This article has been written by Guruswaminaathan, pursuing the Diploma Programme in M&A, Institutional Finance and Investment Laws from LawSikho.

Introduction

In India, merger means where two corporate bodies merge and forms a new entity or allows one entity to survive but the ownership or control of the management is undertaken by another entity.

However, the concept of mergers of companies is not limited in the Domestic geographical area but also widely practised at International level. Which means a company or body corporate from across the world can engage in a merger transaction with another company or body corporate located in a different country. This is termed as Cross-Border merger.

With the continuous development of Industrialization and Globalization, companies started to expand their business and capture the potential markets across the world.

To promote and safeguard the interest of the investors and the companies and the necessity to regulate the cross-border merger transaction, an international body was established in 1983 called as International Organization for Securities Commission (IOSCO) and India is a signatory member to this organization.

Any Foreign entity which intends to engage with Cross-border transaction with an Indian entity, then the Security regulator of such foreign entity must be a signatory to the Memorandum of Understanding with SEBI (Stock Exchange Board of India) as per IOSCO norms.

The cross-border merger is of two types:

1. Inbound merger
2. Outbound merger

An Inbound merger where a Foreign company shall merger with a domestic company and the resultant company will be a Domestic company.

Resultant company in a cross-border merger is either the domestic company or the Foreign company which takes over the assets and liabilities of another company.

An outbound merger where a domestic company shall merge with a Foreign company and the resultant company will be a Foreign company.

Coming to the topic, an outbound merger in India, where the Indian company shall merge with the Foreign company and the shareholders of the Indian company can acquire the securities of the resultant company.

The Foreign company shall become wholly-owned subsidiary or Joint venture of the Indian Company. 

Regulatory framework for outbound merger

Outbound merger in India is governed and regulated by:

• Companies Act, 2013,
• Foreign Exchange Management Act, 1999,
• Foreign Exchange Management (Transfer or issues of foreign security) regulation, 2004,
• Foreign Exchange Management (cross-border merger) Regulation, 2018
• Overseas Direct Investment Regulation,
• Stock Exchange Board of India (SEBI),
• Reserve Bank of India (RBI),
• Competition Act, 2002,
• National Company Law Tribunal (NCLT),
• Income Tax Department.

Procedure to be followed in Outbound Merger

Cross-border merger involves complex procedures and there always has been a rift between the countries as the laws, regulations for such transactions differ from country to country.

Perhaps the government of India eases such possible complications and promotes such International merger. 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.

However, prior to the enactment of cross-border regulation 2018 and amendment to companies act,2013 where it set forth more clarification and detailed provisions for Mergers, acquisition and amalgamation certain cross-border transactions had occurred.

Example: Acquisition of Jaguar Land Rover by Tata Motors in 2008. 

Companies act, 1956 has provisions for mergers and acquisition under section 391-394 however it did not have provisions for a cross-border merger.

So, the question is how Tata Motors had acquired the JLR (Jaguar Land Rover) without adequate provisions?

Foreign Exchange Management Act, 1999 (FEMA) is being a supplement to it. Under FEMA act 1999, FEMA (Transfer or issue of security) Regulation 2004 is enacted in order to regulate overseas direct investments made by the Indian parties.

As per the RBI’s overseas direct investment regulation, an acquisition of a foreign entity can be done through by way of investment.

Procedure for an outbound merger prior to the enactment of Company Act, 2013 and FEMA (Cross-Border merger) regulation 2018 with help of TATA motors-JLR acquisition deal,2008:

