distribution. However, the 2020 Multilateral Instrument (MLI) modifications have introduced Principal Purpose Test (PPT) provisions that require demonstrating commercial substance in the Netherlands — mere letterbox entities will not qualify for treaty benefits.

Direct Investment

For investors from countries with favourable DTAAs (Japan at 10% dividend WHT, UK at 10%, Germany at 10%), direct investment without intermediate structures is increasingly the preferred approach. India's GAAR provisions (effective since April 2017) and the strengthened PPT in updated treaties make substance-light holding structures increasingly risky. The Vodafone and Cairn Energy disputes are cautionary precedents.

Step 2: Conduct FEMA and Sectoral Due Diligence

Before signing a letter of intent, verify that the acquisition is permitted under India's FDI policy.

Sectoral Cap Check

Confirm the FDI sectoral cap for the target's industry. While most sectors permit 100% FDI, restrictions remain in:

Press Note 3 Screening

If the acquiring entity is from a country that shares a land border with India (China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, Afghanistan), Press Note 3 restrictions apply. All FDI from these countries — regardless of sector — requires prior government approval through the DPIIT's Foreign Investment Facilitation Portal (FIFP). As of March 2026, a revised policy permits up to 10% beneficial ownership under the automatic route for neighbouring-country investors, with a mandatory 60-day approval timeline for larger stakes.

Beneficial Ownership Analysis

The beneficial ownership chain must be traced to identify the ultimate beneficial owner. If any entity in the ownership chain has more than 10% beneficial ownership from a land-border country, the entire investment may be treated as requiring government approval under Press Note 3.

Step 3: Valuation and Pricing

FEMA mandates specific pricing rules for share transfers involving non-residents. These are non-negotiable — you cannot transact below (for purchases from residents) or above (for sales to residents) the prescribed floor/ceiling.

Pricing for Unlisted Companies

The price must be determined by a SEBI-registered Category I Merchant Banker or a Chartered Accountant using an internationally accepted pricing methodology. The RBI pricing guidelines require the Discounted Cash Flow (DCF) method as the primary basis, though Comparable Transaction Method (CTM) and Net Asset Value (NAV) may be used as secondary references.

For a foreign investor buying shares from an Indian resident, the price must not be less than the fair market value determined by the valuation report. For a foreign investor selling shares to an Indian resident, the price must not exceed the fair market value.

Pricing for Listed Companies

For listed companies, the pricing follows SEBI's LODR Regulations and takeover code (SEBI Substantial Acquisition of Shares and Takeovers Regulations). The minimum offer price is determined by the higher of the volume-weighted average market price (VWAMP) over 60 trading days or 10 trading days preceding the relevant date.

Valuation Report Requirements

The valuation report must be:

• Not older than 90 days at the time of share transfer
• Issued by a SEBI-registered Category I Merchant Banker (for unlisted companies, a CA report is also accepted)
• Based on audited financial statements
• Compliant with Rule 11UA of the Income Tax Rules (for tax purposes) and FEMA NDI Rules (for exchange control purposes)

Step 4: CCI Merger Approval

The Competition Commission of India must approve acquisitions that cross prescribed thresholds. India's merger control regime is mandatory and suspensory — you cannot close the deal until CCI grants approval or the 150-day deemed-approval period lapses.

Notification Thresholds (2025-2026)

Deal Value Threshold (DVT)

Since September 10, 2024, a new deal value threshold applies: any transaction valued at INR 2,000 crore (approximately USD 240 million) or more requires CCI notification if the target has "substantial business operations" in India — defined as turnover exceeding INR 500 crore or generating over 10% of global turnover in India. The de minimis exemption does not apply to DVT-triggered notifications.

CCI Review Timeline

• Phase I review: 30 working days from filing a complete notification
• Phase II review: Additional 150 calendar days if CCI forms a prima facie opinion that the combination may cause an appreciable adverse effect on competition
• Green channel: Automatic approval for combinations with no horizontal, vertical, or complementary overlaps — effective upon filing

Step 5: Comprehensive Due Diligence

Due diligence for Indian acquisitions must cover dimensions that may not be relevant in other jurisdictions.

