Select Your Location
A merger or acquisition is a great tool to raise your company’s value. A merger is the strategy of choice for many business owners, regardless of their goals, whether to scale and grow, reduce expenses, get access to new markets, or eliminate a rival. Although cross-border Mergers and Acquisitions are common, there are difficulties, particularly complex tax laws and legal/regulatory obstacles. Additionally, India is steadily moving up the ranks for business friendliness and is emerging as a popular location for conducting business. An atmosphere conducive to business has fuelled a rise in international mergers.
Table of Contents
When a company buys or merges with another company in a different country, this is referred to as a cross-border merger or acquisition. Cross-border mergers and acquisitions are used when a corporation seeks to merge with or overtake another company in order to expand internationally without creating a new entity from the beginning. It is also called an overseas merger and acquisition.
In such a deal, the operations and assets of two (or more) businesses from different countries are combined to form a new legal company. As a result, a foreign firm gains control of the assets and activities of a local company, turning the former into an affiliate of the latter.
Technology developments, affordable financing options, and healthy market circumstances have made deal-makers for cross-border Mergers and Acquisitions. Companies from various jurisdictions go through this procedure to accelerate their growth and develop their bar so they can compete in the global market.
The most common merger types are horizontal, vertical, conglomerate, congeneric, product extension, market extension or marketing/technology related concentric, and reverse. Section 234 of The Companies Act 2013 recently included language introducing the ideas of inbound and outbound mergers.
Inbound Merger & Acquisition: When the company formed out of this procedure is an Indian company. It happens when a foreign firm merges with or acquires an Indian enterprise.
Outbound Merger & Acquisition: When the company formed out of this procedure is a foreign company. It happens when an Indian company merges with or acquires a foreign company.
As stated in the Companies Act of 2013, “subject to the provisions of any other law for the time being in force, a foreign company may with the Reserve Bank of India’s prior approval, merge into a company registered under this Act or vice versa”.
Despite the numerous difficulties that can arise in a cross-border transaction, it is a tool that promotes business expansion and raises shareholder value. Access to new markets and clients is made simple by cross-border M&A. The following are a few advantages of cross-border business:
Different factors influence cross-border M&A. These factors primarily involve the need for diversification and market saturation or slowdown in core areas. Regulatory uncertainty in domestic markets, high repatriation costs for earnings earned abroad, technology, and productivity increase are further significant factors.
By increasing revenues, an acquisition in a new market can aid businesses in becoming more cost-effective. In addition, new markets offer a new client base and support scaling more quickly (scale efficiencies). Additionally, businesses may benefit from gaining access to fresh talents, expanding their distribution channels, or acquiring cutting-edge product technology.
These are the likely difficulties you will encounter if you are thinking of expanding the business abroad:
The process for cross-border M&As is highly desirable and occurs on a worldwide level. The difficulties encountered will not be the same as those in domestic transactions. Legal ramifications, cultural differences, customer likes and preferences changes, etc., could make these cross-border transactions challenging. Due diligence must be conducted at every cross-border merger or acquisition stage to ensure and avoid issues. The following are the difficulties that cross-border mergers and acquisitions face:
Reforms Are Needed for Regulatory Compliance – India’s corporate governance is relatively challenging in international M&A deals. After liberalisation, Indian regulators pushed through a number of rather extensive corporate governance reforms that assisted companies in luring foreign investment. However, the role that these reforms play in facilitating outbound M&A is generally unstudied. It makes cross-border mergers and acquisitions more problematic.
Legal Concerns and Gaps – The first issue is pretty obvious. There may be numerous inconsistencies in the compliance laws of the relevant jurisdictions. Not every nation even gives cross-border mergers formal status. They are subject to a variety of legal and regulatory constraints. This deters many businesses from choosing such transactions and frequently results in international businesses pulling out of merger and acquisition agreements.
Concern about Stamp Duty – In mergers and acquisitions, stamp duty is an important aspect to consider. It generates revenue for public exchanges. The asset transfer document is subject to stamp duty, which varies from state to state. Therefore, a foreign company will be compelled to pay taxes in India regardless of whether it merges with an Indian company, a subsidiary of an Indian company, or a subsidiary outside of India. In this sense, it appears that the stamp laws are unclear. It needs to be reviewed once more for a better understanding of cross-border Mergers and Acquisitions.
Due Diligence – Due diligence is the key element of a Mergers and Acquisitions transaction. Due diligence is a procedure that aids in verifying, investigating, and gathering the necessary facts and information in order to help parties close a deal. As a result of the due diligence procedure, a deal’s structure and conditions may change. A detailed analysis gives a complete history of any risks and opportunities that might arise in the trade. The buyer must take full advantage of this process to thoroughly investigate the target company and carry out crucial acquisition-related tasks. Due diligence is essential to avoiding the problems associated with international mergers and acquisitions.
Tax Considerations – Tax laws are essential and basic components of legislation from the standpoint of cross-borderMergers and Acquisitions. India’s legal framework for corporate consolidations consists of numerous statutory provisions for tax advantages and tax neutrality for particular sorts of reorganisations. Reviewing the provisions of the Indian Income Tax Act, 1961, with relation to mergers, demergers, capital gains, setoff, etc., is necessary during the M&A process. The Double Taxation Avoidance Agreement (DTAA) is essential. The tax shall be calculated in accordance with either the ordinary Act provisions or the DTAA when assets are transferred between a transferor and a transferee firm, depending on which is more advantageous for enterprises.
The Incompetent Competition Act, 2000 – The Act prohibits enterprises that are merging from abusing their dominant position. Due to the “Combination” laws’ threshold requirements on assets and turnover, which restrict how broadly the law may be applied, businesses must adhere to them while engaging in cross-border transactions. The Competition Act forbids companies from entering into agreements that will have a negative impact on competition in the relevant Indian market.
Political and Cultural differences – The political environment between India and other nations significantly impacts cross-border mergers and acquisitions in the defence and other security-related sectors. Cultural variations across nations present a variety of risks to successful cross-border mergers and acquisitions. Foreign businesses entering India are failing because they are unable to adjust to cultural differences.
Cross-border mergers and acquisitions present many difficulties. In this era of globalisation, economies’ technological, economic, political, and cultural integration is progressing. As a result, legal frameworks everywhere in the globe are changing to reflect this tendency. When these concerns are examined, it may become clear that the proposed merger and acquisition are incompatible, in which case it would be advisable to postpone the deal. Therefore, it is advised to exercise caution to avoid legal problems in international mergers and acquisitions.
Read our Article: Mergers And Acquisitions in the Banking Sector of India
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
The main idea of CDS, which was initially to give banks a way to transfer credit exposure, has...
Black money has been the subject of heated political debate in India for a long time. Successiv...
The Apex Court pronounced a judgement in the case titled Tata Motors Vs The Brihan Mumbai Elect...
Since economies are moving towards digitalisation and making it feasible to conduct transaction...
The Alternative Investment Funds (AIFs) Pro-rata and Pari-Passu Rights Proposal Consultation Pa...
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Every assessee in India is obligated to file an income tax return and make the timely payment o...
Are you human?: 4 + 3 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
Merger and acquisition is used as instrument of momentous growth. It is getting accepted by Indian business like ne...
23 Aug, 2017
The MCA/Ministry of Corporate Affairs on February 03, 2020, notifies the Companies (Compromises, Arrangements and A...
12 May, 2020
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!