by Puneet Shah.A cross border merger refers to the merger of two or more companies in different countries for scaling economies, efficiency, competing and strategic objectives..The Reserve Bank of India (RBI) late last month has issued draft regulations [pdf] on cross border merger, demerger and restructuring between India Inc. and their foreign counter-parts. The RBI draft regulation is a follow up step after Ministry of Corporate Affairs (MCA) amended the Companies rules [pdf] dealing with merger, demerger and restructuring permitting merger of a foreign company with an Indian company and vice versa..While merger of a foreign company with an Indian company was always possible under the erstwhile Companies Act of 1956, enabling provisions for an Indian company merging with a foreign company were introduced first time in the Companies Act of 2013. These provisions were notified by MCA on April 13, 2017..The MCA rules now provide that after obtaining prior approval of RBI, a foreign company may merge with an Indian company, being an inbound merger. Also, an Indian company may merge with a foreign company, being an outbound merger if the foreign company is from a designated country / jurisdiction. A foreign company only from a country, whose capital market and financial sector regulators respectively are IOSCO (acronym for International Organization of Securities Commission) or BIS (for Bank for International Settlements) compliant or signatory to the bilateral MOU with SEBI and from a country which is not an FATF (for Financial Action Task Force) non-compliant jurisdiction in terms of anti-money laundering or terror financing deficiencies..Interestingly, together with India, there are presently 125 signatories to IOSCO’s MOUs. These include, amongst others, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Mauritius, Netherlands, USA and UK. Also, SEBI has executed bilateral MOUs with monetary authorities of approximately 17 countries including Dubai, Singapore and Mauritius. Central banks and monetary authorities of approximately 60 countries are currently members of BIS including RBI, Monetary authority of Singapore, Hong Kong and Saudi Arabia. Thus, entities from these jurisdictions would qualify for a cross border merger. This is certainly a welcome move as the statistics suggests that most of the foreign direct investment are routed to India from these countries and most of the overseas investment by Indian companies are into these countries..The RBI draft regulations on cross border mergers have proposed that any inbound merger or outbound merger resulting in changes to the assets and liabilities position of the resulting companies, whether Indian or foreign, should comply with the applicable foreign exchange regulations of RBI. For instance, an inbound merger entailing foreign direct investment in India (FDI), which results in issue or transfer of security by the resultant Indian company to a non-resident, shall be in accordance with the FDI regulations of RBI. Similarly, any borrowing of the foreign company from overseas sources, which becomes the borrowing of the resultant Indian company post-merger should confirm to RBI guidelines on external commercial borrowings..On the other hand, an outbound merger, which results in a foreign company issuing security to a person resident in India should confirm to the RBI guidelines on overseas direct investment (ODI). A cross border merger not in compliance with the applicable foreign exchange regulations of RBI would require its specific approval. Here, a clarification may be required from RBI if the same rule would still apply for merger between small companies or between a holding company and its wholly owned subsidiary, which are otherwise subject to lenient regime under the Indian company law provisions not requiring approval from High Court (now National Company Law Tribunal)..Post sanction of the merger scheme, the resulting companies, whether Indian or foreign, have been provided with a clearance window of 180 days to sale and dispose-off such assets and securities which are held by such resulting companies, not in compliance with the applicable foreign exchange regulations of RBI. In addition to any reporting from Indian or foreign resulting companies that may be prescribed by RBI later, a cross border merger resulting in issuance / transfer / swap of securities or overseas borrowing etc. would also require the reporting of such transaction in the normal course entailing the necessary amendments to the Form FC-GPR, Form FC-TRS and Form ECB etc. to record such transactions..Also, continuing its stand on the internationally accepted pricing methodology on an arm’s length basis being the appropriate method for valuation of shares, the RBI has proposed the similar principles for valuing Indian company and foreign company being parties to a cross border merger. The RBI draft regulations are open for public comments till May 9, 2017..So henceforth, if a foreign company has acquired another entity abroad that has a step down subsidiary in India, the new provisions will allow the acquirer foreign company to merge the Indian operations with itself, instead of retaining it as a separate company. This was proving to be a key bottleneck in the earlier regime whereby an Indian company, which otherwise was a part of the group restructuring exercise for commercial reasons, but cannot cease to exist without following the cumbersome winding up process, as Indian laws were not permitting it. Similarly, an Indian company may now choose to merge its loss making foreign subsidiary for getting the tax benefits in India and vice versa..Whilst the foregoing proposal is certainly a step in right direction by MCA and RBI, there are other legal challenges in implementing cross border merger involving India Inc. There are hosts of other laws, which will regulate a cross border merger. The most important being the tax neutrality. Tax has always been the driving force for any corporate merger exercise. Income tax laws will have to be suitably amended to make the cross border merger a tax neutral event just like an inbound merger. Although, the new provisions proposed by RBI would enable better legal and tax structuring for companies established in multiple jurisdictions, clarity is needed, if an outbound merger could end up in a permanent establishment issue in India for a foreign resulting company..Also, stamp duty laws being a state subject may need necessary amendments providing for an outbound merger, as the resulting company will be a foreign entity. Considering that Indian companies have been involved in more and more cross border merger and acquisition activities in the recent past (Sesa Goa – Sterlite, Cairn – Vedanta, Daiichi – Ranbaxy, Sun Pharma – Taro, Roseneft – Essar, to name a few), an early resolution of these issues becomes all the more important and critical..Author is a principal associate with law firm – IC Legal based in Mumbai.
