Cross Border Merger: An Analysis

Key takeaways

• Cross Border merger is a merger of the operations of two or more companies that are formed in one or more foreign jurisdictions.
• Both inbound and outbound mergers are considered cross-border mergers. An inward merger is a cross-border merger in which the resulting business is based in India. A cross-border merger with the resulting firm being a foreign corporation is referred to as an outbound merger.
• The two most relevant regulations under FEMA from a merger & amalgamation perspective are Foreign Exchange Management Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management Regulations, 2004 (the ODI Regulations).

What is a Merger

Under Section 230 of the Companies Act 2013, a merger is a specific type of arrangement that involves the consolidation of shares of several classes and subsequent division of those shares into different classes. Cross-Border Merger would therefore come under this kind of Arrangement.

The term "merger" is specifically defined in explanation I of Section 232 of the Act, which allows for two different types of mergers: "merger by absorption," in which one existing company absorbs or acquires another existing company or more than one existing company, and "merger by formation of a new company," in which two or more existing companies join forces, consolidate their assets, and form a single new entity.

Cross Border Merger

It may be summed up simply as a merger of the operations of two or more companies that are formed in one or more foreign jurisdictions. Companies from various jurisdictions essentially go through this procedure to accelerate their growth and raise their bar so they can compete in the global market.

It is defined as a merger between a business or companies registered under the Act or a previous Companies Act and a company incorporated outside of India in the notified foreign jurisdictions under Section 234 of the Companies Act 2013.

The number of cross-border mergers and acquisitions has sharply expanded, changing the global industrial structure. Any merger, amalgamation, or agreement between an Indian business and a foreign company1 that complies with the Companies Act of 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules of 2016 is referred to as a cross-border merger.

Cross-border mergers are now permitted with effect from April 13, 2017, thanks to the Ministry of Corporate Affairs' notification of Section 234 of the Companies Act, 2013. Therefore, it was only a matter of time until the Reserve Bank of India announced the rules needed to make the cross-border merger practical.

The corporate sector in India is undoubtedly moving toward the point where the state is intended to accept globalisation and its principles through favourable legislation, but because there are numerous technical laws governing the subject, it is nearly impossible to reach the most desirable stage in a single attempt.

Regulatory Framework

In India, Cross border is majorly regulated under

(i) The Companies Act 2013;

(ii) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011;

(iii) Competition Act 2002;

(iv) Insolvency and Bankruptcy Code 2016;

(v) Income Tax Act 1961;

(vi) The Department of Industrial Policy and Promotion (DIPP);

(vii) Transfer of Property Act 1882;

(viii) Indian Stamp Act 1899

(ix) Foreign Exchange Management Act 1999 (FEMA) and other allied laws as may applicable based on the merger structure.

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.

Inbound & Outbound Merger

Both inbound and outbound mergers are considered cross-border mergers. An inward merger is a cross-border merger in which the resulting business is based in India. A cross-border merger with the resulting firm being a foreign corporation is referred to as an outbound merger. An Indian company or a foreign company that acquires the assets and liabilities of the enterprises engaged in the cross-border merger is referred to as a resultant company.

Key provisions of the Cross-Border Regulation in case of Inbound Mergers

Issuance of Securities: As settlement, the Indian company would issue or transfer securities to the transferor entity's shareholders, which might include both Indian and foreign residents. When issuing securities to a person who resides outside of India, the Cross-Border Regulation's pricing criteria, sectoral caps, and other applicable guidelines must be followed. The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, provide that a foreign company must abide by certain restrictions if it is a JV/WOS.

The purchase of one or more step-down subsidiary of the JV/WOS of the Indian party by the resultant Indian company, if it results from the inward merger of the JV/WOS, must also comply with Regulations 6 and 7 of the ODI Regulations.

Vesting of Assets & Liabilities

• Any loans or guarantees made by the transferor company will be converted into loans or guarantees made by the new company. To comply with the requirements for external commercial borrowings, a two-year deadline has been given. In such circumstances, the end use restrictions would not apply.
• The resultant company is free to transfer any asset it acquires in any way that is allowed by the Act or regulations. When an asset cannot be bought, the resulting company must sell it within two years after the National Company Law Tribunal's (NCLT) approval of the decision, and the sale profits must be immediately transferred back to India through banking channels. If the resultant company is not allowed to have any liabilities outside of India, such liabilities may be discharged within two years from the sale proceeds of those foreign assets.
• For a maximum of two years after the NCLT approved the arrangement, the resulting company may open a bank account in the other country's jurisdiction to monitor merger-related operations.

Valuation: According to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, the valuation must be completed by Registered Valuers who are members of recognised professional bodies in the applicable jurisdictions of the transferee company, and it must also adhere to generally accepted accounting and valuation principles

Key provisions of the Cross-Border Regulation in case of Outbound Mergers

Issuance of Securities: In exchange, the foreign company would issue securities to the Indian entity's shareholders, which may include both Indian and foreign residents. If shares are being bought by someone who resides in India, that individual must follow the ODI Regulations as set forth by the RBI.

Vesting of Assets & Liabilities

• The guarantees or borrowings of the resultant company shall be repaid as per the scheme sanctioned by the NCLT. Further, they should not acquire any liability not in conformity with the Act or regulations as prescribed. A no objection certificate to this effect should be obtained from the lenders in India of the Indian company.
• Any asset acquired can be transferred in any manner as permissible under the Act or the regulations thereunder. In cases where it cannot be held or acquired by the resultant company, it shall be sold within two years from the date of sanction of the scheme by the NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of two years shall be permissible.

Opening a Bank Account: For a maximum of two years from the date when a scheme was approved by the NCLT, the resultant company is allowed to create a Special Non-Resident Rupee Account (SNRR Account) in order to supervise transactions related to the merger.

Valuation: According to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, the valuation must be completed by registered valuers who are members of recognised professional bodies in the designated jurisdictions of the transferee company, and it must also adhere to generally accepted accounting and valuation principles.

Other Compliances: The resultant company and/or the companies that take part in the cross-border merger must provide the reports that may occasionally be requested by the RBI, in consultation with the Government of India. It is important to note that any transaction involving a cross-border merger carried out in accordance with Cross-Border Merger regulations will be deemed to have prior approval from the RBI. This is because any transaction involving a cross-border merger carried out in accordance with Cross-Border Merger regulations will be deemed to have been approved by the RBI.

Conclusion

The Companies Act of 2013 was the initial step, and Rule 25A of the Companies (compromise, arrangement and amalgamation regulations) of 2017 was added to further widen the Act's application to outbound mergers. Another significant move along the same lines was the introduction of the "Foreign Exchange Management (Cross Border Merger) Regulations, 2018". However, comparable changes must be made to the Competition and Income Tax Act in order to properly compete on a global level and close any loopholes. To effectively accomplish cross-border mergers, a number of challenging concerns must be resolved. Each cross-border merger is distinctive, and how these concerns are handled will be largely influenced by the circumstances, dynamics, size, and international presence of the merging companies. Due to the Cross-Border Regulations' relatively new, many practical problems have not yet been identified and will be addressed as they arise over time.

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