The Ministry of Corporate Affairs (MCA) on 13 April notified the long-awaited section 234 of the Companies Act, 2013, dealing with the merger or amalgamation of a company incorporated under the act and a foreign company incorporated outside India and vice versa, with effect from 13 April.
Section 394 of the erstwhile Companies Act, 1956, dealing with provisions for facilitating reconstruction and amalgamation of companies, permitted only merger of a foreign company with an Indian company (inbound merger) and not merger of an Indian company with a foreign company (outbound merger).
In a separate notification dated 13 April, the MCA also notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017, which amend the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, by inserting rule 25A. This new rule sets out procedural prerequisites of cross-border merger and their valuation norms. It also defines the term permitted jurisdiction for outbound mergers.
Since both inbound and outbound mergers would be subject to exchange control regulations, the Reserve Bank of India (RBI) on 26 April invited public comments on draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017, which prescribe how the allotment of shares, loans and advances, and assets and security of the resultant Indian or foreign company would be dealt with.
Under the newly notified rules, the transferee company has an added responsibility to ensure that the valuation, conducted by a valuer who is a member of a recognized professional body in the country of such transferee company, is in accordance with internationally accepted principles on accounting and valuation, on an arm’s length basis. The transferor company, before filing an application with the National Company Law Tribunal for merger, must obtain prior approval of the RBI for any such cross-border merger.
The consideration for cross-border mergers is not limited to shares of the transferee company. The act states that the shareholders of the transferor company may be paid in cash, depository receipts, or partly in cash and partly in depository receipts, which is a win-win situation for these shareholders.
Section 234 will help create an ideal platform for Indian companies to raise further capital through overseas markets and to access foreign stock exchanges without complying with overseas listing norms.
The RBI’s draft regulations include cross-border demerger within the definition of cross-border merger while, on the contrary, section 234 specifically deals with the cross-border merger or amalgamation of an Indian company with a foreign company and is silent on the cross-border demerger aspect. For effective implementation of the law, both the act and the draft regulations must be in harmony with each other.
Cross-border mergers have to abide by the long and arduous process of sections 230-232 of the 2013 act, since they have been specifically excluded from availing of the benefit of fast-track mergers, as available for domestic mergers under section 233 of the act.
Further, the draft regulations suggest that an Indian company would need to repay all its outstanding borrowing before venturing into an outbound merger. This provision would discourage loss-making entities from entering into any such cross-border merger and may prove to be detrimental in achieving the overall objects as intended by the legislature.
Relevant authorities will have their task cut out in executing the contemplated process in a timely and efficient manner due to the involvement of multiple agencies, regulatory authorities, laws and regulations.
Further, approvals must be obtained from the concerned regulator in certain sectors such as insurance, defence and telecom and thus may end up in creating more hurdles and thus reducing the feasibility of such deals.
As per the OECD’s Global Forum on International Investment 2017, the global economy witnessed a 20% spurt in cross-
border mergers and acquisitions in 2016.
To explore the hidden potential of such transactions, the government of India has for the first time allowed outbound mergers of Indian companies with foreign companies. However, for a flourishing and effective cross-border merger regime, economies like India need to have less contradiction and ambiguity in the stipulated rules and regulations to govern such cross-border mergers.
Therefore, in order to attain the true purpose of the liberalized cross-border merger regime, the RBI and the government of India should iron out all such inconsistencies and bring unequivocal clarity to the cross-border merger regime.
Aseem Chawla is a partner and Shruti Singh is a senior associate at the Delhi office of Phoenix Legal. Shamik Saha, also a senior associate, co-authored the article.
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