By: Sharanya Ranga, Laxmi Joshi and Meghna Punjabi
Merger of an Indian company with a foreign company was permitted on prior approval basis for the first time in India with the notification of Section 234 of Companies Act, 2013 (Co Act) last April (Read our article here). Shortly thereafter, India’s central bank, the Reserve Bank of India (RBI) issued draft regulations relating to cross border mergers seeking public comments. After extensive public deliberations, the RBI introduced the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Regulations) on 20th March, 2018. The Regulations cover both inbound as well as outbound mergers and extensively refer to the regulatory framework set out in the Foreign Exchange Management Act, 1999 and regulations issued thereunder (FEMA) governing inbound and outbound investments as well as inflows and outflow of money.
The term ‘inbound merger‘ refers to a cross border merger where a foreign company (FC) merges into an Indian company (IC) and the resultant company (RC) is an IC, acquiring the assets and liabilities of the FC. The expression ‘outbound merger‘ refers to a cross border merger where an IC merges into a FC and the RC is a FC, acquiring the assets and liabilities of the IC. A FC is defined as any company or body corporate incorporated outside India whether having a place of business in India or not; while a RC refers to a company, be it Indian or foreign, which takes over the assets and liabilities of the company(ies) involved in the cross border merger.
All cross border merger transactions undertaken in accordance with the Regulations shall be deemed to have prior approval of the RBI as required under the Co Act and the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016 (Amalgamation Rules). Thus, no separate prior approval will be required in these cases. A certificate is required from the Managing Director /Whole Time Director and Company Secretary, if available, confirming compliance to these Regulations along with the application made to the jurisdictional National Company Law Tribunal (NCLT) for approval of the merger scheme.
The Regulations prescribe the following guidelines to be followed in case of inbound and outbound mergers, which we have outlined in the table below:AspectsInbound mergerOutbound merger
Conditions for issuance or transfer of securities
To standalone non-residents:
The RC must comply with the applicable FEMA regulations governing foreign direct investment in India such as pricing guidelines, entry routes, sectoral caps, minimum capitalisation requirements and reporting requirements.
To JV/WOS subsidiaries of the IC or its step-down subsidiaries outside India:
If the RC is an overseas joint venture (JV) or a wholly owned subsidiary (WOS) of the IC, or if it is an acquisition of the step-down subsidiary of JV/ WOS of the Indian party by the RC, issuance or transfer of securities by such JV or WOS has to comply with the applicable FEMA regulations governing outbound or overseas investment such as net worth criteria and specific sector restrictions (Outbound Investment Regulations).
An Indian resident entity may acquire or hold securities of the RC in accordance with the Outbound Investment Regulations.
Where the resident Indian acquiring such foreign security is an individual, the fair market value of such securities must not exceed the limits prescribed under the Liberalized Remittance Scheme of the RBI, i.e., USD 250,000 per financial year as on date.
Status of establishments Foreign office/s of the foreign transferor company shall be deemed to be the branch/overseas office of the RC. Compliance with FEMA regulations governing the holding, operation and maintenance of foreign currency accounts in India is mandatory.Office/s of the Indian transferor company in India may be deemed to be a branch office in India of the RC. Compliance with FEMA regulations governing the establishment of a branch office or liaison office or a project office is mandatory.Guarantees and outstanding borrowings of the transferor company:The guarantees or outstanding borrowings of the FC from overseas sources which become the borrowings of the RC or any borrowings from overseas sources entering into the books of RC pursuant to the merger must conform to norms relating to External Commercial Borrowing, Trade Credit norms or other foreign borrowing norms as per the relevant FEMA regulations, within a period of two years. No remittance for repayment of such liability is possible within the aforesaid period of two years and no end-use conditions will apply.The guarantees or outstanding borrowings of the IC which become the liabilities of the RC must be repaid as provided in the cross border merger scheme sanctioned by the NCLT as per the Amalgamation Rules. The RC shall not acquire any liability payable towards Indian lenders in contravention with applicable FEMA regulations. Also, a no-objection certificate is required from the local lenders in India.
Acquisition of assetsThe RC may acquire and hold an asset or security outside India to the extent permitted under FEMA regulations. Where the asset or security outside India is not permitted to be acquired or held by an IC under FEMA regulations, the RC shall sell such asset or security within a period of two years from the date of sanction of the cross border merger scheme by the NCLT and repatriate the sale proceeds to India immediately through banking channels. Similarly, where any liability outside India is not permitted to be held by the RC, the same may be extinguished from the sale proceeds of such overseas assets within the period of two years.The RC may acquire and hold assets in India, which is permitted to be acquired or held by a FC as per FEMA regulations. Where the asset or security in India cannot be acquired or held by a FC under FEMA regulations, the RC shall sell such asset or security within a period of two years from the date of sanction of the cross border merger scheme by the NCLT and repatriate the sale proceeds outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of two years is permissible.
Bank AccountThe RC may open a bank account in foreign currency in the overseas jurisdiction for a maximum period of two years from the date of sanction of the cross border merger scheme by the NCLT to aid in undertaking transactions incidental to the cross border merger.The RC may open a Special Non-Resident Rupee Account (SNRR Account) as per the applicable FEMA regulations governing such accounts. Such account is permitted to be set up for a maximum period of two years from the date of sanction of the cross border merger scheme by the NCLT.
Additional provisions of the Regulations to be borne in mind:
The valuation of the RC must be conducted in accordance with internationally accepted principles on accounting and valuation, by a valuation professional (members of a recognised professional body in the jurisdiction of the RC) as per Rule 25A of the Amalgamation Rules.
Compensation by the RC, to a holder of a security of the IC or the FC, as the case may be, may be paid, in accordance with the sanctioned cross border merger scheme.
The companies involved in the cross border merger shall ensure that all ongoing or pending regulatory actions with respect to non-compliances and violations, if any, of FEMA regulations shall be completed prior to commencement of the merger.
The RC involved in the cross border merger shall be required to furnish reports as may be prescribed by the RBI, in consultation with the Government of India, from time to time.
All cross border mergers pending before the competent authority as on 20th March 2018 shall be governed by these Regulations.
The Regulations sets out a progressive and comprehensive framework for cross border mergers in India by outlining the applicable FEMA regulations governing the entire spectrum of inflow and outflow of money/assets into and out of India. Further, provisions relating to deemed approval of the RBI and the two years transition period for the cross border merger transaction to comply with FEMA are particularly noteworthy as it demonstrates the RBI’s intent to encourage cross border deals involving Indian parties.
The Regulations are silent on cross border demergers and other forms of arrangement permitted under the Co Act and FEMA. Also, parties evaluating cross border mergers have to seek specific tax counsel to ensure efficient tax structuring of the transaction to mitigate risks in this regard. The Regulations as such may not immediately bring about outbound mergers, unless parity is also created in tax treatment of foreign RCs and Indian RCs in cases of cross border mergers. For instance, under the present Indian income tax law, only an Indian RC is entitled to capital gains tax exemption in case of transfer of a capital asset. Similarly, while the Regulations accord equal treatment to Indian RCs and foreign RCs, with assets of the transferee company (in its home country) being given branch office status, this may create an exposure to tax liability for foreign RCs if the Indian branch office is treated as a permanent establishment for taxation purpose. Thus, these concerns will also have to be allayed by the government to give real impetus for growth of cross border mergers in India.
 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017
 Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004.
 Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015.
 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
 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.
 Foreign Exchange Management (Deposit) Regulations, 2016