August 08, 2017


- Anand Desai, Managing Partner [ DSK Legal ]
- Pragya Dhamija, Associate Partner [ DSK Legal ]
- Chirag Jain, Associate [ DSK Legal ]


I 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

Outbound Mergers will also allow Indian 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.

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