Companies Act, 2013: Cross-Border Merger Provisions Notified

Under the previous Companies,
Act, 1956 (sections 391-394) it was possible for a foreign company to merge
with an Indian company, but an Indian company could not be merged with a
foreign company. This was intended to ensure that the company that continues
after the merger is an Indian company over which the Indian regulatory
authorities continue to exercise control. This position was also accepted by
the courts (see Andhra Pradesh High Court in re Moschip Semiconductor Limited).
Under the Companies Act, 2013,
however, section 234 allows cross-border mergers both ways, subject to the
fulfillment of certain conditions. This is intended to provide additional
stimulus to cross-border mergers. However, it was only last week that section
234 was notified,
with effect from April 13, 2017. The Indian legal regime hence recognises
mergers of Indian companies into foreign companies, which were hitherto
impermissible.
The Ministry of Corporate
Affairs (MCA) has also amended
the Companies (Compromises, Arrangements and Amalgamations) Rules, 2017 (the “Rules”)
and inserted rule 25A that deals with cross-border mergers. Apart from
expressly recognizing cross-border mergers in both directions, the Rules
explicitly require the approval of the Reserve Bank of India (RBI) for such a
cross-border merger. This is understandable given the foreign exchange
implications involved in such a transaction. It goes without saying that
valuation will be an important consideration in this regard, and hence the
Rules set out the requirements of obtaining valuation reports and the
principles to be applied regarding the same. It is only thereafter that the
National Company Law Tribunal will consider the application to give effect to
the merger.
Importantly, Indian companies can
only merge with foreign companies in certain specified jurisdictions. These are
(i) jurisdictions whose securities regulator is a member of IOSCO or has a
bilateral memorandum of understanding with SEBI, (ii) those whose central bank
is a member of the Bank for International Settlements (BIS), and (iii) those
who have not been identified in the public statement of the FATF as regards
certain specified matters. These details are contained in Annexure B of the Rules.
The notification of section 234
marks an important step, and will certainly provide greater flexibility towards
cross-border M&A and restructuring. However, as noted in this column
in BloombergQuint, several other matters such as taxation must fall in place
before one can expect a market for cross-border mergers to develop.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • OFFHAND (To share common sense thoughts) On the first blush, the reported development under the company law appears to be quite attractive , but from the limited viewpoint of attracting more capital inflow, apart from encouraging outflow. To be marked as one more move in the direction of the government's policy to 'ease of doing business'. However, the success of it is , as is to be guessed, going to depend upon what matching proposals are under way from the FM; which would mean rolling back many of its rigid policies / hyper-technical measures being adopted and pursued thus far, in a diagonally opposite direction, thereby proving counter-productive!

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