NEW MERGER RULES NOTIFIED, PROVIDING IMPETUS TO CROSS-BORDER MERGERS
May 19, 2017
The Ministry of Corporate Affairs, Government of India, recently notified the relevant section, and also amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2017, inserting rule 25A. Rule 25A both recognises cross-border mergers in both directions, and mandates Reserve Bank of India (RBI) approval for such a merger prior to application to the National Company Law Tribunal.
This leeway has only been allowed subject to certain conditions, which were laid down in the section and the rules. The Indian company may only merge with a company incorporated in certain jurisdictions, which are those:
(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 jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
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.
This leaves several jurisdictions around the world where such mergers will be allowed to take place, such as Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man, Mauritius, and the Netherlands, among many others.
Further, an independent valuation will be required to be submitted along with the request for RBI approval.
Following these developments, the RBI issued draft regulations on cross-border mergers under the Foreign Exchange Management Act, 1999 (FEMA), titled the Foreign Exchange Management (Cross Border Merger) Regulations, 2017. These aim to clarify issues that will arise when Indian companies and foreign companies enter into such arrangements.
In cases of cross border mergers where the resulting company is India incorporated, the rules provide, among other things, that:
“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 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.”
In cases where the merger results in a foreign incorporated company, the rules provide, among others,
“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.”
“Where the asset or security is not permitted to be acquired or held (emphasis added) 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 shall be repatriated outside India immediately through banking channels.”
The draft regulations also mandate that the valuation of the Indian company and the foreign company for the purpose of the cross border merger shall be done as per internationally accepted pricing methodology for valuation of shares on arm’s length basis which shall be duly certified by a Chartered Accountant/public accountant/ merchant banker authorised to do so in either jurisdiction.
Further, any transaction arising due to the cross border merger shall 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. The Indian company and the foreign company involved in the cross border merger shall be required to furnish reports as may be prescribed by the Reserve Bank.
The notification of Section 234, along with the insertion of rule 25A, and the new draft regulations, will increase clarity considerably in the arena of cross-border mergers. The consequences of newly created foreign companies failing to divest assets or securities within 180 days as mandated, has not been clarified. However, the new developments remain a considerable leap forward in the mergers domain. They will allow companies to realise the fullest possible value from their transactions, and maximise synergy between operations in India and abroad.