RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations) on 20 March 2018 to address various issues that may arise concerning cross border mergers from an exchange control perspective.

By: Riya Singh, 4th year, BBA LLB, KLE Society’s Law College, Bangalore.

Introduction

On 13th April 2017, the Ministry of Corporate Affairs (MCA) notified Section 234 of the Companies Act, 2013 and inserted a new Rule 25A (merger or amalgamation of a Foreign Company with an Indian company and vice-versa) in the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (Compromises Rules), paving way for merger and amalgamation of a Foreign Company with an Indian company and vice-versa. Since Rule 25A required prior approval of the Reserve Bank of India (RBI) for the cross-border merger, without corresponding procedural aspects in place, the cross-border merger could not take-off. Now, with the RBI notifying the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations/Regulations) for mergers amalgamation and arrangement between Indian and foreign companies on 20th March 2018, this gap has been bridged.

Key definitions under the Regulations 

• ‘Cross border merger’ means any merger, amalgamation, or arrangement between an Indian company and foreign company under the Act. 
• ‘Foreign company’ means any company or body corporate incorporated outside India whether having a place of business in India or not. For outbound mergers, a foreign company should be incorporated in a specified jurisdiction. 
• ‘Inbound merger’ means a cross border merger where the resultant company is an Indian company. 
• ‘Indian company’ means a company incorporated under the Companies Act, 2013, or under any previous company law. 
• ‘Outbound merger’ means a cross border merger where the resultant company is a foreign company. 
• ‘Resultant Company’ means an Indian company or a foreign company, which takes over the assets and liabilities of the companies involved in the cross-border merger.
• The Ministry of Corporate Affairs, Government of India notified Section 234 of the Companies Act, 2013 and Rule 25-A of the Companies Merger Rules, providing for a mandatory prior approval of the Reserve Bank of India, to transit mergers and amalgamations between Indian companies and companies incorporated in International/foreign jurisdiction (cross-border merger).

Cross-border merger: Procedural aspects

Inbound Mergers

When the Resultant Company is an Indian Company, the following procedure becomes applicable:

• Issue/Transfer of securities:

The issue or transfer of any security and/or a foreign security, to a person resident outside India should be made under the pricing guidelines, entry routes, sectoral caps, attendant conditions, and reporting requirements for foreign investment as laid down in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO). However, this is subject to the following conditions:

Where the Foreign Company is a joint venture (JV) or a wholly-owned subsidiary (WOS) of the Indian company, it shall comply with the conditions prescribed for transfer of shares of such JV/ WOS by the Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (TIFS); 

where the Inbound Merger of the JV/WOS results in the acquisition of the Step-down subsidiary of JV/ WOS of the Indian party by the Resultant Company, then such acquisition should comply with Regulation 6 and 7 of TIFS which provide for permission for direct investment in certain cases and investment by Indian party engaged in financial services sector respectively.

• Borrowings:

Any borrowing of the Foreign Company from overseas sources that becomes the borrowing of the Resultant Company shall conform within two years, to Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.

Outbound Mergers

• Any person resident in India may acquire or hold securities of the resultant company under ODI Regulations5 (or under LRS6 in case of a resident individual). 
• Any office of the Indian company in India shall be deemed to be a branch office of the resultant company under the Branch/Liaison Office Regulations, 20167. 
• The guarantees or outstanding borrowings shall be repaid as per the sanctioned Scheme. Ø Any liability not in conformity with the FEMA regulations shall not be acquired by the resultant company. Further, a no-objection certificate to this effect is to be obtained from the Indian lenders. 
• The resultant company may acquire, hold, and transfer any asset in India which a foreign company is otherwise permitted to acquire. 
• Where the asset or security is not permitted to be acquired or held, the resultant company shall sell/ dispose of such asset or security within two years from the date of sanction of Scheme and repatriate sale proceeds outside India through banking channels. Repayment of Indian liabilities from sale proceeds of Indian assets within two years permissible.

The legislation provides that any transaction undertaken concerning a cross-border merger under the FEMA Regulations shall be deemed to be approved by RBI under Rule 25-A.

While the FEMA Regulations intend to cover cross-border “merger, amalgamation, demerger or arrangement”, the jurisdiction of legislative provisions of the Companies Act and Merger Rules are delimited to only “mergers and amalgamations”, without any explicit mention of “arrangement or demergers”. This is likely to have a trickle-down impact on insolvency and bankruptcy proceedings as well since it will encourage foreign bidders to consider buying Indian assets. In an inbound merger, the new rules allow the resultant company to issue or transfer any security to a person resident outside India subject to pricing and sectoral foreign investment conditions and FEMA regulations. For an outbound merger, the new provision allows resident Indian entities to acquire or hold securities of the resultant company under FEMA regulations.

Conclusion

After the introduction of the provisions for cross border merger in the Act, the notification of these Regulations would now enable active evaluation of cross border merger. Any transaction on account of a cross border merger undertaken in compliance with these Regulations shall be considered to have deemed approval of the RBI subject to obtaining other applicable regulatory approvals as provided under the Act. Further, for all practical purposes of corporate planning – extant direct and indirect tax laws, statutes governing corporate-conduct, accounting norms, and other relevant compliance provisions of respective jurisdictions need to be evaluated in greater detail concerning cross border arrangement.