CROSS BORDER MERGERS

Jul 13, 2017 Uncategorised

CROSS BORDER MERGERS

The Ministry of Corporate Affairs vide its notification dated 13th April, 2017 has notified relevant rules of merger between Indian and Foreign Companies (‘Cross Border Mergers’) and has also notified 13th April 2017 as the effective date of come into force of Section 234 of the Companies Act 2013 pertaining to Cross Border Mergers.

PART I: COMPANIES ACT 2013 & RULES

Rules pertaining to domestic demergers being the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 have been notified in 14th December 2016 and now rules pertaining to Cross Border Mergers have been notifed by way of an amendment to the Said Rules by incorporation a new Rule 25A to deal with Corss Border Mergers.
The text of the Rule is as follows:
 “25A. Merger or amalgamation of a foreign company with a Company and vice versa.—(1) A foreign company incorporated outside India may merge with an Indian company [after obtaining prior approval of Reserve Bank of India] and [after complying with the provisions of sections 230 to 232 of the Act] and these rules.
(2) (a) A company may merge with a foreign company incorporated in any of the jurisdictions [specified in Annexure B] after obtaining prior approval of the Reserve Bank of India and after complying with provisions of sections 230 to 232 of the Act and these rules.(b) The transferee company shall ensure that valuation is conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under clause (a) of this sub-rule.
(3) The concerned company shall file an application before the Tribunal as per provisions of section 230 to section 232 of the Act and these rules after obtaining approvals specified in sub-rule (1) and sub-rule (2), as the case may be.
Explanation 1.—For the purposes of this rule the term “company” means a company as defined in clause (20) of section 2 of the Act and the term “foreign company” means a company or body corporate incorporated outside India whether having a place of business in India or not
Explanation 2.— For the purposes of this rule, it is clarified that no amendment shall be made in this rule without consultation of the Reserve Bank of India.”
Key takeaways from the above definition:
i). Indian Company merging with a Foreign Company (Outbound Merger);      ii). Foreign Company merging with an Indian Company (Inbound Merger);      iii). Prior Approval of RBI and NCLT in both the instances;
Cross border merger is not a new concept in the Company law domain.  The erstwhile Companies Act, 1956 had provisions for Cross Border Merger as enumerated in Section 391 and Section 394 of the 1956 Act.  However, the said provisions only provided for a merger where a Foreign Company would merge with an Indian Company and not vice-versa.  The term “transferor company” used in Section 394 was clarified to include any body corporate and the term “transferee company” was clarified to include only Indian companies. 
The new Rule 25A provides for reciprocating Cross Border Merger between Indian and Foreign Companies.  However, such merger have been strictly made subject to the prior approval of the RBI.  Furthermore, the merger of an Indian Company (‘Transferor Company’) with a Foreign Company (‘Transferee Company’) has only been allowed with those companies located in specific jurisdictions as prescribed under the Rule.  The permissible Jurisdictions are as follows:
i).whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI; or 
ii).whose central bank is a member of Bank for International Settlements (BIS); and 
iii).a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as: (a) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (b) 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.
However, no such restriction on jurisdiction has been placed for a merger of a Foreign Company (‘Transferor Company’) with an Indian Company (‘Transferee Company’).
Section 234 of the Companies Act, 2013 empowers such Cross Border Mergers and provides as follows:
“234. Merger or amalgamation of company with foreign company(1) The provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporatedin the jurisdictions of such countries as may be notified from time to time by the CentralGovernment:
Provided that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.
(2) Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the 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, as per the scheme to be drawn  up for the purpose.
Explanation.—For the purposes of sub-section (2), the expression “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not.”
The key takeaways from reading of the Section (not discussed above) are:i). Consideration – the manner of payment of the “Consideration” which has been specified in the Section to include “cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts”. Cash would include cheque; and
ii). RBI – Rules of Merger to be in consultation with RBI which means that RBI would have authority to issue separate rules on Merger.

PART II
RBI GUIDELINES

In view of the above RBI has placed in its website Draft Guidelines (for public comments) on Mergers and some key issues are as follows:

Inbound merger

In case of cross border mergers where the resultant company is an Indian company,
a.  Any issue or transfer of security by the resultant company to a person resident outside India shall be in accordance with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.b.  Any borrowing or impending borrowing of the foreign company from overseas sources which becomes the borrowing of the resultant company or any borrowing from overseas sources entering into the books of resultant company arising shall conform to the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowing norms, as laid down under Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.c.  The resultant company may acquire and hold any asset outside India which an Indian company is permitted to acquire under the provisions of the Act, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed thereunder.d. Where the asset or security is not permitted to be acquired or held by the resultant company under the Act, rules or regulations, the resultant company 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 to India immediately through banking channels.

Outbound merger

In case of cross border mergers where the resultant company is a foreign company,
a.  A person resident in India may acquire or hold securities of the resultant company in accordance with the Foreign Exchange Management (Transfer or issue of Foreign Security) Regulations, 2000 or the provisions of the Liberalized Remittance Scheme, as applicable.b.  The resultant company shall be liable to repay outstanding borrowings or impending borrowings as per the Scheme sanctioned by the National Company Law Tribunal in terms of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.c.   The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the provisions of the Act, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed thereunder.d.   Where the asset or security is not permitted to be acquired or held by the resultant company under the Act, rules or regulations, the resultant company 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.

Valuation

The valuation of the Indian company and the foreign company for the purpose of cross border mergeris required to be done as per internationally accepted pricing methodology for valuation of shares on arm’s length basis and duly certified by a Chartered Accountant/public accountant/merchant banker authorized to do so in either jurisdiction.

Reporting

1.  Any transaction arising due to cross border merger is required to be reported to the RBI in the same manner in which it is otherwise required to be reported under the Act or rules or regulations framed thereunder. 2. The Indian company and the foreign company involved in the cross border merger are also required to furnish reports as may be prescribed by the RBI.
As such, cross border mergers have significant regulatory regime as provided under the Companies Act, 2013 of ROC, Official Liquidator, Income Tax Authorities and Competition Commission, SEBI (wherever applicable) as well as mandatory approval of the RBI.

– Arkodeb Sinha

Relevant Links

http://www.mca.gov.in/Ministry/pdf/CompaniesCompromises_14042017.pdf

http://www.mca.gov.in/Ministry/pdf/section234Notification_14042017.pdf

https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3343