India: Cross-Border Merger Framework
In India, mergers and amalgamations between an Indian company and a foreign company located in a permitted jurisdiction are governed by the provisions of the Companies Act, 2013 (CA 2013), the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Companies Rules) and the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (Merger Regulations).
The Merger Regulations provide the framework for mergers, amalgamations and arrangements between Indian and foreign companies, covering both inbound and outbound investments.
MEANING OF CROSS-BORDER MERGERS
The term cross-border merger has been defined under the Merger Regulations as any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies Rules notified under the CA 2013. This may be in the form of an inbound merger or an outbound merger.
The Merger Regulations define an inbound merger as a merger where the resultant company is an Indian company. The following conditions need to be adhered to for an inbound merger:
The issue or transfer of any security by the resultant Indian company to the foreign transferor company must be in compliance with:
- the provisions relating to sectoral caps, pricing guidelines, entry routes, and reporting requirements of the foreign exchange management laws of India and
- the provisions of the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Rules, 2022, where the foreign transferor company is a joint venture (JV) or wholly owned subsidiary (WOS) of the Indian company or where the merger leads to acquisition of a step-down subsidiary of the JV/WOS of the Indian company.
Any overseas guarantee or borrowing of the foreign transferor company which becomes the borrowing of the resultant Indian company must conform, within two years, with the applicable Foreign Exchange Management Act, 1999 (FEMA) rules and regulations. No remittance for repayment of such liability can be made from India within such two-year period. Additionally, the conditions with respect to end use do not apply.
The resultant Indian company can acquire, hold and transfer assets outside India in accordance with applicable FEMA rules and regulations. However, if the resultant Indian company is not permitted under FEMA to acquire or hold any asset or security outside India, it must sell such asset or security within two years of date of sanction of the scheme by the National Company Law Tribunal (NCLT). The sale proceeds shall be repatriated to India immediately. Any liability outside India not permitted to be held by the resultant Indian company can be extinguished using these sale proceeds.
The resultant company may open a bank account in foreign currency for transactions incidental to the cross-border merger for a maximum period of 2 (two) years from the date of sanction of the scheme.
The Merger Regulations define an outbound merger as a merger where the resultant company is a foreign company. Note that, for the purpose of outbound mergers, the foreign company should be incorporated in a jurisdiction specified in the Companies Rules. The following conditions would need to be adhered to for an outbound merger:
A person resident in India holding shares in the Indian transferor company can acquire or hold securities of the resultant foreign company in accordance with the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Rules, 2022. If such a shareholder is an Indian individual, the acquisition must be in accordance with the Liberalized Remittance Scheme.
The guarantees or outstanding borrowings of the Indian transferor company which become the liabilities of the resultant foreign company shall be repaid as per the sanctioned scheme in terms of the Companies Rules. Further, the resultant foreign company shall not acquire any rupee-denominated liability payable to a lender which is not in conformance with FEMA rules and regulations.
The resultant foreign company can acquire, hold and transfer assets in India in accordance with applicable FEMA rules and regulations. If the resultant foreign company is not permitted under FEMA to acquire or hold any asset or security in India, it must sell such asset or security within two years of the date of sanction of the scheme. The sale proceeds shall be repatriated outside India immediately. Any liability in India can be extinguished using these sale proceeds within a period of two years.
The resultant foreign company may open a Special Non-Resident Rupee Account in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of undertaking transactions under the Merger Regulations for a maximum period of two years from the date of sanction of the scheme by NCLT.
Deemed RBI approval
Pursuant to Section 234 of the CA 2013 read with Rule 25A of the Companies Rules, a prior approval is required from the Reserve Bank of India (RBI) in case of cross-border mergers.
However, no separate approval is required in case the cross-border merger is in compliance with the Merger Regulations. Consequently, any cross-border merger not in compliance with the Merger Regulations would require prior RBI approval. Further, all cross-border mergers must comply with the provisions of Sections 230-232 of the CA 2013 read with the Companies Rules for it to be sanctioned by the NCLT.
A certificate from the managing director/ full-time director and company secretary, if available, of the company(ies) concerned ensuring compliance to the Merger Regulations is required to be furnished with the application made to the NCLT under the Companies Rules, 2016.
The following additional requirements must be considered in the case of a cross-border merger:
- The companies involved in the cross-border merger are required to ensure that regulatory actions, if any, prior to merger, with respect to non-compliance, contravention, violation, as the case may be, of the Act or the Rules or the Regulations framed thereunder shall be completed.
- The transferee company is required to ensure that valuation is conducted by valuers who are members of a recognized professional body in the transferee company’s jurisdiction.
- Further, such valuation must be in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect is required to be attached with the application made to the RBI for obtaining its approval, if required.
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*Sidharrth Shankar is a partner at JSA Law. You may reach him via email@example.com.