New cross-border regime: Analysis and observations

By Divi Dutta and Anant Gupta, Shardul Amarchand Mangaldas & Co
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In April this year, the Ministry of Corporate Affairs (MCA) brought into force section 234 of the Companies Act, 2013, which permits cross-border mergers. Simultaneously, the MCA in consultation with the Reserve Bank of India (RBI) also inserted rule 25A in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which sets out procedural requirements for mergers of foreign companies into Indian companies (inbound mergers) and vice versa (outbound mergers), and also provides that such mergers would require prior approval of the RBI.

Divi DuttaPartnerShardul Amarchand Mangaldas
Divi Dutta
Partner
Shardul Amarchand Mangaldas & Co

In order to facilitate such approval, the RBI has now introduced the Draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017, which set out the conditions to be complied with to obtain its approval under rule 25A. It is expected that the final set of regulations will be notified shortly.

While the 2013 act has opened its doors for all foreign companies for inbound mergers into Indian companies, outbound mergers of Indian companies are only permitted with foreign companies which are incorporated in a notified jurisdiction, i.e.:

  • A jurisdiction whose securities market regulator is a signatory to the Multilateral Memorandum of Understanding (MoU) of the International Organization of Securities Commissions (IOSCO) or a bilateral MoU with the Securities and Exchange Board of India (SEBI);
  • A jurisdiction whose central bank is a member of the Bank for International Settlements; and
  • A jurisdiction which is not identified in the Financial Action Task Force’s public statement for deficiencies in respect of anti-money laundering or combating the financing of terrorism or a jurisdiction which has not sufficiently progressed in addressing the deficiencies or has not developed an action plan for addressing the deficiencies.

The MCA cited its difficulty in identifying the list of notified jurisdictions as one reason behind its delay in notifying the cross-border provisions. Currently, by virtue of rule 25A, tax-friendly jurisdictions such as Bermuda, the British Virgin Islands, Cayman Islands, Isle of Man, Jersey, Luxembourg, Mauritius and Switzerland fall within the list of notified jurisdictions as they are signatories to the IOSCO MoU. Further, Dubai, Singapore and Mauritius, which are preferred jurisdictions for routing investment in India, have bilateral MoUs with SEBI and fall within the list of notified jurisdictions.

Anant GuptaAssociateShardul Amarchand Mangaldas & Co
Anant Gupta
Associate
Shardul Amarchand Mangaldas & Co

The need to comply with the applicable laws of notified jurisdictions is a potential impediment to a cross-border merger transaction. Further, the definition of “foreign companies” in the 2013 act includes bodies incorporated outside India. Given that the definition of “body corporate” under section 2(d) of the Limited Liability Partnership Act, 2008, includes a limited liability partnership (LLP) incorporated outside India, a plain reading of both provisions would mean that foreign LLPs would be permitted to merge with Indian companies. However, given that cross-border merger provisions under the 2013 act do not contain any specific requirement/reference to foreign LLPs, it is expected that the MCA may clarify its intention of including/excluding foreign LLPs and any other specific provision for foreign LLPs under the cross-border merger provisions.

As for the RBI’s draft regulations, a major highlight is the requirement to comply with certain Indian foreign exchange laws. The draft regulations provide that for inbound mergers, issuances of shares have to comply with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. In the case of outbound mergers, Indian residents may hold securities of the foreign company in accordance with the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2004, or the provisions of the liberalized remittance scheme. It will be interesting to see whether the RBI introduces any further conditions for inbound and outbound mergers while aligning these regulations with the provisions of the draft regulations.

All in all, the provisions of the 2013 act read together with the draft regulations will allow companies to expand their business and integrate globally with ease. These provisions can also provide an exit to foreign group companies with Indian subsidiaries by allowing such subsidiaries to merge with their foreign parent entity as opposed to undergoing the rigorous process of liquidation.

Divi Dutta is a partner and Anant Gupta is an associate at Shardul Amarchand Mangaldas & Co. The views and opinions expressed are solely those of the authors and do not necessarily reflect the official view or position of the firm.

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