The Ministry of Corporate Affairs, Government of India (MCA) has notified Section 234 of the Companies Act 2013 (2013 Act) which permits cross border mergers with effect from 13 April 2017. Further, in consultation with the Reserve Bank of India (RBI), the MCA has also notified corresponding amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 (Merger Rules) by inserting a new Rule 25A to be effective on and from 13 April 2017.
We discuss below the key highlights in relation to cross border mergers:
Cross border mergers | Now permitted both ways
Marking a significant change from the old regime under Companies Act 1956, in terms of which only merger of a foreign company with an Indian company was permitted, the newly notified Section 234 of 2013 Act, now permits cross border mergers in both ways i.e., –
- a foreign company can merge into an Indian company (Inbound Merger); and
- an Indian company can merge into a foreign company of permitted jurisdiction (Outbound Merger).
Prior approval of RBI is mandatory
Prior approval of RBI is mandatory and only after receiving RBI’s approval, an application can be made by the Indian company with the jurisdictional National Company Law Tribunal.
Jurisdictions of foreign company into which an Indian company can merge - notified
While the 2013 Act has now opened its doors for Outbound Mergers, such mergers are only permitted with a foreign company which is incorporated in:
- a jurisdiction whose:
- securities market regulator is a signatory to the International Organisation of Securities Commission's Multilateral Memorandum of Understanding (MoU) (Appendix A signatories) or a signatory to the bilateral MoU with Securities and Exchange Board of India (SEBI); or
- central bank is a member of the Bank for International Settlements; and
- a jurisdiction which is not identified in the public statement of Financial Action Task Force (FATF) as:
- a jurisdiction having strategic ‘Anti-Money Laundering or Combating the Financing of Terrorism’ deficiencies to which counter measures apply; or
- a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.
It may be noted that no specific jurisdiction restrictions have been prescribed for Inbound Mergers in respect of foreign companies.
Guidance provided on foreign company’s valuer and valuation
In case of Outbound Mergers, the foreign company should ensure that its valuation is:
- conducted by such valuers who are members of recognised professional body in their country, and
- in accordance with internationally accepted principles on accounting and valuation.
While obtaining RBI’s prior approval for the Outbound Merger, a declaration to this effect is required to be filed.
The aforesaid requirement of foreign company’s valuer and valuation is presently applicable only to Outbound Mergers and the law remains silent on such requirement for Inbound Mergers.
Payment of consideration for merger | Cash or depository receipts also permitted
The scheme of merger may provide for payment of consideration to the shareholders of the merging company in the form of cash or depository receipts or partly in cash and partly in depository receipts.
So far as using depository receipts as a mode of consideration in cases of Outbound Mergers is concerned, the same remains to be tested under the extant legal framework and the Indian markets.
Another point to be noted is that if the mode of consideration for the merger will be cash or depository receipts, ramifications from Indian income tax laws standpoint will need to be evaluated as such a scheme may not qualify as a tax neutral scheme.
Applicability of Sections 230 to 232 of 2013 Act
Sections 230 to 232 of 2013 Act (which are applicable in case of a merger of Indian companies) and the corresponding provisions under the Merger Rules have to be complied with in the case of cross border mergers as well.
The much-awaited notification of Section 234 of the 2013 Act is definitely a welcome move. Under the previous regime, only Inbound Mergers were permitted. For the first time, Outbound Mergers have also been permitted. This will facilitate Indian companies in expanding their horizons for achieving growth, be it for consolidation, acquisitions or internal restructuring. It will also grant the advantage of having access to a ready infrastructure for listing which can be achieved by merging an Indian company with an offshore listed company and will also provide an exit option for existing investors in overseas jurisdictions.
While this is a welcome move, alignment of these provisions with other applicable Indian laws may be required. Accordingly, corresponding amendments may follow to Indian foreign exchange control laws in relation to external commercial borrowings, guarantees, foreign direct investment and overseas direct investment. Further, under Indian Income tax laws, since the capital gains tax benefit is presently available only in case of Inbound Mergers, one awaits corresponding changes to the Indian Income tax laws with respect to any reliefs for the merging company, its shareholders and the merged company, in the case of Outbound Mergers where the merged company is a foreign company. To conclude, we anticipate that other laws applicable to such cross-border mergers will also evolve in due course.