Cross-border mergers and acquisitions have rapidly increased reshaping the industrial structure at the international level. A cross-border merger means any merger, amalgamation or arrangement between an Indian company and a foreign company in accordance with the Companies Act, 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016.
The Ministry of Corporate Affairs notified Section 234 of the Companies Act, 2013 thereby enabling cross-border mergers with effect from 13 April 2017. Thus, it was a matter of time that the Reserve Bank of India notified the regulations in order to operationalize the cross-border merger.
In very simple words, it is a combination of businesses of two or more companies incorporated in two or more countries. Companies of different jurisdiction basically go through this process in order to enhance their growth and elevate their standard to compete in International market.
Cross border mergers result in transfer of control authority in operating the merged or acquired company. Assets and liabilities of the two companies from two different countries are combined into a new legal entity in terms of the merger, the control of assets and operations is transferred from local to a foreign company, the former becoming an affiliate of the latter.
In India, Cross border is majorly regulated under
The two most relevant regulations under FEMA from a merger & amalgamation perspective are Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (the ODI Regulations). In addition to this, the Reserve Bank of India (the RBI) has notified Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (the Cross-Border Regulation) under the Foreign Exchange Management Act, 1999 to include enabling provisions for mergers, demergers, amalgamations and arrangements between Indian companies and foreign companies covering Inbound and Outbound Investments. This is a significant move as there will be a massive surge in the flow of Foreign Direct Investment with the enactment of new laws and tweaking of existing policies.
The Companies Act, 2013 (CA, 2013) brought about a significant change in this position. Section 234 of the CA, 2013 which was notified in December 2017 has made provisions for both inbound and outbound mergers. It enables the Central Government in consultation with Reserve Bank of India (RBI) to make rules pertaining to cross-border mergers.
The most popular types of mergers are horizontal, vertical, market extension or marketing/technology related concentric, product extension, conglomerate, congeneric and reverse. Recently, the concept of inbound and outbound mergers was also introduced in the Companies Act, 2013 as part of Section 234 of the Act.
In this process foreign company mergers with or acquires an Indian company.
In this process an Indian company merger with or acquires a foreign company.
The resultant company can transfer any security including a foreign security to a person resident outside India in accordance with the provisions of FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.
However, where the foreign company is a Joint Venture or Wholly Owned Subsidiaries of an Indian company, such foreign company comply with the provisions of FEMA, ODI Regulations.
An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India for in accordance with the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2015.
The borrowings of the transferor company would become the borrowings of the resulting company. The Merger Regulations has provided a period of 2 years to comply with the requirements under the external commercial borrowings (ECB) regime. The end use restrictions are not applicable here.
Assets acquired by the resulting company can be transferred in accordance with the Companies Act, 2013 or any regulations formulated thereunder for this purpose. If any asset is not permitted to be acquired, the same shall be sold within two years from the date when the National Company Law Tribunal (NCLT) had given sanction. The proceeds of such sale shall be repatriated to India.
The resultant company is allowed to open a bank account in foreign currency in the overseas jurisdiction for a maximum period of 2 years in order to carry out transactions pertinent to the cross-border merger.
The securities issued by a foreign company to the Indian entity, may be issued to both, persons resident in and outside India. For the securities being issued to persons resident in India, the acquisition should be compliant with the ODI Regulations. Securities in the resultant company may be acquired provided that the fair market value of such securities is within the limits prescribed under the Liberalised Remittance Scheme.
An office of the Indian company in India may be treated as the branch office of the resultant company in India in accordance with the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016.
(a) The borrowings of the resulting company shall be repaid in accordance with the sanctioned scheme.
(b) Assets which cannot be acquired or held by the resultant company should be sold within a period of two years from the date of the sanction of the scheme.
(c) The resulting foreign company can now open a special non-resident rupee account in terms of the Foreign Exchange Management (Deposit) Regulations, 2016 for a period of two years to facilitate the outbound merger.
Prior to the enactment of CA, 2013, Indian companies were prohibited from merging with foreign entities. The notification of Section 234 in December 2017 brought about an end on this restriction and made out-bound mergers a reality. The Merger Regulations further consolidate this process by laying down detailed ground rules to be followed during cross-border mergers. Moreover, providing deemed approval of RBI to companies which are compliant with the Merger Regulations is a welcome step. The time period of 2 years, provided to the parties to sell off the assets not permitted to be held and to become compliant with the ECB regime provides flexibility to the transferor and transferee companies.
With serious and effective implementation, the Merger Regulations would go a long way in creating a more conducive commercial environment and would strengthen and increase India’s presence on the global front.
The Government of India has, in the past few months, announced a wave of reforms to check and revitalize the economy. With special packages being announced to boost infrastructure sector and the small and medium enterprise sector, India is actively looking to project itself as global manufacturing hub for companies looking to move their operations out of China.
As per the review, M&A, activity in India will start picking up towards the third quarter, riding high on the various attractive tax policies and regulatory reforms announced by the Government. In the post-COVID-19 era, Indian corporates are more likely to divest their non-core businesses and continue to aspire to consolidate by improving their size, scalability and operating models.