Cross Border Merger Regulations Enacted – A Boost to Foreign Investment in India
The Reserve Bank of India has finally enacted the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 vide notification No. FEMA 389/2018-RB dated 20th March 2018.
Before the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 coming into force, the Companies (Compromise, Arrangement or Amalgamation) Rules, 2016 mandated for a prior approval of the RBI to be taken in case of Cross Border Mergers.
With the advent of the aforesaid Regulations, the provision of deemed approval of the RBI will come into play i.e. if any transaction of a cross border merger has taken place as per these Regulations, then the mandate of prior approval of the RBI shall be deemed.
WHY SUCH REGULATION?
The main object of the regulation is to boost the foreign direct investment in India.
This regulation lays down the mechanisms relating to mergers, amalgamation and arrangements between Indian and Foreign Companies.
This Regulation will cover both inbound and outbound investments.
It is the merger or amalgamation of a foreign company with an Indian company. The resultant company will be an Indian company.
It is the merger or amalgamation of an Indian company with a foreign company. The resultant company will be a foreign company.
These regulations are in continuation to the provisions of Section 234 of the Companies Act, 2013 and Companies (Compromises, Arrangements and Amalgamations) Rules, 2017 that provides for the process and provisions facilitating mergers and amalgamations between an Indian company and a foreign company i.e.
- Merger of a foreign company with an Indian company and
- Merger of an Indian company with a foreign company incorporated in any of the prescribed jurisdictions.
WHO WILL BE THE BENEFICIARY?
It will help Multi-National Companies (MNCs) who are willing to consolidate their business operations by way of merger of their Indian entity with companies in other jurisdictions.
The guidelines are now specified and hence, it will give better clarity of every aspect to all Indian companies which have their verticals and operations outside India.
The chance of litigation will be curtailed as better understanding and valuation parameters are already set out for business houses.
PROMINENT TERMS AND THEIR DEFINITION AS PER THE REGULATIONS:
Cross Border Merger
Cross Border Merger means any merger, amalgamation or arrangement between an Indian company and a foreign company in accordance with Companies (Compromises, Arrangements and Amalgamations) Rules 2016 notified under the Companies Act 2013.
Foreign company means any company or body corporate incorporated outside India whether having a place of business in India or not.
Indian company means a company incorporated under the Companies Act or under any previous company law.
Resultant company means an Indian company or a foreign company which takes over the assets and liabilities of the companies involved in the cross border merger.
KEY FEATURES OF THE REGULATIONS:
ISSUE OR ACQUISITION OF SECURITIES
- INBOUND MERGER: The pricing guidelines, entry routes, attendant conditions and other requirements as laid down under Foreign Exchange Management (Transfer and issue of Security by a person Resident outside India) Regulations, 2017 should be complied with when securities are issued or transferred to a person who is a non-resident of India.
The conditions mentioned under Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 will have to be complied with in case where the foreign company is a joint venture or a wholly owned subsidiary of the Indian company.
The Regulation 6 and 7 of Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 shall need to be complied with if the merger with the joint venture or the wholly owned subsidiary results into an acquisition.
- OUTBOUND MERGER: The securities of a foreign company can be acquired by a resident of India by following the present regulations relating to investment in Joint Venture or wholly owned subsidiary or LRS i.e. Liberalised Remittance Scheme.
LOCATION OF THE OFFICE
- INBOUND MERGER: As per the Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015, any office of the foreign company outside India shall be deemed as a Branch or an Office of the resultant Indian company. Under the aforesaid Regulations, the resultant Indian company would be allowed to undertake any transactions as permitted to a branch or an office.
- OUTBOUND MERGER: Any office in India shall be deemed as a Branch or an office of the resultant foreign company in India according to the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business), Regulations, 2016. As per these Regulations, the foreign company may undertake any transaction as permitted to a branch office.
- INBOUND MERGER: Before the inbound merger, if there is any borrowing by the foreign company, it shall become the borrowing of the Indian company after the merger and therefore, it should be in conformity to the External Commercial Borrowing Norms or other foreign borrowing norms within a period of two years.
