Introduction

On 13th April 2017, the Ministry of Corporate Affairs (MCA) notified Section 234 of the Companies Act, 2013 and inserted a new Rule 25A (merger or amalgamation of a Foreign Company with Indian company and vice-versa) in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Compromises Rules), paving way for merger and amalgamation of a Foreign Company with an Indian company and vice-versa. Since Rule 25A required prior approval of the Reserve Bank of India (RBI) for cross-border merger, without corresponding procedural aspects in place, cross-border merger could not take-off. Now, with the RBI notifying the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations/Regulations) for mergers amalgamation and arrangement between Indian and foreign companies on 20th

Crucial definitions

The FEMA Regulations cover both inbound and outbound investments. The term “Inbound Merger” means a Cross Border Merger where the Resultant Company is an Indian company whereas “Outbound Merger” means a Cross Border Merger where the Resultant Company is a Foreign Company. The “Resultant Company” means an Indian company or a Foreign Company which takes over the assets and liabilities of the companies involved in the cross-border merger. FEMA Regulations define “Cross Border Merger” as any merger, amalgamation or arrangement between an Indian company and a Foreign Company in accordance with the Compromises Rules. The term “Foreign Company” has been defined as any company or body corporate incorporated outside India in a jurisdiction specified in Annexure B to Compromises Rules whether having a place of business in India or not.

Cross-border merger: Procedural aspects

Inbound Mergers

When the Resultant Company is an Indian Company, the following procedure becomes applicable:

i. Issue/Transfer of securities: The issue or transfer of any security and/or a foreign security, to a person resident outside India should be made in accordance with the pricing guidelines, entry routes, sectoral caps, attendant conditions and reporting requirements for foreign investment as laid down in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO). However, this is subject to the following conditions:

  1. where the Foreign Company is a joint venture (JV) or a wholly owned subsidiary (WOS) of the Indian company, it shall comply with the conditions prescribed for transfer of shares of such JV/ WOS by the Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (TIFS);
  2. where the Inbound Merger of the JV/WOS result into acquisition of the Step-down subsidiary of JV/ WOS of the Indian party by the Resultant Company, then such acquisition should be in compliance with Regulation 6 and 7 of TIFS which provide for permission for direct investment in certain cases and investment by Indian party engaged in financial services sector respectively.

ii. Borrowings: Any borrowing of the Foreign Company from overseas sources that becomes the borrowing of the Resultant Company shall conform within a period of two years, to Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.

iii. Assets: The Resultant Company may acquire and hold any asset outside India which an Indian company is permitted to acquire under the provisions of FEMA. Such assets can be transferred in any manner for undertaking a transaction permissible under FEMA.

iv. Sale of assets: Where the asset or security is not permitted to be acquired/ held by the Resultant Company under the FEMA provisions, the Resultant Company should sell such asset/ security within a period of two years from the date of sanction of the Scheme of the cross-border merger and repatriate the sale proceeds to India immediately.

v. Offices: An office outside India of the Foreign Company, pursuant to the sanction of the Scheme of Cross Border Merger shall be deemed to be the branch/office outside India of the Resultant Company in accordance with the Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015. Accordingly, the Resultant Company may undertake any transaction as permitted to a branch/office under the aforesaid Regulations.

Outbound Mergers

When the Resultant Company is a Foreign Company, the following procedure becomes applicable:

i. Eligibility: A person resident in India may acquire or hold securities of the Resultant Company in accordance with TIFS.

ii. Fair Market Value: A resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme laid down under FEMA.

iii. Repayment: The guarantees or outstanding borrowings of the Indian Company, which become the liabilities of the Resultant Company shall be repaid as per the Scheme sanctioned by the NCLT in terms of the Compromises Rules. However, this is subject to the following conditions: (a) The Resultant Company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with FEMA. (b) A no-objection certificate to this effect should be obtained from the lenders in India of the Indian company.

iv. Assets: The Resultant Company may acquire and hold any asset in India which a Foreign Company is permitted to acquire under the provisions of FEMA. Such assets can be transferred in any manner for undertaking a transaction permissible thereunder. In cases where the asset or security in India cannot be acquired or held by the Resultant Company under FEMA, the Resultant Company shall sell such asset or security within a period of two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. The Resultant Company may open a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for putting through transactions under these Regulations and such account shall run for a maximum period of two years from the date of sanction of the Scheme by NCLT.

v. Offices: An office in India of the Indian company, after sanction of Scheme of Cross Border Merger, may be deemed to be a branch office in India of the Resultant Company 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. The Resultant Company may undertake any transaction as permitted to a branch office under the aforesaid Regulations.

Compliance related aspects

The FEMA Regulations provide that the valuation of the Indian Company and the Foreign Company shall be done in accordance with Rule 25A of the Compromises Rules. Compensation by the Resultant Company to a holder of a security of the Indian Company or the Foreign Company, may be paid, in accordance with the Scheme sanctioned by the NCLT. The companies involved in the cross-border merger must ensure that any regulatory actions, prior to merger, regarding non-compliance, contravention, violation under FEMA shall be completed. The Resultant Company and/or the companies involved in the cross-border merger are required to furnish reports prescribed by the RBI periodically. Any transaction, because a cross-border merger is undertaken in accordance with the FEMA Regulations, is deemed to have prior approval of the RBI required under Rule 25A of the Compromises Rules. Additionally, a certificate ensuring compliance to the FEMA Regulations from the Managing Director/Whole Time Director and Company Secretary of the company(ies) concerned shall be furnished along with the application made to the NCLT under the Compromises Rules.

Conclusion

While the FEMA Regulations are a welcome step in providing clarity to the extant regulatory regime and enabling corporate houses abroad to plan their businesses more effectively thereby giving an impetus to the M&A activity in the country, a crucial aspect to take note of is the definition of a “Foreign Company” in these FEMA Regulations which act as a double-edged sword resulting in dual applicability of permitted jurisdictions under Rule 25A as well as these Regulations. Additionally, these Regulations will also have a bearing on pending as well as the future insolvency and bankruptcy proceedings since foreign bidders will now turn towards buying Indian assets. Keeping in mind these factors, the interplay of these Regulations with the existing regime is yet to be seen, going forward.