Merging a foreign company into an Indian company

By Puja Sondhi and Ramanuj Gopalan, Amarchand Mangaldas
0
2164
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Court-approved mergers form an important part of corporate restructuring in India. Outlined below are certain key issues under Indian foreign exchange laws for issuance of shares of an Indian (transferee) company to non-resident shareholders of the transferor company pursuant to merger of a foreign company into an Indian company.

Puja Sondhi
Puja Sondhi

Key issues

Provisions under the Companies Act, 1956: The Companies Act, 1956, currently permits the merger of a foreign transferor (amalgamating) company with an Indian transferee (amalgamated) company. Courts have in several instances upheld the merger of a foreign transferor company with an Indian transferee company (see for example, In Re: Moschip Semiconductor Technology Limited). The laws of the foreign country would also have to be observed for the merger and this would typically be required by the sanctioning court in India as a condition to the merger.

Provisions under the Companies Act, 2013: The Companies Act, 2013, which will replace the Companies Act, 1956, has been promulgated and certain sections have been notified. Sections 230 to 234 of the Companies Act, 2013, which have not yet been notified and made effective, provide for the amalgamation of companies. Section 234 provides that a foreign company may, with the prior approval of the Reserve Bank of India (RBI), merge into an Indian company or vice versa, provided the foreign company is registered in a jurisdiction that is notified by the central government for the purpose of section 234.

Provisions under the foreign exchange regulations: The foreign exchange laws do not expressly provide for the treatment of a merger between a foreign company and an Indian company. Regulation 7 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA regulations), currently permits the issuance of shares of an Indian company to non-residents pursuant to merger of two or more Indian companies under the automatic route (i.e. without prior government/RBI approval) subject to fulfilment of certain specified conditions. No express permission has been granted under the FEMA regulations for issuance of shares of an Indian company under the automatic route to non-residents pursuant to merger of a foreign company into an Indian company, resulting in ambiguity.

Under prevailing practice in India, issuance of shares of the Indian (transferee) company to non-resident shareholders of the foreign company pursuant to the merger of a foreign (transferor) company into an Indian (transferee) company is treated akin to a share swap, which requires approval of India’s Foreign Investment Promotion Board (FIPB), and although the law is not entirely clear on this issue, a FIPB approval is generally obtained in such cases.

Ramanuj Gopalan
Ramanuj Gopalan

Additionally, as per the prevailing foreign direct investment policy, a share swap requires the valuation of shares to be made by a category-I merchant banker registered with the Securities and Exchange Board of India or an investment banker outside India registered with the appropriate regulatory authority, and such a valuation certificate is generally attached to the FIPB application.

A separate RBI approval may be required in certain cases including where pursuant to the merger, there is a transfer of overseas assets, loans, guarantees, etc., from the foreign company to the Indian company. This would need to be examined on a case-by-case basis, also taking into account other applicable laws such as those governing external commercial borrowings and overseas direct investment.

Recommendations

In light of the above provisions, it is suggested that, as under regulation 7 of the FEMA regulations, the treatment for issuance of shares to non-resident shareholders pursuant to merger of a foreign (transferor) company with an Indian (transferee) company should be expressly provided for under the foreign exchange laws, and specific conditions may be prescribed, on satisfaction of which regulatory approval requirements may be dispensed with.

Some considerations that could be prescribed to determine whether regulatory approval would be required could include: (i) whether the Indian company is engaged in a sector that is under the 100% automatic route for foreign investment without any sectoral limits or conditions; (ii) whether the proposed non-resident shareholders can freely invest in India without any restrictions; (iii) whether the pricing guidelines for issue of shares by the Indian company to non-residents are complied with; and (iv) what type of assets/liabilities (if any) are getting transferred from the foreign company to the Indian company pursuant to the merger.

Such a provision would provide clarity and also help in streamlining the corporate restructuring process in India.

Puja Sondhi is a partner and Ramanuj Gopalan is a principal associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.

Amarchand_Mangaldas_-_new_logo

Amarchand Towers

216 Okhla Industrial Estate – Phase III

New Delhi – 110 020

Tel: +91 11 2692 0500

Fax: +91 11 2692 4900

Managing Partner: Shardul Shroff

Email: shardul.shroff@amarchand.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link