Under the previous Companies, Act, 1956 (sections 391-394) it was possible for a foreign company to merge with an Indian company, but an Indian company could not be merged with a foreign company. This was intended to ensure that the company that continues after the merger is an Indian company over which the Indian regulatory authorities continue to exercise control. This position was also accepted by the courts (see Andhra Pradesh High Court in re Moschip Semiconductor Limited).
Under the Companies Act, 2013, however, section 234 allows cross-border mergers both ways, subject to the fulfillment of certain conditions. This is intended to provide additional stimulus to cross-border mergers. However, it was only last week that section 234 was notified, with effect from April 13, 2017. The Indian legal regime hence recognises mergers of Indian companies into foreign companies, which were hitherto impermissible.
The Ministry of Corporate Affairs (MCA) has also amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2017 (the “Rules”) and inserted rule 25A that deals with cross-border mergers. Apart from expressly recognizing cross-border mergers in both directions, the Rules explicitly require the approval of the Reserve Bank of India (RBI) for such a cross-border merger. This is understandable given the foreign exchange implications involved in such a transaction. It goes without saying that valuation will be an important consideration in this regard, and hence the Rules set out the requirements of obtaining valuation reports and the principles to be applied regarding the same. It is only thereafter that the National Company Law Tribunal will consider the application to give effect to the merger.
Importantly, Indian companies can only merge with foreign companies in certain specified jurisdictions. These are (i) jurisdictions whose securities regulator is a member of IOSCO or has a bilateral memorandum of understanding with SEBI, (ii) those whose central bank is a member of the Bank for International Settlements (BIS), and (iii) those who have not been identified in the public statement of the FATF as regards certain specified matters. These details are contained in Annexure B of the Rules.
The notification of section 234 marks an important step, and will certainly provide greater flexibility towards cross-border M&A and restructuring. However, as noted in this column in BloombergQuint, several other matters such as taxation must fall in place before one can expect a market for cross-border mergers to develop.