1. In India, every merger, acquisition or amalgamation is processed through Court approval. Tata Motors needs to submit a scheme for its restructuring or acquisition before the court for obtaining approval for the scheme. The court before approving the scheme shall consider the interest of creditors, members of the company and the overall benefits to the economy from such a transaction Deal.
2. The company is also required to obtain approval from CCI (Competition Commission of India). As per the Competition Act, 2002, a merger is said to be void if it is being anti-competitive. CCI has the power to evaluate any mergers that take place outside India and also have the power to nullify such mergers if it is anti-competitive to the Indian market. 
3. The Company can acquire a foreign entity by way of Overseas Direct Investment, then the company’s value of shares has to be evaluated by the AD category-1 bank registered with SEBI.
4. The shareholders of the Indian company shall be issued the securities of the foreign company. Each resident individual can hold securities upto USD 2,50,000 as per the Liberalized Remittance Scheme (LRS).
5. The shareholders of the Indian company shall open an Earners Exchange Foreign Currency account, through which the shareholders shall be paid the profits, dividends declared or other returns earned in the resultant company.
6. The Indian parties must receive the share certificate of the foreign entity within 6 months from the date of investment and must submit debit, credit details of the EEFCA to AD category-1 bank for the purpose of preparing Annual Performance Report which need to be filed with the RBI.
7. The company is required to obtain approval from RBI and where mandatory to make several filings before it like ODI form, Annual Performance Report etc.
8. As per the provisions of FEMA regulation 2004, Indian parties are restricted to make investments in Foreign entity engaged in sectors like:
   1. Real estate,
   2. Trading in Transferable Development Rights,
   3. Gambling business,
   4. Banking sectors.
9. The Indian parties, unless with the approval of Government of India cannot make an investment in the entities which jurisdiction falls under the notification of Financial Action Task Force notified by Government of India such as Pakistan, Bangladesh etc. 
10. As per the provisions of FEMA regulation 2004, Indian parties can make ODI through Automatic route without the intervention of the Government of India. When the investment is in compliance as per Master Direction Reporting prepared by the RBI.
11. The Resultant company shall open a Special Non-Resident Rupee account (SSNR) for receiving Overseas Investment from the Indian parties.
12. The account shall be valid for 2 years from the date of investment.
13. The Indian Body corporates can invest upto 400% of their net worth.
14. As per the guidelines of RBI, the Indian parties can fund the Overseas Direct Investment through:
    1. Drawl of Foreign exchange in Authorized Bank of the Indian party,
    2. Swap of shares as per the valuation of the AD-bank,
    3. Proceeds of External commercial borrowings,
    4. Balance held in EEFC account,
    5. In exchange of ADR/GDR.
15. The Indian company shall be liable to pay the liabilities of the resultant company pursuant to the scheme, the approvals of the creditors to the Indian company is also required.

Compliance required

Post enactment of the Companies Act, 2013 and FEMA (cross-border merger) regulation 2018, Both the Companies act, 2013 and FEMA regulation 2018 goes hand in hand to regulate and govern the cross border mergers in India. In the Companies Act, 2013 includes the provisions for cross border merger under section 234 of the act Cross-border is effectively regulated and the Government of India with consultation from RBI from time to time eases the complexities involved in the Cross-border merger.

Outline for executing an Outbound merger in adherence to provisions of Companies act, 2013 and FEMA regulation 2018.

1. Provisions of section 230-232 of the Companies Act, 2013 i.e. approval of NCLT, shareholders, creditors, SEBI and tax authorities is necessary.
2. 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.
3. Valuation of the Target company is prepared as per International Accounting Standards and to be submitted to RBI.
4. As per the FEMA 2018, the resultant company is not required to acquire the liabilities if it is not in conformity with FEMA regulations.
5. The regulation requires a timely report of Annual performance of the entities both the Indian company and the resultant company and to be submitted to RBI.
6. The Indian company shall become Branch office/ Liaison office of the Resultant company in accordance with provisions of Branch/Liaison office regulation, 2016.
7. The Resultant company can operate in India as if any other Foreign company operates as per the provisions of Foreign Exchange Management Act, 1999.

Conclusion

The cross-border merger promotes wide exploration of potential markets around the world to the body corporates. Through cross-border mergers, the companies from developing and under-developing countries can enjoy the technological advancement, business models of the transferee company, promoting cross cultures of the peoples etc. Such cross-border merger is not only beneficial for the companies involved in the transaction but also to the benefitting to the consumers, respective governments by way providing quality and alternative products, integrating different countries, economical benefits and tax revenues for the Government.

However, there are limitations to such a transaction as the governing laws for cross border mergers differ from country to country, It is important to realize that for successful completion of the transaction, Both companies involved in the merger must fulfil and in compliance with respective laws governing their jurisdiction. This shall cause the transaction to become more complex and time-consuming and that is in India unlike for Domestic mergers there is no concept of fast merger process for cross-border mergers.

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