In the last few months, India has witnessed significant legal transformation in foreign exchange control norms and the merger/acquisition regime, which should enable Indian companies to gain from the world economy. The Government of India has abolished the Foreign Investment Promotion Board (“FIPB”) and handed over the government approval mechanism...
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n the last few months, India has witnessed
significant legal transformation in foreign exchange
control norms and the merger/acquisition regime,
which should enable Indian companies to gain from
the world economy. The Government of India has
abolished the Foreign Investment Promotion Board (“FIPB”)
and handed over the government approval mechanism to respective administrative Ministries/Departments. This should simplify the approval mechanism and make it easier
for foreign companies to invest in Indian companies covered
by sectors wherein government approval was required.
On April 13, 2017, the government issued the following
announcements:
- notification
of Section
234 of the Companies
Act, 2013
(“Act”) (merger or amalgamation of a company with a
foreign company in the specified jurisdictions), and
- insertion
of new sub-rule
25A (merger
or amalgamation
of a foreign
company
with a company
and vice-versa)
in the Companies
(Compromises,
Arrangements
and
Amalgamations) Rules, 2016 (“Compromise Rules”).
With these developments, Indian companies will have
additional ways to have a presence in overseas jurisdictions.
Outbound mergers will also allow Indian companies to get
access to overseas listing of their business by merging with
a foreign-listed company.
Cross-border
mergers/acquisitions
are also
regulated by the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act, 1999 (“FEMA”) read along
with regulations, guidelines, directions issued by RBI. On April 26, 2017, RBI published the draft Foreign Exchange Management (Cross-Border Merger) Regulations, 2017 (“Draft Regulations”).
As per Regulation 8 of the Draft Regulations, if all
requirements stipulated in the Draft Regulations and Rule
25A of the Compromise
Rules are completed,
then the cross-
border merger transaction would be deemed to have been
approved by RBI. However, there is no timeframe stipulated
for RBI to respond
to an application
under
Rule 25A of the
Compromise
Rules,
or for deemed
approval
by RBI, while
under
Rule 8 (3) of the Compromise
Rules,
30 (thirty)
days’
time is available to statutory authorities to send their
representation
to the National
Company
Law Tribunal
(“NCLT”) on the application made to them by the applicant,
and if no such representation
is received
by NCLT from such
statutory authorities then it shall be presumed that the
authorities have no representation to make on the proposed
scheme of compromise or arrangement.
Inbound Mergers
In case of an inbound merger/acquisition, the Draft
Regulations provide that upon sanction of the scheme of
merger
by NCLT, the resultant
company
may issue or transfer
securities to a person residing outside India in accordance
with the Foreign Exchange Management (Transfer or Issue
of Security
by a Person
Resident
outside
India)
Regulations,
2000.
All borrowings or impending borrowings of a foreign
company from overseas sources, which would become the
borrowings of the resultant company in India, shall be in
conformity with the parameters stated under the external
commercial borrowing norms or trade credit norms or
other foreign borrowing norms as laid down under the
Foreign
Exchange
Management
(Borrowing
or Lending
in
Foreign Exchange) Regulations, 2000 or Foreign Exchange
Management (Guarantee) Regulations, 2000 as applicable.
The resultant company in India shall acquire and hold
assets outside India as permitted under the provisions of
FEMA and rules and/or regulations framed thereunder.
For instance, the resultant company may acquire
immovable property outside India for its business and
for residential purposes for its staff in accordance with
Regulation
5 of the Foreign
Exchange
Management
(Acquisition and Transfer of Immovable Property outside
India) Regulations, 2015.
Outbound Mergers
companies to get access
to overseas listing of their
business by merging with a
foreign-listed company
The resultant company in the specified foreign jurisdiction
may acquire and hold any asset whether movable/
immovable in India, which a foreign company is permitted
to acquire under the provisions of FEMA and rules
and/or regulations framed thereunder, including the
Foreign Exchange Management (Acquisition and Transfer
of Immovable Property in India) Regulations, 2000.
Other Provisions Of The Draft Regulations
In case of both inbound and outbound mergers/acquisitions,
the resultant company is required to sell such assets or
securities which are prohibited from being acquired under
the provisions of FEMA and rules and/or regulations framed
thereunder within a period of 180 (one hundred and eighty)
days from the date of sanction
of the scheme
of cross-
border merger. The proceeds from such sale are required
to be repatriated either to or from India, as the case may
be. The Draft Regulations are silent as to what happens if
the resultant company does not conduct such sale in the
stipulated time.
The valuation of the Indian company and foreign company
for the purpose
of a cross-border
merger
are required
to be
done as per internationally accepted pricing methodology
for valuation
of shares
on arm’s-length
basis,
which
is
required to be duly certified by a chartered accountant/
public accountant/merchant banker authorized to do so in
either jurisdiction.
The Draft Regulations require all transactions arising due
to cross-border
merger
to be reported
to RBI by the Indian
company
and foreign
company
involved
in the cross-border
merger, as may be prescribed from time to time.
We await
the final Foreign
Exchange
Management
(Cross-
Border Merger) Regulations, 2017 to be issued and notified
by RBI.
Disclaimer
– The views expressed in this article are the personal
views of the authors and are purely informative in nature.