April 21, 2017
Provision enabling cross-border mergers notified: India further integrates into the stream of globalization
The Ministry of Corporate Affairs of the Government of India (“MCA”) by way of a notification1 has notified Section 2342 of the Companies Act, 2013 (“Act”) enabling cross-border mergers with effect from April 13, 2017. The MCA has also notified the Companies (Compromises, Arrangement and Amalgamation) Amendment Rules, 2017 (“Amendment”) to make suitable changes to the Companies (Compromises, Arrangement and Amalgamation) Rules, 2016 (“Rules”), to operationalize the said provision.
In view of these notifications, an inbound merger (i.e., a merger of a foreign company into an Indian company with the Indian company as the surviving entity) as well as an outbound merger (i.e., a merger of an Indian company into a foreign company situated in certain permitted jurisdictions3 with such foreign entity as the surviving entity) is now possible. This is of course subject also to the host jurisdiction of such a foreign company permitting such schemes with an Indian company. It is important to note that implementation of the provision on cross-border merger fulfills one of the recommendations of the Expert Committee on Company Law under Dr. Jamshed J. Irani, which was constituted to suggest corporate law reforms in India.4
Such merger will be subject to approval of the Reserve Bank of India (“RBI”), India’s central bank and administrator of exchange control regulations, and compliance with the provisions of the Section 230 to 232 of the Act.
Only recently, on December 7, 2016, merger related provisions of the Act (i.e. Sections 230-233, 235-240 of the Act) were made effective which replaced similar provisions of the Companies Act, 1956 (“1956 Act”). However, Section 234 (which enables cross-border mergers) was not brought into force. As a result, until now, Indian companies desirous of an outbound cross-border merger were unable to undertake such a transaction.
What does the notification entail?
The newly notified Section 234 provides that the provisions of Chapter XV (Compromises, Arrangements and Amalgamations) of the Act shall apply, mutatis mutandis (with appropriate changes), to an inbound or outbound cross-border merger. The provision envisages a scheme of amalgamation providing for, amongst others, payment of consideration, including by way of cash or depository receipts or a combination of those. Further, it is important to note that a cross-border merger may be subject to multiple parallel scrutiny and will have to be approved by the RBI, the jurisdictional National Company Law Tribunal (“NCLT”), and if applicable the relevant sectoral regulator in India, and the relevant competent authority(ies) in the foreign jurisdiction, if necessary in such jurisdiction.
Section 234 also empowers the Central Government to frame rules in consultation with the RBI to deal with such mergers. In exercise of this power, the MCA has notified the Amendment, amending the Rules, with effect from April 14, 2017 by inserting a new Rule 25A to operationalize Section 234. Based on the new Rule 25A, the following are the mandated steps for Indian companies involved in a cross-border merger:
Further, any cross-border merger under Section 234 will have to comply with the requirements as laid down in Sections 230-232 (requirements applicable to domestic transactions). This will include procedural requirements such as, for e.g., filing an application before the jurisdictional NCLT, conducting meeting of shareholders/creditors, notification to income tax authorities, other sectoral regulators etc.5, publication of advertisement in respect of the merger, etc.
Additionally, in line with Section 234, the Amendment requires that any further amendment to the relevant rules on cross-border merger should be undertaken only after consultation with RBI.
The notification of the provision on cross-border merger and the Amendment is a welcome development. Although there remain a few issues as highlighted above, cross-border mergers will present an additional structuring avenue for undertaking corporate transactions in an efficient and flexible manner. Further, such a move should improve the accessibility of companies to access capital in overseas market. However, considering the involvement of multiple agencies and laws (primarily RBI and NCLT in India, and the competent authority, if applicable, and the laws of the relevant foreign jurisdiction), the timelines and implementation will have to be calibrated in order to achieve the commercial objective.
Internationally, cross-border mergers have remained a relatively uncommon phenomenon; however, they have received some traction in multilateral single markets like the European Union, where a formal legal framework for undertaking cross-border mergers was introduced in 20059 and migration of companies is possible due to recognition within the legal and tax framework. Based on the learnings in the European Union, it appears to be a success although certain scope of improvement exists.10 It is important that MCA and RBI analyze the available knowledge internationally on implementation of legal framework for regulating cross-border mergers and fine-tune the domestic legal framework. One can be cautiously optimistic that cross-border mergers may turn-out to be an efficiency enhancing avenue for corporates in India.
– Shashwat Sharma, Aditya Shukla, Simone Reis & Ruchi Biyani
You can direct your queries or comments to the authors
1Notification Dated April 13, 2017 [F. No. 1/37/2013 CL.V] available at: http://www.mca.gov.in/Ministry/pdf/section234Notification_14042017.pdf
2Section 234 of the Act reads as follows:
“(1) The provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government:
Provided that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.
(2) Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.
Explanation.—For the purposes of sub-section (2), the expression “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not.”
3In case of outbound cross-border merger, a permitted jurisdiction will mean the surviving entity is located in a jurisdiction which is:
(i) whose securities market regulator is a signatory to the International Organisation of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to a bilateral Memorandum of Understanding with SEBI; OR
(ii) whose Central Bank is a member of the Bank of International Settlements (BIS); AND
(iii) a jurisdiction, not identified in the public statement of the Financial Action 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 FATF to address the deficiencies. (Emphasis Supplied)
4Report of the Expert Committee on Company Law (2005) available at http://www.mca.gov.in/MinistryV2/report+of+the+expert+committee+on+company+law.html
5As per Section 230(5) of the Act, the notice for meetings shareholders and creditors of the merging companies must also be sent to the RBI, SEBI, income tax authorities, the Competition Commission of India, respective stock exchanges (if companies are listed) and other concerned sectoral regulators who are likely to be affected by the scheme of merger to enable them to make representation before the NCLT within 30 days from date of receipt of notice.
6The need to have a forward looking law in respect of mergers and amalgamations was also expressed by the Expert Committee on Company Law headed by Dr. Jamshed J. Irani.
7Please refer to the Statement of Objects and Reasons of the Act.
8The Central Board of Direct Taxes released Circular No 7 of 2017 on January 27, 2017 which, among other things, clarified that where any court or authority such as the NCLT “explicitly and adequately” considers the tax implication of an arrangement, while giving its sanction, GAAR will not apply to such an arrangement. The wording of this clarification gives room to the tax authorities to invoke the GAAR provisions even in the case of mergers which receive sanction of the NCLT. For our hotline on this Circular please click this link (http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/indias-tax-regulator-issues-clarifications-regarding-the-implementation-of-the-gaar-provisions.html?no_cache=1&cHash=4ef51b860372ec0707ac3af0ad4bf508).
9Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies.
10Study on the Application of the Cross-Border Mergers Directive conducted for the Directorate General for the Internal Market and Services, The European Union available at: http://ec.europa.eu/internal_market/company/docs/mergers/131007_study-cross-border-merger-directive_en.pdf
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