This article is written by Aditi Deshmukh, pursuing a Diploma in M&A, Institutional Finance and Investment Laws from LawSikho.

Introduction 

India is one of the fastest growing major economies in the world. The changing trends and continuous amendments in policy framework of globalisation, technology and deregulation all over the world, led to increased competition and has given a wider scope for mergers and acquisitions activities.

We have been hearing the news of billion dollar deals of acquisition of Jaguar and Land Rover by Tata Motors in 2011, acquisition of Hamleys by Reliance group. What are these activities known as? Very recently top giant merger and acquisition deals such as Hutch essar acquired by vodafone, corus acquired by Tata Steel were in the news. These all are foreign companies acquired by Indian companies, On the onset of pandemic and china border disputes with India, world’s attention is being shifted to Indian entities and with cut throat competition every entity is looking to expand its boundaries. 

With technological advancement and the new normal digital, healthcare, pharma industries are more into expansion. The cash rich tech sector has been the more acquisitive. Companies such a HCL, Infosys, TCS have made overseas transactions. HCL announced the intent of acquisition of australia based IT solution provider DWS Ltd for around $137 million the transaction is expected to close till Dec 2020. How are these companies acquired? Who regulates these activities? What is the process for initiating these kinds of mergers?

Cross border mergers

As Mergers are not only limited within companies in a domestic country but are also initiated within two different companies situated in two different countries, this is termed as cross border mergers.

A cross border merger could involve an Indian company ”z” merging with a foreign company “x” or vice versa. A company in one country can be acquired by an entity (another company) from other countries. 

Cross border merger transfer’s control and authority of the merged or acquired company to acquiring company. In the merger process assets and liabilities of the two companies from two different countries are combined into a new legal entity, in case of Cross border acquisition, there is a transformation process of assets and liabilities of local company to foreign company (foreign investor), and automatically, the local company is in charge.

Types of cross-border mergers

There are two types of cross border mergers mentioned in companies rules,2016 under companies act 2013:

(i) Inbound merger:  A foreign company merges with an Indian company as a result of which an Indian company is formed.

Eg. Daiichi Acquired Ranbaxy

(ii) Outbound merger: An Outbound Merger is a Cross border Merger in which the Resultant Company is a Foreign Company. It means, Indian Company merged with a foreign company as a result of which a foreign company is formed.

Eg. Tata steel Acquired Corus

Prior to the implementation of companies act 2013, there was no provision for outbound merger, only inbound mergers were permitted. Reserve Bank of India (RBI) issued the Foreign Exchange Management (Cross Border Merger) Regulations 2018  to regulate cross-border mergers.

What are the laws governing cross border outbound merger in India

(i) The Companies Act 2013;

(ii) Competition Act 2002; 

(iii) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011;

(iv) Foreign exchange Management Act.

(v) Transfer of Property Act 1882; 

(vi) Indian Stamp Act 1899 

(vii) Insolvency and Bankruptcy Code 2016;

(vii) Income Tax Act 1961; 

(ix) The Department of Industrial Policy and Promotion (DIPP).

Which government authorities regulate Outbound Merger Processes in India

1. Registrar of Companies and Regional Director under Ministry of Corporate Affairs(MCA)
2. National Company Law Tribunal (NCLT)
3. Competition Commission of India (CCI)
4. Securities and Exchange Board of India (SEBI)
5. Reserve Bank of India (RBI)
6. The Income Tax Department (ITD)

What documents are needed for outbound merger

Documents needed generally depends on nature of transaction but generally the following documents are needed:

1. Documents for obtaining approval from the Board of Directors and Shareholders of both the acquirer and target company.
2. Scheme/Petition to be filed to the concerned authority.
3. Notices to be circulated to shareholders and creditors.
4. Shareholders and creditors consent.
5. Publishable notices for newspapers.
6. In case of acquisition of shares of a listed company public announcement notices.
7. Different affidavits, declarations and other documents.
8. Share subscription/ purchase agreement and Share Transfer form.
9. In case of a listed company a prescribed format for reporting to stock exchanges. 

What are the conditions to be fulfilled for cross-border outbound mergers in India

• Prior Approval of RBI is mandatory.
• Provision of Section 230-232 of Companies Act, 2013, are to be followed during outbound mergers.
• Prior Approval of SEBI, National Company Law Tribunal (NCLT), Shareholders, Creditors, Income Tax Authorities should be taken.
• Shareholders of a merging company should be provided payment of consideration in cash or depository receipts or partly in cash and partly in depository receipts.
• Foreign companies incorporated should be in a permitted jurisdiction.
• The resultant company (foreign company) in case of outbound merger is required to submit reports from time to time as per RBI guidelines. The company should also consult the government of India while preparing a report.
• Valuation of surviving should be submitted to RBI. The Valuation should be done according to the internationally accepted principles on Accounting and Valuation and the report is to be made by a valuer who is the member of a recognized body in its jurisdiction.

