The ministry of corporate affairs (MCA) has notified Section 234 of the Companies Act 2013 which permits cross border mergers with effect from 13 April 2017. Further, in consultation with the Reserve Bank of India (RBI), MCA has also notified corresponding amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 by inserting a new Rule 25A to be effective 13 April 2017 onwards.
The law and implications
Marking a significant change from the old regime under the Companies Act, in terms of which only the merger of a foreign company with an Indian company was permitted, the newly notified Section 234 of the 2013 Act now permits cross border mergers in both ways, i.e., a foreign company can merge into an Indian company (inbound merger), and an Indian company can merge into a foreign company of permitted jurisdiction (outbound merger).
Prior approval of RBI is mandatory and only after receiving RBI's approval, an application can be made by the Indian company with the jurisdictional National Company Law Tribunal.
While the 2013 Companies Act opened its doors for outbound mergers, such mergers are only permitted with a foreign company whose securities market regulator is a signatory to the International Organisation of Securities Commission’s multilateral memorandum of understanding (MoU) (Appendix A signatories) or a signatory to the bilateral MoU with the Securities and Exchange Board of India (SEBI).
The other possibility is if the central bank is a member of the Bank for International Settlements, and a jurisdiction which is not identified in the public statement of Financial Action Task Force (FATF) as a jurisdiction having strategic ‘anti-money laundering or combating the financing of terrorism’ deficiencies to which counter measures apply, or a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.
It may be noted that no specific jurisdiction restrictions have been prescribed for inbound mergers in respect of foreign companies.
In case of outbound mergers, the foreign company should ensure that its valuation is conducted by such valuers who are members of recognised professional bodies in their country, and in accordance with internationally-accepted principles on accounting and valuation.
While obtaining RBI’s approval for the outbound merger, a declaration to this effect is required to be filed. The aforesaid requirement of foreign company’s valuer and valuation is presently applicable only to outbound mergers and the law remains silent on such requirement for inbound mergers.
The scheme of merger may provide for payment of consideration to the shareholders of the merging company in the form of cash or depository receipts or partly in cash and partly in depository receipts. As far as using depository receipts as a mode of consideration in cases of outbound mergers is concerned, the same remains to be tested under the extant legal framework and the Indian markets.
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