Mergers and Acquisitions

FEMA Cross Border Merger Regulation: An Analysis

The Cross Border merger is used as a tool to achieve growth. It is the fastest way to expand business operations abroad without extra cost. The cross-border merger enables the company to get acquainted with the new market and make necessary adjustments according to the market’s needs. The phase of liberalisation in the regulatory framework has paved the way for cross-border mergers and the execution of this idea has been put into action by the government by issuing the FEMA Cross Border Merger Regulation, 2018^[1]. Further, Section 234 of the Company Act 2013 provides for the Cross Border Merger of Indian and Foreign Companies. The present article will enunciate the key provisions in the FEMA Cross Border Merger Regulation, 2018, that governs inbound and outbound mergers.

Merger of Indian Company with Foreign Company: Section 234 of Company Act, 2013

The Cross Border Merger or Amalgamation of an Indian and foreign company is governed by Section 234 of the Company Act, 2013. It states that the provisions of Chapter XV of the Company Act 2013 shall apply mutatis mutandis to all the schemes of merger and amalgamation held between companies registered in India and companies incorporated in such jurisdictions of countries as the central government may notify. According to Section 234, a foreign company means any corporate body incorporated outside India and has a registered place of business in India.

Further, it is provided that the foreign company may require prior approval of the Reserve Bank of India before initiating any merger or amalgamation with the Indian company registered under Company Act, 2013. Moreover, the Indian company must take prior approval from RBI before initiating any merger or amalgamation with the foreign company. The provision further entails that the central government may make rules in consultation with the RBI in connection with the Merger and Amalgamations, in pursuance of which the government has notified FEMA Cross Border Merger Regulation, 2018.

Rule 25A of Companies (Compromise, Arrangements, and Amalgamations) Rules, 2016

The Central Government has further inserted Rule 25A in the Companies (Compromise, Arrangements, and Amalgamations) Rules, 2016. The rule provides for the arrangement of merger or amalgamation of a foreign company with an Indian company or vice-versa. The rule states that a foreign company willing to enter into a merger agreement with an Indian company shall take prior approval of the RBI and must comply with all the provisions of Section 230 to 232 of the Company Act, 2013.

Further, the company’s valuation shall be done by the members of a recognised professional residing in the Transferee Company’s jurisdiction, and it shall be evaluated keeping in mind the internationally accepted principles of accounting.

Key provision of FEMA Cross Border Merger Regulation, 2018

The Central government has notified the FEMA Cross Border Merger Regulation, 2018, under the power provided by the proviso of Section 234(1) of the Company Act, 2013, with the aim to regulate the process of cross-border mergers. The key provisions of the regulations are as follows:

Key Definitions

1. Cross Border Merger: The regulations define cross-border merger as any merger, amalgamation or arrangement between an Indian Company and a Foreign Company that is taking place according to Companies (Compromises, Arrangements and Amalgamation) Rules, 2016.
2. Inbound Merger:The regulations define an inbound merger as a cross-border merger where the resultant company is an Indian company.
3. Outbound Merger: The regulations define an outbound merger ascross border merger where the resultant company is a foreign company.
4. Resultant Company: The regulations define the resultant company asa Company registered under the Company Act 2013 and a foreign-registered company that takes over the assets and liabilities of another company during a cross-border merger.

Deemed Approval for Cross Border Merger Regulation

The FEMA Cross Border Merger Regulation provides that any cross-border merger transaction shall be taken only with the RBI’s prior approval. It is also required that a certificate of compliance from the MD, Whole Time Director and CS be furnished at the time of making an application in NCLT.

Provision governing the Inbound Mergers

Inbound mergers can be construed as a foreign company that is willing to enter into a merger agreement with an Indian company. In an Inbound Merger, all the assets and liabilities of the foreign company shall be transferred to the Indian Company. The conditions stipulated in the FEMA Cross Border Merger Regulation, 2018 for Inbound Mergers are as follows:

A. Issuance or Transfer of Securities by Resultant company (Foreign Company) to Non-resident

The Indian company or resultant company may issue or transfer securities of a foreign company to a person resident outside India, provided that it shall be in accordance with the pricing guidelines, entry routes, sectoral caps and attendant conditions. Further, the reporting requirements of any foreign investment shall be made in accordance with the FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.

B. Merger of a Joint venture and wholly owned Subsidiary with an Indian company

If the JV( joint venture) or wholly owned subsidiary (WOS) of the Indian Company is located outside India, then the transfer of shares of such a joint venture or wholly owned subsidiary company into an Indian Company shall take place according to the “Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004.”