What are the key provisions for cross border outbound merger

• Issuance of securities: 

1. Securities are issued to both Indian residents as well as foreign residents. The Foreign Company would issue securities to the shareholders of Indian entities which may include both persons resident in India and persons resident outside India.
2. In case if shares are being acquired by a person resident in India, then such acquisition shall be subject to the ODI Regulations as prescribed by the RBI. Securities in the resultant company may be acquired provided that the fair market value(i.e. of USD 2,50,000 per person per financial year) of such securities is within the limits prescribed under the Liberalized Remittance Scheme.

• Valuation: 

1. Valuation of Indian and foreign company both is to be done according to Rule 25A of the Companies Rules, 2016
2. Capital Instrument’s valuation is to be done as per internationally accepted pricing methodology valuation on an arm’s length duly certified by chartered accountant or SEBI registered merchant banker or practicing cost accountant in case of unlisted Indian company or as per SEBI guidelines in case of listed company.

• Vesting of Assets and Liabilities:

1. Guarantees or borrowings of the resultant foreign company shall be repaid as per the scheme sanctioned by NCLT. Any liability should not be acquired, not in conformity with Act or regulations as prescribed. A no objection certificate is to be obtained from lenders in India of the Indian company.
2. Any asset can be acquired or transferred as permissible under the act. In cases where it cannot be acquired by resultant company, it shall be sold within two years from the date of sanction of the scheme by NCLT, sales proceeding are to be held in homeland outside India via banking channels.
3. Repayment of any liabilities of India from sales proceeds of assets and securities are permissible within 2 years.

• Branch Office

1. The office of the resultant company in India will be treated as a branch office of the resultant company as per Branch office/ Liaison office Regulations, 2016. Further the office may operate according to FEMA regulations.

What is the procedure to be followed in Outbound Merger

The procedure has always been complex for crossborder outbound merger and there has always been confusion between the countries as the laws and regulations differ from country to country and it takes many attempts to finalize the deal.

In 2018 Government of India introduced Foreign Exchange Management (Cross-Border merger) regulation 2018 under Foreign Exchange Management Act, 1999 for promoting and regulating cross-border mergers.

Example: Acquisition of DWS Ltd (Australian IT) firm  by  HCL  in 2020

Procedure for an outbound merger after enactment of companies act 2013 and Foreign Exchange Management act 2018 explained through example of  acquisition of DWS by HCL:

• HCL or DWS, any of them, should make an application to the tribunal as prescribed in Sec 230 to Sec 232 of the companies Act, 2013.
• After receiving the application the tribunal may call a meeting to obtain approval of the proposed scheme by the members and creditors. The tribunal after calling a meeting may look into the objections (if any) raised by the members and creditors.
• If any important information relating to the company and its business must be attached with the application. Certificate of companies’ auditor regarding the accounting treatment of the company must be filed before the tribunal to ascertain the nature of the proposed scheme.
• The notice of the meeting to be conducted is to be sent to Central Government of India, Reserve Bank of India (RBI), Security and Exchange Board of India (SEBI), Competition Commission of India(CCI), the Registrar of Companies (ROC), respective stock exchanges and the official liquidator; and if any of them has any objection they have to raise it within thirty days of receiving the notice.
• The merger will come into force if 3/4th of the creditors in debt value or members in their share values, caste votes in favour of the cross border merger.
• If the creditors holding at least 90% value of total outstanding debt, then the condition of ‘meeting of creditors’ is not needed, the scheme of cross border M&A is approved by way of an affidavit.
• Rule 25 A of Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017 also specifies some procedures as follows:

1. DSW may merge with HCL only after receiving prior approval from RBI.
2. DSW needs to comply with the provisions specified in section 230 to section 232 of Companies Act, 2013.
3. The valuation must be conducted by DSW in their respective jurisdiction.

You can go through the official FEMA 2018 notification released by RBI  to understand the procedure and regulations in more detail.

https://www.rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=11235

Other regulatory provisions for outbound merger

• SEBI: Exemptions under Takeover Regulations, Outbound Merger of Indian Listed Co.
• Accounting: Compliance with local GAAP/IFRS Conversion of accounts in local GAAP for consolidation with merged Company.
• Stamp Duty: Potential Dual-Duty Impact Mutation of Indian/Foreign properties, Operational Guidelines from Regulator/ Government needed.
• CCI: Compliances with respect to prior approval, disclosures and filings etc. under Competition Law.
• Approval of NCLT, shareholders, creditors, SEBI and tax authorities is mandatory according to. Provisions of section 230-232 of the Companies Act, 2013.
• As per rule 25A of the Act, prior approval of RBI is required for the investment even though such Investment is adhering to schedule of the ODI regulation.
• A timely report of Annual performance of both entities should be submitted to RBI.
• Reporting Requirements:

1. Issuing or transfer of shares in case of the merger calls for the submission of FC-GPR / FC-TRS forms or Form ODI form in case of foreign investment. 
2. Filing of Form FLA and APR on an annual basis includes in post merger compliance.

