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Cross-Border Mergers Permitted in India

By: Sharanya Ranga and Riya Dutta

With protectionist winds holding sway in the developed economies, India seems to be bucking the trend with the notification of Section 234 of the Companies Act, 2013 (“Co Act”) on 13th April 2017 allowing outbound mergers subject to specific conditions. While the erstwhile Companies Act, 1956 provided only for inbound mergers, i.e. merger of a foreign company with an Indian company, this provision gives the green signal for cross-border mergers, both inbound and outbound.

It is now possible for an Indian company to merge with a foreign company and vice versa, subject to the following:

  1. All such schemes of mergers and amalgamations between a foreign company and an Indian company will be subject to the prior approval of India’s central bank, the Reserve Bank of India (“RBI”).

A foreign company for this purpose refers to any company which has been incorporated outside India, irrespective of whether the foreign company has a place of business in India.

  1. The valuation of the transferee company (i.e. the foreign company) must be conducted by valuers who are members of a recognized professional body in its jurisdiction and the valuation has to be conducted as per internationally accepted principles of accounting and valuation. A declaration to this effect has to be attached to the application for obtaining approval from the Reserve Bank of India.

  2. The mode of payment of the consideration amount in all such cases can be either in cash or in depository receipts or a combination of both.

  3. Post obtaining the approval of the RBI, the merger provisions under the Co Act will accordingly apply and the usual process of filing the merger application before the National Company Law Tribunal (NCLT) will follow.

Additionally, outbound mergers are permitted only if the foreign entity is from a notified jurisdiction that meets the following requirements:

  1. Jurisdictions whose securities regulator is a member of the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding or has a bilateral memorandum of understanding with Securities and Exchange Board of India (SEBI); or

  2. Jurisdictions whose central bank is a member of the Bank for International Settlements (BIS) and

  3. Jurisdictions that have not been identified in the public statement of the Financial Action Task Force (FATF) for having a strategic ‘Anti-Money Laundering or Combating the Financing of Terrorism’ deficiencies or those that have not made sufficient progress in addressing the deficiencies or have not committed to the FATF’s action plan to address such deficiencies.

With foreign direct investment into India crossing over $46 billion in the year 2016 and M & A outlook looking positive for 2017, the notification will hopefully pave the way for business expansion/consolation with different structuring options for cross-border transactions across sectors. With the RBI proactively coming out with its draft regulations for cross border mergers (open for public comments till 9th May 2017), one hopes for some capital gains tax benefits for outbound mergers in due course.


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