Until recently, whilst it was possible for a foreign company to merge with an Indian company, it was not possible for an Indian company to merge with a foreign company within the court sanctioned merger framework set out under Indian corporate law. This finally changed in April 2017, when the company law provisions that govern cross border mergers were brought into force. In the same month, the Reserve Bank of India (RBI) also issued draft regulations setting out the conditions for obtaining ‘deemed’ approval from the RBI for cross border mergers. Now, companies in India desirous of merging with a foreign company may do so in specified jurisdictions.
Following are some of the key highlights of the recent regulations governing cross border mergers:
- Jurisdiction Test
The eligible jurisdictions are: (a) those whose securities market regulator is a signatory to the Multilateral Memorandum of Understanding of the International Organisation of Securities Commission or to the Bilateral Memorandum of Understanding with the Securities and Exchange Board of India; or (b) jurisdictions whose central bank is a member of the Bank of International Settlements; and jurisdictions not identified in the public statement of the Financial Action Task Force (FATF) for deficiencies relating to anti-money laundering or combating terrorism financing or jurisdictions without an action plan developed with the FATF to address the deficiencies. Key countries like the USA, UK, Russia, Germany, France, Japan, China, Singapore, Mauritius, etc. will fall within the definition of eligible jurisdictions.
- For inbound mergers
All issuance of shares / security or transfer of security to a non-resident, borrowings of the foreign company (becoming borrowings of the Indian company pursuant to the inbound merger) and assets acquired, held or transferred by the resultant Indian company, must be in compliance with the relevant Indian foreign exchange regulations (i.e., compliance with sectoral caps and conditions, government approval route, compliance with applicable external commercial borrowing norms, trade credit norms, etc).
- For outbound mergers
An Indian resident may acquire or hold securities of the foreign company in accordance with the applicable Indian foreign exchange regulations. As regards any borrowings of the foreign company, the resultant foreign company shall be liable to repay any outstanding borrowings or impending borrowings as per the court sanctioned scheme. Further, the resultant foreign company may acquire, hold and transfer any asset or security in India, provided it is permitted to do so under the provisions of relevant Indian foreign exchange regulations.
Cross border mergers that are in compliance with the above conditions, as well as other conditions of the RBI, would not be required to file applications to seek approval with the RBI on account of the deemed approval status.
Challenges and Concerns
While the move by the Government and the RBI are much needed and welcome steps, there are some areas of concern that still need to be ironed out. For instance, the Indian Income Tax Act exempts a transaction of amalgamation, where the amalgamated (i.e. transferee) company is an Indian company. Thus presently, where an Indian company merges into a foreign company, it would be a taxable transaction. Given the intricacies involved, India’s tax laws need to be realigned to exempt shareholders from any taxes that may arise in an outbound merger. One can be hopeful that the income tax provisions may be modified in line with the new regulations above.
As it stands today, the requirement to bring all cross border merger transactions in line with requirements under Indian foreign exchange laws may also be practically difficult to implement. For example, in the case of inbound mergers, it may not be possible for the resultant Indian company to comply with all of the provisions of the external commercial borrowing regulations, especially loans which are already existing on the books of the foreign company. Also, in respect of outbound mergers, the RBI notification on cross border mergers mandates compliance with all provisions of the Indian overseas direct investment and liberalised remittance scheme regulations. The foregoing regulations, inter alia, set out thresholds for overseas investments and remittances, and such thresholds may impede outbound mergers.
It may also be noted that the prevalent rules in the jurisdiction of the resultant foreign company could play a role in determining the efficacy of the Indian cross border merger scheme. For example, it is understood that Japanese corporate law currently does not allow a Japanese company to undergo a statutory merger with a non-Japanese company. Hence, the satisfaction of the Indian jurisdiction test satisfies only half the puzzle!
Outbound mergers would also need to comply with the provisions in the Indian Companies Act governing compromises, arrangements and amalgamations, and these provisions may need to be revisited to tie in with the newly notified provisions on outbound mergers, especially on applicability to foreign companies. For instance, there is no clarity in addressing the eventuality of any conflict between the Indian merger framework and the laws of the resultant foreign company in case of outbound mergers. Further, as per the current merger framework under Indian company law, inter alia, various intermediaries including auditors are required to participate, a meeting of the stakeholders is required to be conducted and an application is required to be submitted in a prescribed form and manner prior to the final sanction of the merger by the tribunal having the authority to do so. In the absence of specific provisions to govern cross border mergers, the current merger framework may not be efficient, especially in the case of an outbound merger.
It is important for the Government of India to come out with further clarifications and amendments keeping in mind the practical implications of a cross border merger. While the regulations issued by the RBI are currently only in draft form, we hope that necessary clarifications will come to light when the cross border regulations are (hopefully) notified by the RBI.
In light of the new cross border regime, the path to pursue group restructuring exercises and to make Indian companies more globally relevant and competitive is clearer than before. Indian companies seeking a global platform are most likely to benefit, and can further unlock global potential and reach through mergers with foreign companies. Bringing into force a roadmap and structure to govern cross border mergers is indeed a welcome change that provides regulatory sanctity for such transactions. This regulatory sanctity to outbound mergers will bolster the presence of Indian companies on the global map.
* The authors were assisted by Kunal Savani, Director – Tax, Private Client Practice and Pooja Sable, Associate