What are the jurisdictions specified for cross border outbound mergers in India 

• Jurisdiction where the securities market regulator of the concerned entity is a signatory to an International organization of securities commission (IOSCO) Multilateral memorandum of understanding (MOU) or a signatory to the bilateral memorandum of understanding with SEBI.
• Jurisdiction not identified in the public statement of Financial Action Task Force (FATF):

(a) Jurisdiction which having a strategic Anti-Money Laundering or which can combat financing of terrorism deficiences. 

(b) A jurisdiction that has not taken sufficient actions under FATF to address the deficiencies.

• Jurisdiction where the foreign country’s Central Bank is a member of Bank for International Settlements (BIS).
• Jurisdiction which has strategic Anti-money laundering or counter measures may apply for combating the financing of terrorism deficiencies.
• Jurisdiction which has not made satisfactory progress to address the deficiencies or are not committed to an action plan developed with the financial action task force.

What compliance to be followed by companies during Outbound Cross Border Mergers

• The merging companies should meet the threshold limit by qualifying under section 5. Within 30 days of approval of proposed scheme of merger and acquisition companies need to give notice to Competition Commission of India (CCI) by the Board of Directors of the companies involved or execution of any agreement per document in furtherance of acquisition proceedings.
• A waiting period of 210 days from the day of giving notice for investigating purposes should be provided to check the possibility of its negative impact on the competition.
• If the Competition Commission of India is satisfied with the effect of the deal it shall approve it. If, after thorough analysis it concludes that the merger is likely to bring a negative impact in the market, the scheme will either be disapproved or will be sent for modification.

How post cross border outbound Merger Performance is evaluated

The following parameters can be used to assess post merger performance:

1. Returns: A comparative analysis of returns pre and post merger should be made and assessed, if the merged company is earning high returns then the merger can be declared successful.
2. Cash flow and operational efficiency: If cash flow seems increasing after merger and this cash flow is directed towards increasing operational efficiency then the merger is operating well.
3. Stock market: If the reaction of the stock market after merger is positive then the merger may benefit the entities.

What are the benefits of outbound Cross Border Merger and Acquisition in India

• The M&A leads to increased productivity of the host country, in cases where the policies used by the government are favourable, also leads to economies of scale.
• When business expands and becomes successful in the long run there is employment creation.
• Sharing two diverse cultures and management skills will create more efficient and effective human resources.
• Expansion of technology and productivity of the host country.
• Geographical diversification provides opportunities in exploring the assets in other countries.

What are the issues and challenges faced during the cross border outbound merger process in India

Political challenges

In cross border merger global political situations of the countries in which companies are set up is a very important factor to be considered. It is an important factor for politics driven industries like military, defense etc.

Cultural Challenges

Cultural challenge plays a very important role as two different culture based organizations come together and this can be a huge threat to the deal if not handled carefully. Therefore a lot of research and planning should be done in advance to bridge the cultural gap.

Legal considerations

The merging companies must look into the various legal and regulatory issues that they are likely to face. While going through the process of reviewing these concerns, it could indicate that the potential merger or acquisition would be incompatible. Hence, it is recommended to not go ahead with the deal.

Tax and Accounting considerations

Tax-related matters are complicated, specifically when it comes to structuring the transactions. International Financial Reporting Standards (IFRS) should be implemented all over the globe to make it easy.

Due Diligence

Due diligence affects merger and acquisition deals and may create fluctuations in deal and price of the deal. The structure and strategy of the deal should be critically analysed and due diligence checks should be conducted to eliminate any complexities in future.

Conclusion

As we saw the procedure for outbound merger is still complex and time taking however from the time outbound merger has been permitted under companies act 2013, many mergers like Tata motors – Land Rover Jaguar has not been in picture since then. Each cross border is different in nature, for successful completion of outbound merger companies need to go through different complexities. 

In spite of some relaxation and new rules in place, the activity of India’s mergers and acquisition has been on decline and with the pandemic it have faced more downfall however, boom industries such as telecom, healthcare, edutech are looking for expansion. There are no proper demerger and exit strategy provisions for outbound merger and this is holding back many companies to expand their boundaries. After the pandemic maybe we will see a rising map in India’s outbound merger deals. India needs to make more clear provisions for Outbound cross border M&A deals.

References

• https://www.rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=11235
• https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11235&Mode=0
• https://www.icsi.edu/media/webmodules/PP-CRVI-2017%20-%20MARCH%207.pdf
• https://www.caclubindia.com/articles/intricacies-of-outbound-mergers-in-india-42985.asp
• https://tradebrains.in/biggest-mergers-acquisition-india/
• https://www.iflr.com/article/b1nhrgctfb3x5g/indian-mampa-in-a-changed-world

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