A Closer Look at the Cross-Border Mergers Regime in India

[Post by Suprotik Das, a 5th year law student at the Jindal Global
Law School, Sonepat, Haryana.]
April 13, 2017 marked a momentous event
in the cross-border merger regime in India with the Ministry of Corporate
Affairs notifying
section 234
of the Companies Act, 2013 as well as amendments
to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 in
the form of Rule 25A. Read together, they allow for the merger of an Indian company
and a foreign company, with the resultant entity being either Indian or foreign
owned and controlled – something that was hitherto disallowed under the Companies
Act, 1956 and up until April 13, 2017.
However, the successful
implementation of a cross-border merger between an Indian company (“I”) and a foreign
company (“F”) is fraught with a number of difficulties. For example, say ‘I’ is
the transferor company, F is the transferee company and ‘G’ is the resultant
entity, which is foreign, what happens to the ownership of assets in India? Issues
such as management and administration of assets in India by a foreign entity
pose a number of compliance hurdles. Against this milieu, I attempt to analyse
the existing provisions on foreign exchange laws and regulations.
The Companies Act, 2013
1.         Section 234 now authorises mergers of an
Indian company with a foreign company, with the resultant entity being either
Indian-controlled or foreign-controlled.
2.         Sections 230 to 232 apply similarly to
cross-border mergers, irrespective of whether the resultant entity is Indian or
3.         Section 234(2) further provides that
the scheme of merger may include payment of consideration to the shareholders
of the merging company in cash, or in Depository Receipts, or partly in cash
and partly in Depository Receipts, as the case may be. In the event the company
decides to adopt the Indian Depositary Receipts route, the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 and the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 will be applicable.
The Companies
(Compromises, Arrangements and Amalgamations) Amendment Rules, 2017
1.         The newly introduced Rule 25A allows
for a merger between a foreign company and an Indian company after:
(a)        procuring approvals from the Reserve
Bank of India; and
(b)       complying with sections 230 to 232 of the
Companies Act, 2013 and the Companies (Compromises, Arrangements and
Amalgamations) Rules, 2016.
2.         Regarding
valuation, the transferee company shall ensure that it is in accordance with:
(a)        the valuation conducted by a valuer who
is a member of a recognised professional body in the jurisdiction of the
transferee company; and
(b)       internationally accepted principles on
accounting and valuation.
3.         However, an Indian company may only
merge with foreign companies from the following jurisdictions:
(a)        whose securities market regulator is a
signatory to the International Organization of Securities Commission’s
Multilateral Memorandum of Understanding (Appendix A Signatories) or a
signatory to a bilateral Memorandum of Understanding with the Securities and
Exchange Board of India (“SEBI”), or
(b)       whose central bank is a member of Bank
for International Settlements (BIS) AND one which is not identified in the
public statement of Financial Action Task Force (FATF) as:
(i)     a jurisdiction having a
strategic Anti-Money Laundering or Combating the Financing of Terrorism
deficiencies to which counter measures apply; or
(ii)       a jurisdiction that has not made
sufficient progress in addressing the deficiencies or has not committed to an action
plan developed with the Financial Action Task Force to address the
The Foreign Exchange Management Act, 1999 (‘FEMA’)
1.         From our example set out earlier, ‘G’
will be considered a ‘foreign company’ as it qualifies as a person resident
outside India in accordance with section 2(u) read with section 2(w) of FEMA.
2.         In accordance with section 6(5) of FEMA,
a foreign company can hold, own, transfer or invest in Indian currency,
security or any immovable property situated in India if such currency, security
or property was acquired, held or owned by such person when he was resident in
India or inherited from a person who was resident in India.
3.         FEMA,
therefore, allows for a foreign company to hold assets in India.
The Foreign Exchange Management (Cross Border Merger) Draft
Regulations, 2017 (the ‘Draft Regulations’).
Interestingly, within 13 days of
the notification of section 234 and Rule 25A, the Reserve Bank of India had published
draft regulations
to deal with the implementation of cross border mergers. These
Draft Regulations were open to public comments until May 9, 2017. The final
version of these regulations is yet to be notified.
To answer the question posed earlier,
Draft Regulation 5 lends some credence. It
pertains to outbound mergers between an Indian company and foreign company
where the resultant company is foreign. Sub-regulation (c) of the draft allows
for the resultant foreign company to
acquire and hold any asset
in India, which it is permitted to acquire under the provisions of FEMA and the
Rules or Regulations framed thereunder. Furthermore, the assets can be transferred
in any manner for undertaking a transaction permissible under the FEMA, Rules or
As per sub-regulation (d) of the
draft, if the asset or security is not permitted to be acquired or held by
the resultant foreign company under FEMA, Rules or Regulations, it shall sell
such asset or security within a period of 180 days from the date of sanction
of the scheme of cross border merger, and the sale proceeds shall be
repatriated outside India immediately through banking channels.
It is interesting to note that sub-regulation
(c) authorises the holding of any asset while sub–regulation (d) of the draft creates a dichotomy between
a resultant foreign company holding an asset and a security. It is unclear
why this dichotomy exists. Perhaps the final version of the Regulations will
remedy this anomaly.
Master Direction dated January
1, 2016 on the Acquisition and Transfer of Immovable Property under FEMA
A Master Direction proceeds to compile and consolidate rules, regulations
and circulars framed by the Reserve Bank of India pertaining to various foreign
exchange issues and transactions. Clause 6, Part II of this Master
Direction deals with the
acquisition of immovable property by a person
resident outside India for carrying on a permitted activity. Here I analyse the
impact of this Master Direction on cross-border mergers.
Only a branch or office in India
established by a person resident outside India, other than a liaison office,
may acquire immovable property in India which is necessary for or incidental to
the activity carried on in India by such branch or office. Therefore, this
necessarily means that the resultant foreign company has to set up a branch
office to administer the assets in India, which means complying with the FEMA
Master Direction on Establishment of
Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO), or any other
place of business in India by foreign entities, issued on January 1, 2016.
One can therefore conclude that theoretically Indian law allows for cross
border mergers. However, in practice, one notices that implementation of a
cross-border merger with the resultant entity being foreign is fraught with
difficulty. This is due to complicated issues that may arise regarding ownership
and management of Indian assets by a resultant foreign company. Furthermore, if
the resultant entity is foreign, having to set up and run an Indian branch
office will only add to transaction costs and may render this type of a merger less
attractive. In this regard, India’s foreign exchange laws may have to be
updated to reflect the new liberal intention of the government in allowing
quick, seamless and easy cross-border mergers and acquisitions involving Indian
– Suprotik Das

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.

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