CROSS BORDER MERGER – INBOUND - OUTBOUND

CROSS BORDER MERGER – INBOUND - OUTBOUND

 


SHORT SUMMARY:

VIA Notification Dated 13TH April, 2017 MCA has recently notified the much awaited provisions of Section 234 of Companies Act, 2013 dealing with “Merger or amalgamation of company with foreign Company”. The same has been published in the official gazette, Section 234 of the Act should be effective from 13 April, 2017. On the same date MCA has issued the corresponding rules the Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017 inserting Rule 25A and Annexure B in prescribing rules in the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 in relation to operation of section 234.  The corresponding rules have been notified in consultation with the [1]Reserve Bank of India (RBI) for implementation of the said section.

Via Notification Dated 27th April, 2017 in exercise of the powers conferred by section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank has issued Draft Regulation on “Foreign Exchange Management (Cross Border Merger) Regulations, 2017”

In this Flash editorial, the author begins by referring notifications for applicability of provisions of Cross Border Merger (inbound or outbound) under Companies Act, 2013 read with Draft RBI Regulation under FEMA (CBM) Regulations, 2017.

This is article no. 224 of the series of editorials written by the author on corporate laws {including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:
Section 234 of the Act provides for amalgamation of a foreign company incorporated in jurisdictions notified in Annexure B of the notification dated 13th April, 2017 (attached at the end) with the company incorporated in India.

Section 234 allowed both inbound (A foreign company, incorporated in any jurisdiction outside India, may merge with a company incorporated in India) or outbound (A company incorporated in India may merge with a foreign company incorporated in jurisdictions specified in Annexure “B”) mergers subject to the provisions. Section 394 of the 56 Act allowed inbound mergers only; there was no provision for outbound merger under the 56 Act. Both type of mergers should complied with the provisions of Section 230 to 232 of Companies Act, 2013.

It is to be note that sections provide only for scheme of Merger & amalgamation with foreign Companies. Thus, Cross border Demerger may not be possible.

As per explanation the term “Foreign Company” means any company or body corporate incorporated outside India whether having a place of business in India or not

Highlights:
Ø  Inbound/ outbound both mergers require prior approval of Reserve Bank of India.
Ø  Merger should comply with the provisions of Section 230 to 232 read with relevant rules.
Ø  An Indian Company can merge with foreign company incorporated in jurisdiction specified in Annexure B.
Ø  Valuation should be conducted by the recognized professional body in the jurisdiction of the transferee Company.

provisions of cross border mergers:-

INBOUND MERGER
Inbound Merger means “Merger of foreign Company, incorporated in any jurisdiction outside India with a Company in India”.



Provisions under Companies Act, 2013;
A foreign Company incorporated outside India may merge with an Indian company after obtaining prior approval of Reserve Bank of India and after complying with the provision of Section 230 to 232 of the Companies Act, 2013 and rules 25A of The Companies (Compromise, Arrangements and amalgamations) Rules, 2016.
Provisions as per Draft RBI Regulations (as per draft Regulations)
A.    Transfer of Security:
Any issue or transfer of security by the resultant company to a person resident outside India shall be in accordance with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000

B.     Borrowing:
Any borrowing or impending borrowing of the foreign company from overseas sources which becomes the borrowing of the resultant company or any borrowing from overseas sources entering into the books of resultant company arising shall conform to the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowing norms, as laid down under Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable

‘Resultant company’ means an Indian company or a foreign company which is established or formed or is proposed to be established or formed on sanction of the Scheme of cross border merger
C.    Acquire and hold Asset:
The resultant company may acquire and hold any asset outside India which an Indian company is permitted to acquire under the provisions of the Act, rules or regulations framed there under.
Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed there under.