by Puneet Shah.A cross border merger refers to the merger of two or more companies in different countries for scaling economies, efficiency, competing and strategic objectives..The Reserve Bank of India (RBI) late last month has issued draft regulations [pdf] on cross border merger, demerger and restructuring between India Inc. and their foreign counter-parts. The RBI draft regulation is a follow up step after Ministry of Corporate Affairs (MCA) amended the Companies rules [pdf] dealing with merger, demerger and restructuring permitting merger of a foreign company with an Indian company and vice versa..While merger of a foreign company with an Indian company was always possible under the erstwhile Companies Act of 1956, enabling provisions for an Indian company merging with a foreign company were introduced first time in the Companies Act of 2013. These provisions were notified by MCA on April 13, 2017..The MCA rules now provide that after obtaining prior approval of RBI, a foreign company may merge with an Indian company, being an inbound merger. Also, an Indian company may merge with a foreign company, being an outbound merger if the foreign company is from a designated country / jurisdiction. A foreign company only from a country, whose capital market and financial sector regulators respectively are IOSCO (acronym for International Organization of Securities Commission) or BIS (for Bank for International Settlements) compliant or signatory to the bilateral MOU with SEBI and from a country which is not an FATF (for Financial Action Task Force) non-compliant jurisdiction in terms of anti-money laundering or terror financing deficiencies..Interestingly, together with India, there are presently 125 signatories to IOSCO’s MOUs. These include, amongst others, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Mauritius, Netherlands, USA and UK. Also, SEBI has executed bilateral MOUs with monetary authorities of approximately 17 countries including Dubai, Singapore and Mauritius. Central banks and monetary authorities of approximately 60 countries are currently members of BIS including RBI, Monetary authority of Singapore, Hong Kong and Saudi Arabia. Thus, entities from these jurisdictions would qualify for a cross border merger. This is certainly a welcome move as the statistics suggests that most of the foreign direct investment are routed to India from these countries and most of the overseas investment by Indian companies are into these countries..The RBI draft regulations on cross border mergers have proposed that any inbound merger or outbound merger resulting in changes to the assets and liabilities position of the resulting companies, whether Indian or foreign, should comply with the applicable foreign exchange regulations of RBI. For instance, an inbound merger entailing foreign direct investment in India (FDI), which results in issue or transfer of security by the resultant Indian company to a non-resident, shall be in accordance with the FDI regulations of RBI. Similarly, any borrowing of the foreign company from overseas sources, which becomes the borrowing of the resultant Indian company post-merger should confirm to RBI guidelines on external commercial borrowings..On the other hand, an outbound merger, which results in a foreign company issuing security to a person resident in India should confirm to the RBI guidelines on overseas direct investment (ODI). A cross border merger not in compliance with the applicable foreign exchange regulations of RBI would require its specific approval. Here, a clarification may be required from RBI if the same rule would still apply for merger between small companies or between a holding company and its wholly owned subsidiary, which are otherwise subject to lenient regime under the Indian company law provisions not requiring approval from High Court (now National Company Law Tribunal)..Post sanction of the merger scheme, the resulting companies, whether Indian or foreign, have been provided with a clearance window of 180 days to sale and dispose-off such assets and securities which are held by such resulting companies, not in compliance with the applicable foreign exchange regulations of RBI. In addition to any reporting from Indian or foreign resulting companies that may be prescribed by RBI later, a cross border merger resulting in issuance / transfer / swap of securities or overseas borrowing etc. would also require the reporting of such transaction in the normal course entailing the necessary amendments to the Form FC-GPR, Form FC-TRS and Form ECB etc. to record such transactions..Also, continuing its stand on the internationally accepted pricing methodology on an arm’s length basis being the appropriate method for valuation of shares, the RBI has proposed the similar principles for valuing Indian company and foreign company being parties to a cross border merger. The RBI draft regulations are open for public comments till May 9, 2017..So henceforth, if a foreign company has acquired another entity abroad that has a step down subsidiary in India, the new provisions will allow the acquirer foreign company to merge the Indian operations with itself, instead of retaining it as a separate company. This was proving to be a key bottleneck in the earlier regime whereby an Indian company, which otherwise was a part of the group restructuring exercise for commercial reasons, but cannot cease to exist without following the cumbersome winding up process, as Indian laws were not permitting it. Similarly, an Indian company may now choose to merge its loss making foreign subsidiary for getting the tax benefits in India and vice versa..Whilst the foregoing proposal is certainly a step in right direction by MCA and RBI, there are other legal challenges in implementing cross border merger involving India Inc. There are hosts of other laws, which will regulate a cross border merger. The most important being the tax neutrality. Tax has always been the driving force for any corporate merger exercise. Income tax laws will have to be suitably amended to make the cross border merger a tax neutral event just like an inbound merger. Although, the new provisions proposed by RBI would enable better legal and tax structuring for companies established in multiple jurisdictions, clarity is needed, if an outbound merger could end up in a permanent establishment issue in India for a foreign resulting company..Also, stamp duty laws being a state subject may need necessary amendments providing for an outbound merger, as the resulting company will be a foreign entity. Considering that Indian companies have been involved in more and more cross border merger and acquisition activities in the recent past (Sesa Goa – Sterlite, Cairn – Vedanta, Daiichi – Ranbaxy, Sun Pharma – Taro, Roseneft – Essar, to name a few), an early resolution of these issues becomes all the more important and critical..Author is a principal associate with law firm – IC Legal based in Mumbai.
