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 incorporated
in the jurisdictions of
such countries as may be notified from time to time by the Central
Government:
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.
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
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