[Post by Suprotik Das, a 5th year law student at the Jindal Global Law School, Sonepat, Haryana.]
April 13, 2017 marked a momentous event in the cross-border merger regime in India with the Ministry of Corporate Affairs notifying section 234 of the Companies Act, 2013 as well as amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 in the form of Rule 25A. Read together, they allow for the merger of an Indian company and a foreign company, with the resultant entity being either Indian or foreign owned and controlled – something that was hitherto disallowed under the Companies Act, 1956 and up until April 13, 2017.
However, the successful implementation of a cross-border merger between an Indian company (“I”) and a foreign company (“F”) is fraught with a number of difficulties. For example, say ‘I’ is the transferor company, F is the transferee company and ‘G’ is the resultant entity, which is foreign, what happens to the ownership of assets in India? Issues such as management and administration of assets in India by a foreign entity pose a number of compliance hurdles. Against this milieu, I attempt to analyse the existing provisions on foreign exchange laws and regulations.
The Companies Act, 2013
1. Section 234 now authorises mergers of an Indian company with a foreign company, with the resultant entity being either Indian-controlled or foreign-controlled.
2. Sections 230 to 232 apply similarly to cross-border mergers, irrespective of whether the resultant entity is Indian or foreign.
3. Section 234(2) further provides that the scheme of merger may include payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be. In the event the company decides to adopt the Indian Depositary Receipts route, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 will be applicable.
The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017
1. The newly introduced Rule 25A allows for a merger between a foreign company and an Indian company after:
(a) procuring approvals from the Reserve Bank of India; and
(b) complying with sections 230 to 232 of the Companies Act, 2013 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
2. Regarding valuation, the transferee company shall ensure that it is in accordance with:
(a) the valuation conducted by a valuer who is a member of a recognised professional body in the jurisdiction of the transferee company; and
(b) internationally accepted principles on accounting and valuation.
3. However, an Indian company may only merge with foreign companies from the following jurisdictions:
(a) whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to a bilateral Memorandum of Understanding with the Securities and Exchange Board of India (“SEBI”), or
(b) whose central bank is a member of Bank for International Settlements (BIS) AND one which is not identified in the public statement of Financial Action Task Force (FATF) as:
(i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
(ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
The Foreign Exchange Management Act, 1999 (‘FEMA’)
1. From our example set out earlier, ‘G’ will be considered a ‘foreign company’ as it qualifies as a person resident outside India in accordance with section 2(u) read with section 2(w) of FEMA.
2. In accordance with section 6(5) of FEMA, a foreign company can hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.
3. FEMA, therefore, allows for a foreign company to hold assets in India.
The Foreign Exchange Management (Cross Border Merger) Draft Regulations, 2017 (the ‘Draft Regulations’).
Interestingly, within 13 days of the notification of section 234 and Rule 25A, the Reserve Bank of India had published draft regulations to deal with the implementation of cross border mergers. These Draft Regulations were open to public comments until May 9, 2017. The final version of these regulations is yet to be notified.
To answer the question posed earlier, Draft Regulation 5 lends some credence. It pertains to outbound mergers between an Indian company and foreign company where the resultant company is foreign. Sub-regulation (c) of the draft allows for the resultant foreign company to acquire and hold any asset in India, which it is permitted to acquire under the provisions of FEMA and the Rules or Regulations framed thereunder. Furthermore, the assets can be transferred in any manner for undertaking a transaction permissible under the FEMA, Rules or Regulations.
As per sub-regulation (d) of the draft, if the asset or security is not permitted to be acquired or held by the resultant foreign company under FEMA, Rules or Regulations, it shall sell such asset or security within a period of 180 days from the date of sanction of the scheme of cross border merger, and the sale proceeds shall be repatriated outside India immediately through banking channels.
It is interesting to note that sub-regulation (c) authorises the holding of any asset while sub--regulation (d) of the draft creates a dichotomy between a resultant foreign company holding an asset and a security. It is unclear why this dichotomy exists. Perhaps the final version of the Regulations will remedy this anomaly.
Master Direction dated January 1, 2016 on the Acquisition and Transfer of Immovable Property under FEMA
A Master Direction proceeds to compile and consolidate rules, regulations and circulars framed by the Reserve Bank of India pertaining to various foreign exchange issues and transactions. Clause 6, Part II of this Master Direction deals with the acquisition of immovable property by a person resident outside India for carrying on a permitted activity. Here I analyse the impact of this Master Direction on cross-border mergers.
Only a branch or office in India established by a person resident outside India, other than a liaison office, may acquire immovable property in India which is necessary for or incidental to the activity carried on in India by such branch or office. Therefore, this necessarily means that the resultant foreign company has to set up a branch office to administer the assets in India, which means complying with the FEMA Master Direction on Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO), or any other place of business in India by foreign entities, issued on January 1, 2016.
One can therefore conclude that theoretically Indian law allows for cross border mergers. However, in practice, one notices that implementation of a cross-border merger with the resultant entity being foreign is fraught with difficulty. This is due to complicated issues that may arise regarding ownership and management of Indian assets by a resultant foreign company. Furthermore, if the resultant entity is foreign, having to set up and run an Indian branch office will only add to transaction costs and may render this type of a merger less attractive. In this regard, India’s foreign exchange laws may have to be updated to reflect the new liberal intention of the government in allowing quick, seamless and easy cross-border mergers and acquisitions involving Indian companies.
- Suprotik Das