If the joint venture or wholly owned Subsidiary has a step-down Subsidiary, then, in that case, the Indian company may acquire the shares of a step-down Subsidiary in accordance with Regulations 6 and 7 of FEMA (Transfer or issue of any foreign security) Regulations, 2004.

C. Branch office located outside India shall be handled by the Resultant Company.

The branch office of the foreign company located outside India shall be deemed to be the branch office of the Indian Company after executing the scheme of a cross-border merger in accordance with the FEMA (Foreign Currency Account by a person resident in India) Regulations, 2015.

D. Guarantees/Outstanding Borrowings of the Foreign Company

Any guarantees/outstanding borrowings of the foreign company shall become the borrowing of the Indian company after the scheme of cross-border merger. The regulations further state that the resultant company or the Indian company shall confirm within 2 years to the External borrowing norms or financial borrowing norms given under FEMA (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or FEMA (Guarantee) Regulations, 2000 or FEMA(Borrowing or Lending in Rupees) Regulations, 2000.Moreover, the remittance of such liability shall not be allowed from India after 2 years.

E. Overseas Assets of Foreign Company

The Resultant or Indian company may acquire, hold and transfer the assets held outside India provided that the Indian Company is permitted to acquire the assets according to the rules, act or regulations framed from time to time.

Further, if the Indian company is not permitted to acquire or hold the overseas assets of the foreign company, then, in that case, it may sell such assets within 2 years from the approval date of the scheme and acquire the sale proceeds through proper banking channels. Moreover, if the resultant company or Indian Company is not allowed to extinguish liability outside India, then the company is permitted to extinguish such liability from the sale proceeds of the assets.

A bank account can be registered by the resultant company in an overseas jurisdiction to execute the incidental cross-border merger transactions within 2 years starting from the date of sanction of the scheme by NCLT.

Provision governing the Outbound Mergers

Outbound mergers can be construed as an Indian company that is willing to enter into a merger agreement with the Foreign Company. In an outbound Merger, all the assets and liabilities of the Indian company shall get transferred to the Indian Company. The conditions stipulated in the FEMA Cross Border Merger Regulation, 2018 for outbound Mergers are as follows:

A. Acquire or Hold Securities of Foreign Company

The regulations allow the resident in India to hold or acquire foreign company assets in accordance with the FEMA(Transfer or issue of any Foreign Security) Regulations, 2004.Further, the resident individual may acquire the securitiesof a foreign company provided that the fair market value of such security is well within the limits prescribed under Liberalised Remittance Scheme.

B. Branch office located in India shall be handled by the Resultant Company.

The branch office of the Indian company located in India shall be deemed to be the branch office of the Foreign Company after the execution of the scheme of the cross-border merger in accordance with the FEMA (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.

C. Guarantees/Outstanding Borrowings of the Indian Company

The guarantees/outstanding borrowings of the Indian company shall become the borrowing of the foreign company after the scheme of cross-border merger, and the same shall be repaid as per the scheme provided by the NCLT in accordance with Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.Moreover, the foreign company is not liable to pay any lender in India in INR if it is not in conformity with the act or rules or regulations framed thereunder.

D. Assets held in India

The Resultant or foreign company may acquire, hold and transfer the assets held in India. Further, the Foreign Company may sell such an asset within 2 years from the date of approval of the scheme by NCLT and acquire the sale proceeds through proper banking channels. Moreover, theforeign company is allowed to extinguish the liability in India from the sale proceeds of such assets.

Valuation

The FEMA Cross Border MergerRegulations provide that the valuation of the Indian Company or Foreign Company shall be carried out in accordance with Rule 25A of Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

Compensation, compliance with prior Regulatory Actions and Reporting

The FEMA Cross Border Merger Regulation provides that the compensation shall be given to the holder of securities in a Foreign Company or Indian company in accordance with the scheme approved by NCLT.

The resultant company must make sure that the foreign company or Indian company does not have any prior regulatory actions pending. If there are pending regulatory actions, then such action shall be completed first before initiating any merger.

The resultant company engaged in the cross-border merger shall furnish such report as the RBI and Central government prescribes.

Conclusion

The cross-border merger is a way of providing expansion opportunities to the companies. To regulate the structure of the cross-border merger in India, the central government has issued a simplified procedure by notifying FEMA Cross Border Merger Regulation, 2018. The regulations have divided the cross-border merger in two ways, i.e. Inbound Mergers and outbound Mergers. Moreover, it is pertinent to mention here that even though the Company Act does not provide the provision for cross-border demerger, the FEMA regulations are well drafted to include it. Hence, the FEMA Cross border merger regulation shall be complied with before initiating any merger application before NCLT.

Read our Article: Cross Border Merger and Acquisition: A Complete Analysis