Exception:
Where the asset or security is not permitted to be acquired or held by the resultant company under the Act, rules or regulations then;
·         The resultant company shall sell such asset or security within a period of 180 days from the date of sanction of the Scheme of cross border merger; and
·         The sale proceeds shall be repatriated to India immediately through banking channels

OUTBOUND MERGER
 Outbound Merger means “Merger of Indian Company, with a Company Incorporated in any jurisdiction specified in Annexure “B”
Annexure B:

Jurisdictions-
(i)        Whose securities market regulator is a signatory to international organization of securities commission’s multilateral memorandum of understanding (appendix a signatories) or a signatory to bilateral memorandum of understanding with sebi, or
(ii)     Whose central bank is a member of bank for international settlements (BIS), and
(iii)   A jurisdiction which is not identified in the public statement of financial actions task force (FATF) as:
(a)    A jurisdiction having a strategic  anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply: or
(b)   A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the financial action task force to address the deficiencies”.
(c)     
Provisions under Companies Act, 2013;
A Company may merge with any foreign company Incorporated in any jurisdiction specified in Annexure “B”  after obtaining prior approval of Reserve Bank of India and after complying with the provision of Section 230 to 232 of the Companies Act, 2013 and rules 25A of The Companies (Compromise, Arrangements and amalgamations) Rules, 2016.
A.    Valuation Report:

§  The Transferee Company shall ensure that valuation is conducted by the valuer who is member of recognized professional body in the jurisdiction of the transferee Company.
§  Such valuation is in accordance with internationally accepted principles on accounting, valuation on arm’s length basis.
§  A declaration to the effect shall be attached with the application made to Reserve Bank of India for obtaining their approval.
As per RBI Draft regulations:
§  The valuation of the Indian company and the foreign company for the purpose of cross border merger shall be done as per internationally accepted pricing methodology for valuation of shares on arm’s length basis
§  which should be duly certified by a Chartered Accountant/public accountant/merchant banker authorized to do so in either jurisdiction.
Provisions as per Draft RBI Regulations (as per draft Regulations)
B.     Purchase of Security:

A person resident in India may acquire or hold securities of the resultant company in accordance with the Foreign Exchange Management (Transfer or issue of Foreign Security) Regulations, 2000 or the provisions of the Liberalized Remittance Scheme, as applicable.
C.    Borrowing:

The resultant company shall be liable to repay outstanding borrowings or impending borrowings as per the Scheme sanctioned by the National Company Law Tribunal in terms of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016
D.    Acquire and hold Asset:

The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the provisions of the Act, rules or regulations framed there under.
Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed there under.
Exception:
Where the asset or security is not permitted to be acquired or held by the resultant company under the Act, rules or regulations then;
·         The resultant company shall sell such asset or security within a period of 180 days from the date of sanction of the Scheme of cross border merger; and
·         The sale proceeds shall be repatriated to outside India immediately through banking channels

E.     Valuation Report:
The valuation of the Indian company and the foreign company for the purpose of cross border merger shall be done as per internationally accepted pricing methodology for valuation of shares on arm’s length basis
Report should be duly certified by a Chartered Accountant/public accountant/merchant banker authorized to do so in either jurisdiction.
CONCLUSION:

The much-awaited notification of Section 234 of the 2013 Act is definitely a welcome move.  It will also grant the advantage of having access to a ready infrastructure for listing which can be achieved by merging an Indian company with an offshore listed company and will also provide an exit option for existing investors in overseas jurisdictions. While this is a welcome move, alignment of these provisions with other applicable Indian laws may be required. Like under FEMA draft regulations is already issued by the RBI. Under Indian Income tax laws, since the capital gains tax benefit is presently available only in case of Inbound Mergers, one awaits corresponding changes to the Indian Income tax laws with respect to any reliefs for the merging company, its shareholders and the merged company, in the case of Outbound Mergers where the merged company is a foreign company. 

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. 



[1] No amendment can be made in Rules 25A without consultation with Reserve Bank of India.

Comments

  1. Cardinal Point specializes in providing cross-border expatriate tax preparation, tax planning and tax compliance services for clients living, working, investing, transitioning residency or conducting business in the United States and Canada.
    canadians living in california

    ReplyDelete

Post a Comment

Popular posts from this blog

Declaration of Commencement of Business - Series 487

Vacancy Updates (Through Google Form) | Dated: 20-August-2020

Process of Conversion of Loan into Equity