Cross Border Mergers – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Question 1.
Differentiate between Inbound merger and Outbound merger. What are the laws governing Cross-border mergers in India?
Answer:
→ Section 234 of the Companies Act, 2013, deals with merger between a Foreign Company and an Indian Company. A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not.
→ An inbound merger is one where a Foreign company merges with an Indian company resulting in an Indian company being formed.
→ An outbound merger is one where an Indian company merges with a Foreign company resulting in a foreign company being formed.
→ The following Acts/laws govern cross border mergers in India:
- The Companies Act, 2013
- The Foreign Exchange Management Act, 1999 (FEMA)
- Foreign Exchange Management (Cross Border Merger) Regulations, 2018
- The Competition Act, 2002
- The Income-tax Act, 1961
- The Transfer of Property Act, 1882
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
- The Insolvency and Bankruptcy Code, 2016
- The Department for Promotion of Industry and Internal Trade (DPHT)
- The Indian Stamp Act, 1899
- IND AS 103 – Business Combinations
Question 2.
GKL Ltd., an Indian company intends to amalgamate with PS International Ltd., a foreign company. Examine the legal provisions that have to be complied with for such an amalgamation.
Answer:
→ Where an Indian company merges with a foreign company, and the resultant company is a foreign company, it is known as ‘Outbound merger’
→ In the given cases, the merger between GKL Ltd. (Indian company) and PS International Ltd. (foreign company) shall be treated as outbound merger.
→ Section 234 of the Companies Act, 2013 deals with cross border mergers. Along with Companies Act, there shall be compliance of RBI and FEMA (Cross Border Merger) Regulations, 2018.
→ Following provisions shall be complied by both the companies:
(a) An office in India, of the Indian company, pursuant to sanction of the scheme of cross border merger, may be deemed to be a branch office in India of the resultant foreign company. Accordingly, the resultant company may undertake any transaction as permitted to a branch office under the aforesaid Regulations.
(b) The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant foreign company shall be repaid as per the scheme sanctioned by the National Company Law Tribunal (NCLT).
(c) The resultant foreign company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with the FEMA or rules or regulations framed thereunder. A no-objection certificate to this effect should be obtained from the lenders in India of the Indian company.
(d) The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the pro-visions of the Foreign Exchange Management Act, 1999, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the said Act or rules or regulations thereunder.
(e) Where the asset or security in India cannot be acquired or held by the resultant foreign company under FEMA, 1999, rules or regulations made thereunder, the resultant company shall sell such asset or security within a period of 2 years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of 2 years shall be permissible.
(f) The resultant foreign company may open a Special Non-Resident Rupee Account (SNRR) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of putting through transactions under these regulations. The account shall run for a maximum period of two years from the date of sanction of the Scheme by NCLT.
(g) A person resident in India may acquire or hold securities of the resultant company as per FEMA (Transfer or Issue of any Foreign Security) Regulations, 2004.
(h) A resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme (LRS) laid down in the Act or rules or regulations framed thereunder.
Question 3.
“Cross Border Mergers not only bring benefits but also assume risks”.
Briefly comment with specific provision under Companies Act, 2013.
Answer:
→ Section 234 of the Companies Act, 2013, deals with merger between an Indian company and a foreign company, ie. cross border mergers.
→ Cross border mergers shall comply with Companies Act, RBI and FEMA regulations.
→ An Inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed.
→ An outbound merger is one where an Indian company merges with a foreign company resulting in a Foreign Company being formed.
→ Cross border merger provides a lot of benefits such as technology advancement, diversification etc. However, where are certain risks associated with cross border mergers such as :
1. Taxation: Double Tax is an important risk faced by such deals. There are Avoidance of Double Taxation Agreements, but the tax implications may prove to be complex and tedious.
Further, this may increase the costs as a local professional is required to be hired.
2. Regulatory Background: The laws and regulations in the host country would be different and may be difficult to comply. An unsuitable regulatory landscape may pose risks to a cross border merger.
3. Political scenario: It is essential to assess the political situation of the country before one enters into a merger with an entity belonging to that country. Unstable political situation may lead to difficulties in carrying out business.
4. Valuation: Valuation is one factor which changes with countries due to changes in exchange rate, stock market transactions and other macroeconomic developments.
Question 4.
Explain Inbound and Outbound merger as defined in the Foreign
Exchange Management (Cross Border Merger) Regulations, 2018.