Legal Due Diligence

• Memorandum and Articles of Association — check for restrictions on share transfer, pre-emptive rights, and anti-dilution provisions
• Board and shareholder resolutions — verify all past issuances, transfers, and corporate actions were properly authorised
• Litigation register — active, threatened, and settled litigation, including tax disputes and labour claims
• Regulatory approvals — sector-specific licences, environmental clearances, FSSAI/BIS certifications

Financial and Tax Due Diligence

• Audited financial statements for the last 5 years
• Pending tax assessments and demands — income tax, GST, customs, transfer pricing
• Transfer pricing compliance — audit trail for related-party transactions, arm's length documentation
• Contingent liabilities — guarantees, indemnities, pending show-cause notices
• MAT credit entitlement and carried-forward losses

FEMA Compliance Due Diligence

• Verify all past foreign investment was properly reported (FC-GPR, FC-TRS filings)
• Check FLA return filing history
• Confirm compliance with downstream investment rules if the target has made onward investments
• Review ECB compliance — end-use restrictions, all-in-cost ceiling, reporting

Employment Due Diligence

• Employee contracts, non-compete clauses, and ESOP schemes
• Provident Fund and ESI compliance — arrears can create significant post-acquisition liability
• Compliance with the four new labour codes (effective in phased manner)
• Retrenchment restrictions under the Industrial Disputes Act

Step 6: Transaction Documentation

The core transaction documents for a share acquisition include:

Share Purchase Agreement (SPA)

The SPA is the primary transaction document. Key clauses for foreign acquisitions include:

• Representations and warranties: Seller representations on FEMA compliance, tax filings, litigation, and regulatory approvals
• Indemnities: Tax indemnity for pre-closing periods, FEMA violation indemnity, and environment liability indemnity
• Conditions precedent: CCI approval (if applicable), RBI reporting, shareholder consent for transfer
• Escrow arrangement: 10-20% of the purchase price held in escrow for 12-24 months to cover warranty claims
• Non-compete: Typically 2-3 years, limited to the specific business segment and India geography

Shareholders' Agreement (SHA)

If acquiring less than 100%, the SHA governs the relationship between the new foreign shareholder and continuing Indian shareholders. Critical provisions include board nomination rights, reserved matters, tag-along/drag-along rights, exit mechanisms, and deadlock resolution.

Transition Services Agreement (TSA)

Where the seller's management team is departing, a TSA ensures continuity of operations during the handover period (typically 6-12 months).

Step 7: Closing Mechanics and Fund Flow

Payment and Currency

The purchase consideration must be paid through banking channels (wire transfer to an Indian bank account). Payment must be in freely convertible foreign currency or through debit to the buyer's NRE/FCNR account in India. Payment in Indian rupees from an NRO account is permitted only in specific circumstances.

Stamp Duty

Stamp duty on share transfers depends on whether shares are held in physical or demat form:

Tax Deducted at Source (TDS)

When an Indian resident seller receives consideration from a foreign buyer, withholding tax under Section 195 applies on any capital gain. The buyer is responsible for deducting TDS. If no capital gain arises (e.g., seller incurs a loss), the seller should obtain a nil/lower withholding certificate under Section 197 to avoid cash flow blockage.

Capital gains tax rates for the seller depend on holding period and listing status. Long-term capital gains (shares held for more than 24 months for unlisted shares) are taxed at 12.5% after indexation benefit. Short-term gains are taxed at the applicable slab rate for residents or 35% for foreign companies.

Step 8: Post-Acquisition RBI and ROC Filings

After closing, a series of mandatory filings must be completed within strict timelines.

FC-TRS Filing (Within 60 Days)

Form FC-TRS must be filed on the RBI's FIRMS portal within 60 days of the share transfer or receipt/remittance of funds, whichever is earlier. The filing is made through the company's Authorised Dealer (AD) bank.

Required documents include:

• Board resolution approving the share transfer
• Share transfer form (SH-4)
• Valuation report from a CA or SEBI-registered merchant banker
• FEMA declaration by the transferee
• Copy of the SPA
• KYC documents of the foreign buyer

ROC Filings

• Form MGT-14: Filing of board/shareholder resolutions approving the transfer — within 30 days
• Form DIR-12: If directors are being appointed/removed — within 30 days of appointment
• Form FC-1: If the acquisition results in the company becoming a foreign company subsidiary — within 30 days
• Form BEN-2: Declaration of significant beneficial ownership — within 30 days if beneficial ownership exceeds 10%

FLA Return

The acquired company must file an FLA return annually by July 15, reporting all foreign liabilities and assets as of March 31.

Step 9: Post-Acquisition Integration Checklist

Beyond regulatory filings, successful integration requires attention to these operational items:

Board Reconstitution

Appoint nominee directors, ensure at least one resident director (person who has stayed in India for 182+ days in the preceding calendar year), and update the digital signature certificates and DINs for all new directors.

Bank Account and Signatory Changes

Update bank mandates, add new signatories, and ensure compliance with KYC requirements. Indian banks typically require board resolutions, updated specimen signatures, and re-KYC of the new beneficial owners.

