India Paves The Way For Cross-Border Mergers
Enabling cross-border mergers involving Indian companies, the Ministry of Corporate Affairs has, with effect from April 13, 2017, notified Section 234 of the Companies Act 2013 and the related Rule 25A of The Companies (Compromises, Arrangements and Amalgamation) Amendment Rules, 2017.
Now, a foreign company can carry out an inbound merger with an Indian company and an Indian company can enter an outbound merger with a foreign company incorporated in ‘notified jurisdictions’. Such cross-border mergers would be, however, subject to a prior approval of the Reserve Bank of India (RBI). This would be a pre-requisite before filing an application before the National Company Law Tribunal in compliance with Sections 230-232 of the Act.
In addition, in case of an outbound merger, the transferee company has to ensure that the valuation for such a merger is conducted by valuers who are members of a recognised professional body in its country, and that this valuation is in accordance with internationally accepted accounting and valuation principles. The valuation declaration has to be filed along with the RBI application. The law allows consideration for cross-border mergers to be also discharged in the form of cash or Indian Depository Receipts (IDRs) or both.
Jurisdictions That Qualify
One much-awaited clarification in Section 234 of Companies Act has been the scope of ‘notified jurisdictions’ to qualify for a cross-border merger. The Rules have now defined ‘notified jurisdictions’ for the purpose of outbound mergers to mean jurisdictions:
- Whose securities market regulator is signatory to Appendix A of International Organisation of Securities Commission (IOSCO) Multilateral Memorandum of Understanding, or has a bilateral Memorandum of Understanding with the Securities and Exchange Board of India (SEBI); or
- Whose central bank is a member of Bank of International Settlement (BIS)
Additionally, jurisdictions that are not compliant with the Financial Action Task Force (FATF) standards won’t qualify for cross- border mergers. The FATF’s public statement does not identify jurisdictions if they have Anti-Money Laundering/Combating the Financing of Terrorism deficiencies or those that have not made sufficient progress in addressing such deficiencies or those who have failed to commit to FATF’s action plan to address such deficiencies.
The FATF keeps updating its public statement periodically, and the jurisdictions presently on FATF’s AML/CFT list are put up on its website.
In a nutshell, the notified jurisdictions within which an Indian company may pursue a cross-border merger is quite wide.
- There are presently 112 signatories to Appendix A of IOSCO’s Multilateral Memorandum of Understanding. These include, among others, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Mauritius, and Netherlands.
- SEBI has executed MOUs with securities authorities of approximately 17 countries including Dubai, Singapore and Mauritius.
- Central banks of approximately 60 countries are currently members of BIS.
Having said that, the permissibility of such cross-border merger as per the domestic corporate, securities and other relevant laws of that foreign country is equally important.
Cross-Border Mergers: Way Forward
While inbound mergers were possible under the erstwhile Companies Act, 1956, enabling provisions for cross-border mergers have now been introduced for both outbound and inbound mergers. Such cross-border mergers offer a significant avenue to both Indian corporates as well as foreign investors to achieve varied strategic objectives. This may include tapping new markets, achieving cost reductions and synergies, facilitating externalisation to tap low cost financing arrangements, tapping overseas monetisation opportunities and exit planning.
There are several aspects that would require considerable evaluation for successful implementation of cross-border mergers including but not limited to a prior RBI clearance. These are - approval under competition law, feasibility of tax neutrality in all the relevant countries, impact of associated transaction costs (stamp duty, registration costs) and evaluation of impact under other tax provisions such as general anti-avoidance rules, base erosion and profit shifting, and place of effective management.
Ravi Mehta is Partner at Grant Thornton India.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.