In the initial two years, the resultant Indian company would be restricted to make any remittance for the repayment of such borrowing of the foreign company. On such borrowings, there shall be no restrictions towards end use.
- OUTBOUND MERGER: Pursuant to an outbound merger, the foreign company shall be liable to repay any borrowings or guarantees that are outstanding on the Indian companies according to the scheme sanctioned by NCLT in terms of the Companies (Compromise, Arrangement or Amalgamation) Rules, 2016.
If there is any liability to be paid to a lender in India, the same shall not be acquired or paid by the foreign company unless it is in conformity with the Foreign Exchange Management Act, 1999, Rules or Regulations framed by the RBI.
Also, the company shall need to have a no-objection certificate to this effect from the lenders in India of the Indian company.
ACQUISITION OF ASSETS:
- INBOUND MERGER: After the Inbound merger, the resultant Indian company may acquire or hold any assets or securities outside India which it is permitted to acquire under the RBI Act, Rules or Regulations.
- OUTBOUND MERGER: After the Outbound merger, the foreign company may acquire or hold any assets in India which it is permitted to acquire under provisions of Act, rules or regulations framed by the RBI.
Any acquisition or holding of assets or securities shall be subject to provisions of RBI.
TRANSFER OF ASSETS/ SECURITIES NOT PERMITTED TO BE ACQUIRED:
- INBOUND MERGER: When an Indian company is not permitted to acquire or hold any asset/securities outside India which is a part of the foreign company under inbound merger, the Indian company would have a period of 2 years from the date of sanction of the scheme to transfer such assets/securities and sale proceeds shall be transferred to India immediately through banking channels.
Similarly in case of liabilities, such liabilities may be extinguished from the sale proceeds of such overseas assets within a period of two years.
- OUTBOUND MERGER: When a foreign company is not permitted to acquire or hold any asset/securities in India which is a part of an Indian Company under outbound merger, the foreign company can transfer such assets/securities within a period of 2 years from the date of sanction of the Scheme and sale proceeds shall be transferred outside India immediately through banking channels.
Similarly in case of liabilities, such liabilities can be paid within the period of 2 years from the sale proceeds of assets/securities.
Two years is the stipulated period for transfer of assets and/or securities.
- INBOUND MERGER: The resultant Indian company may open a bank account overseas, in foreign currency for a maximum period of 2 years from the date of sanction of Scheme.
- OUTBOUND MERGER: In accordance with the Foreign Exchange Management (Deposits) Regulations, 2016, the resultant foreign company may open Special Non-resident Rupee (“SNRR”) account in India for a maximum period of 2 years from the date of sanction of Scheme.
Two years is the maximum period for a bank account.
VALUATION OF THE COMPANY:
Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016 shall govern the valuation of the Indian Company and the Foreign Company for the purpose of cross border merger.
The valuation shall be at arm’s length by adopting international pricing methodology for valuation of shares.
The valuation should be duly certified by a Chartered Accountant/public accountant/merchant banker authorized to do so in either jurisdiction
The valuation parameter shall be applicable for both inbound and outbound merger of companies.
REPORTING TO RBI:
Both the Indian Company as well as the foreign Company involved in the cross-border merger shall be required to furnish reports that may be prescribed by RBI, in consultation with Government of India, from time to time.
- When the cross border merger takes place in consonance with these regulations, it would be deemed that the approval of the RBI has been taken as mandatory under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016. No separate approval from the RBI is required.
- The only other requirement is to produce a certificate from Managing/ Whole Time Director and Company Secretary stating that compliance with the RBI Cross Border Merger Regulations has been made and it shall be submitted to the NCLT along with the application under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016.
- In accordance with the Scheme as sanctioned by the NCLT, compensation shall be paid to the shareholders by the resultant Indian company or foreign company as may be applicable.
- All the non-compliance, contravention, violation of the Act or the Rules or the Regulations shall need to be completed as a sine qua non prior to the cross border merger.
We feel that this regulation is a welcome step of the Government of India and it will help international operations of any company to be more realistic and ease of doing business will be elevated in India.
The business planning of companies with presence in diversified jurisdictional operations will be with a more holistic approach as well.
The content is an academic analysis and does not result into any advice to any person, including any client.
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