Tax Registration Updates

• Update PAN card details if the company name or address changes
• Amend GST registration to reflect new directors/authorised signatories
• Update TAN (Tax Deduction Account Number) details

Employment and Labour Compliance

If the acquisition triggers a change in management, review obligations under the Industrial Disputes Act regarding continuity of employment, transfer of workmen, and notification to appropriate government authorities.

Sector-Specific Regulatory Approvals

Depending on the target company's industry, additional sector-specific approvals may be required before or after the acquisition:

Financial Services

Acquiring a stake in an NBFC, insurance company, or banking entity requires prior approval from the respective regulator (RBI for NBFCs and banks, IRDAI for insurance). RBI's "fit and proper" criteria assessment for new shareholders can take 3-6 months.

Telecom

Transfer of telecom licences (Unified Licence, ISP Licence) requires prior approval from the Department of Telecommunications (DoT). The DoT evaluates whether the acquirer meets the eligibility conditions of the licence, including net worth requirements and security clearance.

Defence

Acquisitions in the defence sector above 74% FDI require prior government approval. The acquirer must demonstrate that the acquisition will result in access to modern technology, and security clearance from the Ministry of Home Affairs is mandatory.

Pharmaceutical

While pharma permits 100% FDI under automatic route for greenfield investments, brownfield acquisitions (acquiring existing pharma companies) above 74% require government approval through the FIFP. This additional screening reflects the government's concern about foreign control of existing pharma manufacturing capacity.

Real Estate

FDI in real estate is restricted to construction-development projects (not completed properties). Acquiring a company whose primary assets are completed real estate properties is effectively prohibited for foreign investors under the FDI policy.

Tax Structuring Considerations for the Acquisition

Capital Gains Tax on the Seller

The tax burden on the Indian seller directly affects the deal price. Understanding the seller's tax position helps in negotiating a fair price:

• Listed shares (held 12+ months): Long-term capital gains taxed at 12.5% above INR 1.25 lakh threshold, with Securities Transaction Tax (STT) of 0.1% on sale
• Unlisted shares (held 24+ months): Long-term capital gains at 12.5% without indexation benefit (post-July 2024 amendment)
• Short-term gains: Taxed at slab rates for residents, 35% for foreign companies

Goodwill and Intangible Valuation

The acquisition price typically includes goodwill (excess of consideration over net asset value). Since April 2020, goodwill is no longer a depreciable intangible asset under the Income Tax Act. This means the premium paid over book value does not generate tax depreciation — a significant consideration in pricing negotiations.

Common Pitfalls Foreign Investors Must Avoid

• Closing before CCI approval: Gun-jumping (consummating a notifiable combination before CCI clearance) can result in penalties of up to 1% of total turnover or assets, whichever is higher
• Missing the FC-TRS deadline: Late filing attracts compounding fees from the RBI. Repeated delays can trigger an RBI investigation and FEMA proceedings
• Ignoring transfer pricing history: If the target has unresolved transfer pricing disputes, the acquirer inherits the liability. TP adjustments in India often run 15-30% of transaction value
• Overlooking indirect transfer tax: Under Section 9(1)(i) of the Income Tax Act, if you acquire shares of an offshore holding company that derives substantial value from Indian assets, indirect transfer tax applies in India
• Underestimating compliance costs: Post-acquisition compliance — annual filings, statutory audit, transfer pricing documentation, FEMA reporting — typically costs INR 15-30 lakh per year for a mid-size subsidiary

Cost Breakdown: Typical Acquisition Expenses

Timeline: End-to-End Acquisition Process

Total timeline: 4-8 months from LOI to completion, depending on CCI review complexity and whether government approval is required.

Key Takeaways

• Structure matters: Share purchase is faster but inherits all liabilities; asset purchase is cleaner but operationally complex with GST and licence transfer requirements
• FEMA pricing is non-negotiable: The valuation must follow RBI-prescribed methodology — DCF for unlisted companies — and the report must be current (within 90 days)
• CCI thresholds have expanded: The new deal value threshold (INR 2,000 crore) catches large transactions even when the target itself is below the traditional asset/turnover thresholds
• Post-acquisition compliance is extensive: FC-TRS within 60 days, ROC filings within 30 days, FLA return annually, and ongoing FEMA/Companies Act compliance
• Budget INR 50 lakh-2 crore for transaction costs (excluding purchase price) depending on deal size and complexity

For end-to-end support on acquiring an Indian company — from structuring and due diligence to regulatory filings — explore our FDI advisory services and FEMA compliance support.