Answer:
- Section 234 of the Companies Act, 2013 refers to merger of a Foreign Company with an Indian Company. Such mergers are also known as ‘Cross border’ mergers.
- A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not. Apart from the Companies Act, 2013, compliance of FEMA Act and RBI and related guidelines is vital for such mergers. Further, compliance of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 is required.
- Inbound Merger is one where a foreign company merges with an In-dian company (or domestic company) resulting in an Indian company being formed.
- Following are the key aspects which need to be followed during an inbound merger:
- The resultant company post cross border merger can transfer any security including a foreign security to a person resident outside India.
- An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India.
- Borrowings of Transfer or company would become the borrowings of the resulting company.
- Assets acquired by the resulting company can be transferred in accordance with the provisions of the Companies Act, 2013 or any regulations framed thereunder for this purpose.
- Resultant company is allowed to open a bank account in foreign currency outside India.
- Outbound Merger is one where an Indian company (or domestic company) merges with a foreign company resulting in a foreign company being formed.
- The following are the key aspects governing an outbound merger:
- The securities issued by a foreign company to the Indian company, may be issued to both, persons resident in and outside India.
- An office of the Indian company in India may be treated as the branch office of the resultant company in India.
- Borrowings of Resultant company shall be repaid in accordance with the sanctioned scheme.
- Assets which cannot be acquired or held by the resultant company should be sold within a period of two years.
- The resultant company can now open a Special Non-Resident Rupee Account.
Question 5.
Secure Source Ltd., an Indian Company, is contemplating to take over Super Securers Pte. Ltd. of Singapore through a process of merger and its top Management seeks your advice. Suggest the required compliances.
Answer:
- A cross border merger refers to any merger or amalgamation between an Indian Company and Foreign Company. A cross border merger essentially helps in global expansion of companies.
- In the given case, Secure Source Ltd. (Indian Company) wishes to takeover Super Securers Pte. Ltd. (Singapore) through a process of merger. Since the Indian company shall continue after the merger, it is known as Inbound merger.
- For cross border mergers, there shall be compliance of Section 234 of the Companies Act, 2013, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, the Reserve Bank of India (RBI) and prescribed provisions of Foreign Exchange Management Act.
- The terms and conditions of such merger may include payment of consideration to shareholders of the merging company in cash, or in Depository Receipts, or both.
- The Transferee Company (Secure Source Ltd.) shall ensure that valuation is conducted by registered valuers who are members of a recognized professional body in India. Valuation shall be as per inter-nationally accepted principles on accounting and valuation.
- The Indian Company shall file a petition with the National Company Law Tribunal in terms of sections 230 to 232 of the Companies Act, 2013. Concurrently, a declaration shall be submitted to RBI for ob-taining its approval.
- Cross Border Merger is permitted with companies belong to certain countries –
- whose securities market regulator is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU)
- whose central bank is a member of Bank for International Settlements (BIS), and
- a country which is identified by Financial Action Task Force (FATF) for not addressing Anti-Money Laundering or Financing Terrorism activates
Question 6.
The amalgamated company has to issue new shares to Non-resident Indians in amalgamation and for that it has to obtain permission of Reserve : Bank of India under the provisions of the Foreign Exchange Management Act, 1999.
Answer:
- Section 234 of the Companies Act, 2013 refers to merger of a Foreign Company with an Indian Company. Such mergers are also known as ‘Cross border’ mergers.
- Apart from the Companies Act, 2013, compliance of FEMA Act and RBI and related guidelines is vital for such mergers. Further, compliance of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 is required.
- An inbound merger is one where a Foreign company merges with an Indian company resulting in an Indian company being formed. This results in issuing equity shares to non-residents.
- When a scheme of amalgamation includes issue of shares/cash option to non-resident Indians, the amalgamated company is required to obtain the permission of Reserve Bank of India, subject to conditions prescribed under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
- It shall be ensured that the percentage of shareholding of persons resident outside India in the Transferee company shall not exceed the percentage approved by the Central Govt, or the RBI.
- However, if such percentage is likely to exceed the pre-sanctioned percentage, the Transferor or Transferee Company should get fresh approval from the Central Govt., and RBI.
- The Transferee Company should file a report with the RBI giving full details of the shares held by persons resident outside India. Also, it must furnish a confirmation that all terms and conditions stipulated in the scheme approved by the Tribunal have been complied with.