Cross border merger – A reality Now

Finally in April, 2017 a new era began in India with the introduction of provisions relating to Cross border merger in the Companies Act, 2013.

On 13th April 2017, Ministry of Corporate Affairs (“MCA”) notified Section 234 of the Companies Act, 2013 (“the Act”) and Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017 which enabled amalgamation of a foreign company incorporated in notified jurisdiction with a company in India and vice versa.

Although MCA had notified relevant section and Rules, the Regulations from RBI was pending to be issued, without which no cross border transaction could be possible. The RBI had issued draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 for public comment. Finally  on March 20, 2018 the RBI notified Foreign Exchange Management (Cross Border Merger) Regulations, 2018 vide notification no. FEMA.389/2018-RB ( “Regulations”) These regulations will not only open new doors for Foreign Direct Investment but also contribute in strengthening the economy.

All inbound or outbound mergers are required to follow the provisions of these regulations by RBI. As per the Regulations Çross border merger’ means any merger, demerger, amalgamation or arrangement between Indian company(ies) and foreign company(ies) in accordance with Companies(Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013.

Regulation in Detail

For Inbound Mergers :  Where the “Resultant Company” is an Indian Company.

Regulations to be followed: Ø Transfer of securities by Resultant Company to a person outside India shall be governed by Foreign Exchange Management (Transfer o Issue of Security by a Person Resident outside India) Regulations, 2000.

Outstanding Borrowings : Ø The guarantees or outstanding borrowings of the foreign company from overseas sources which become the borrowing of the resultant company or any borrowing from overseas sources entering into the books of resultant company shall conform, within a period of two years, 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 (Borrowing or Lending in Rupees) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.  No remittance for repayment of such liability is made from India within such period of two years; The conditions with respect to end use shall not apply. Where any liability outside India is not permitted to be held by the resultant company, the same may be extinguished from the sale proceeds of such overseas assets within the period of two years.

Ø Deemed Branch office outside India : An office outside India of the foreign company, pursuant to the sanction of the Scheme of cross border merger shall be deemed to be the branch/office outside India of the resultant company in accordance with the Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015.  Accordingly, the resultant company may undertake any transaction as permitted to a branch/office under the aforesaid Regulations.

Acquisition of Assets outside India :-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. Where the asset or security outside India 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 two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated to India immediately through banking channels.

Bank Account :   The resultant company may open a bank account in foreign currency in the overseas jurisdiction for the purpose of putting through transactions incidental to the cross border merger for a maximum period of two years from the date of sanction of the Scheme by NCLT.

For Outbound Mergers : where the ‘’Resultant company’’ is a Foreign Company.

Regulations to be followed : 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 any Foreign Security) Regulations, 2004. A resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme laid down in the Act or rules or regulations framed thereunder.

Deemed Branch office : An office in India of the Indian company, pursuant to sanction of the Scheme of cross border merger, may be deemed to be a branch office in India of the resultant company in accordance with 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. Accordingly, the resultant company may undertake any transaction as permitted to a branch office under the aforesaid Regulations.

Borrowings by the resultant company : The guarantees or outstanding borrowings of the Indian company which becomes the liabilities of the resultant company shall be repaid as per the Scheme sanctioned by the NCLT in terms of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016. The resultant company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with the Act or rules or regulations framed thereunder.  No-objection certificate to this effect should be obtained from the lenders in India of the Indian company.

 Acquisition of Assets in India : 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.  However, where the asset or security in India cannot 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 two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of two years shall be permissible.

Bank account : The resultant company may open a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of putting through transactions under these Regulations. The account shall run for a maximum period of two years from the date of sanction of the Scheme by NCLT.

Other relevant Provisions : 

The valuation of the Indian company and the foreign company shall be done in accordance with Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

Compensation by the resultant company, to a holder of a security of the Indian company or the foreign company, as the case may be, may be paid, in accordance with the Scheme sanctioned by the NCLT.

The companies involved in the cross border merger shall ensure that regulatory actions, if any, prior to merger, with respect to non-compliance, contravention, violation, as the case may be, of the Act or the Rules or the Regulations framed thereunder shall be completed.

Reporting

The resultant company and/or the companies involved in the cross border merger shall be required to furnish reports as may be prescribed by the Reserve Bank, in consultation with the Government of India, from time to time.

Deemed approval

Any transaction on account of a cross border merger undertaken in accordance with these Regulations shall be deemed to have prior approval of the Reserve Bank as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016.

A certificate from the Managing Director/Whole Time Director and Company Secretary, if available, of the company(ies) concerned ensuring compliance to these Regulations shall be furnished along with the application made to the NCLT under the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

Conclusion

These regulations were much awaited to make the cross border merger a possibility. This new regime shall prove very beneficial to make Indian companies globally relevant and Competitive.

For earlier post on same subject : https://www.linkedin.com/pulse/outbound-merger-ca-sudha-g-bhushan/

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