Cross-border Mergers and Acquisitions

Cross-border mergers and acquisitions have been quickly increasing, changing the global industrial structure. According to the Companies Act, 2013, and the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, a cross-border merger is any merger, amalgamation, or agreement between an Indian business and a foreign company. In simple terms, a cross border merger is the merging of two firms that are situated in separate nations, resulting in the formation of a third company.

An Indian firm combining with a foreign corporation or vice versa is known as a cross-border merger. An entity (another firm) from another nation can buy a corporation in one country. The local business might be private, public, or government-owned. Cross-border mergers and acquisitions occur when two or more companies combine or are acquired by foreign investors.

With effect from April 13, 2017, the Ministry of Corporate Affairs notified Section 234 of the Companies Act, 2013, allowing cross-border mergers. As a result, it was only a matter of time until the Reserve Bank of India issued laws to make the cross-border merger a reality.

 Legal jargon used in cross-border mergers and acquisitions

According to the legal terminology, it involves two countries: -

      i.          The country of origin for firms making acquisitions (the acquiring company) in other countries: "Home Country."

     ii.         The "Host Country" is the country in which the target firm is located.

 Regulatory Framework

In India, cross-border transactions are primarily governed by

      I.         the Companies Act 2013;

    II.          the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011;

   III.          the Competition Act 2002;

  IV.         the Insolvency and Bankruptcy Code 2016;

    V.          the Income Tax Act 1961;

  VI.         the Department of Industrial Policy and Promotion (DIPP);

 VII.          the Transfer of Property Act 1882;

VIII.         the Indian Stamp Act 1899

  IX.          Foreign Exchange Management Act 1999 (FEMA) and other allied laws as may applicable based on the merger structure.

In addition, the Reserve Bank of India (RBI) has notified the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (the Cross-Border Regulation) under the Foreign Exchange Management Act, 1999, which includes enabling provisions for inbound and outbound investment mergers, demergers, amalgamations, and arrangements between Indian and foreign companies. This is an important move since the passage of new legislation and modification of current rules will result in a substantial increase in the flow of Foreign Direct Investment.

Outbound and Inbound Mergers

Inbound or outbound mergers are both possible types of cross-border mergers. An inward merger is a cross-border merger in which the resulting firm is based in India. A cross-border merger in which the resulting firm is a foreign corporation is known as an outbound merger. The assets and liabilities of the firms engaged in the cross-border merger are taken over by a resulting entity, which might be an Indian or foreign corporation.

Over the past few decades, various domestic companies, involved in sectors such as automobile, information technology and pharmaceuticals have made significant acquisitions overseas. Tata Motors acquiring Jaguar and Land Rover, Tata Steel acquiring Corus Steel and Hindalco acquiring Novelis are only some of the examples. The synergy between Facebook’s and Reliance’s Jio platform proved to be one of the biggest alliances in the field of digital technology

Indian outbound mergers were valued at USD 0.7 billion in 2000-01 which then crossed the USD 15 billion mark in 2006. Sixty percent of mergers and acquisition in India in 2006 were outbound merger deals.

 Key requirements of the Cross-Border Regulation In the event of inward mergers

a)     Securities Issuance

As a consideration, the Indian business would issue or transfer securities to the transferor entity's shareholders, which might include both Indian and non-Indian citizens. The issue of securities by a person residing outside of India must follow the price standards, sectoral caps, and other applicable guidelines set forth in the Cross-Border Regulation. If the foreign firm is a joint venture or a wholly-owned subsidiary, it must adhere to the criteria set out in the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. Furthermore, if the inward merger of the JV/WOS leads to the Resultant Indian business acquiring one or more step-down subsidiaries of the Indian party, such purchase must comply with Regulations 6 and 7 of the ODI Regulations.

b)    Assets and Liabilities Vesting

Any borrowings or guarantees of the transferor firm will become the resulting business's borrowings or guarantees. To comply with the external commercial borrowings’ compliance, a two-year timetable has been specified. In such instances, the end-use restrictions would not apply.

Any asset purchased by the resulting corporation can be transferred in any way allowed by the Act or regulations. If such an asset is not authorized to be purchased, the resulting firm must sell it within two years of the National Company Law Tribunal (NCLT) issuing the decision, and the sale profits must be immediately returned to India through banking channels. Where the resultant business is not authorized to have any obligation outside of India, the liability may be eliminated from the sale profits of such foreign assets within two years.

For a maximum of two years, after the NCLT approves the plan, the resultant firm is allowed to open a bank account in the other country's jurisdiction to monitor activities relating to the merger.

c)     Valuation

The valuation shall be performed in accordance with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, that is, by Registered Valuers who are members of recognized professional bodies in the transferee company's prescribed jurisdictions, and in accordance with internationally accepted accounting and valuation principles.

d)    Outside India, there is a branch/office.

In line with the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015, a foreign company's office/branch outside India shall be regarded to be the resultant company's office outside India.

 The Cross-Border Regulation's Key Provisions in the Case of Outbound Mergers

·       Securities Issuance

 As a consideration, the Foreign Company would issue securities to the Indian entity's shareholders, who might include both Indian and non-Indian residents. If shares are purchased by a person who is a resident of India, they will be subject to the RBI's ODI Regulations.

·       Assets and Liabilities Vesting

The guarantees or borrowings of the resulting business must be repaid according to the NCLT-approved arrangement. Furthermore, they should not take on any obligation that is not in accordance with the Act or the rules. The Indian company's lenders in India should provide a no-objection certificate to this effect.

Any asset acquired may be transferred in any way permitted by the Act or the rules enacted thereunder. If the resultant firm is unable to hold or purchase it, it must be sold within two years of the NCLT's approval of the plan, and the sale profits must be quickly transferred outside India through banking channels. It is allowed to repay Indian debts with revenues from the sale of such assets or securities within two years.

·       Establishing a Bank Account

For a maximum of two years, after the NCLT approves a plan, the resultant firm is allowed to create a Special Non-Resident Rupee Account (SNRR Account) for the purpose of supervising activities relating to the merger.

·       Valuation

The valuation shall be carried out in accordance with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, that is, by registered valuers who are members of recognized professional bodies in the transferee company's prescribed jurisdictions, and in accordance with internationally accepted accounting and valuation principles.

·       Other Requirements

The resultant firm and/or the companies participating in the cross-border merger would be required to submit reports as stipulated by the RBI from time to time in conjunction with the Government of India.

It is important to note that when sanctioning the merger of a foreign transferor body corporate with an Indian transferee company, the NCLT will consider the merger's validity under the laws of the country in which the foreign transferor body corporate was incorporated, and any transaction involving a cross-border merger carried out in accordance with the Cross-Border Merger regulations will be deemed to have received prior RBI approval.

 Merger OR Amalgamation of the company with foreign company: Procedure under section 234 of the Companies Act of 2013

1.    Unless otherwise specified by any other legislation in force at the time, the provisions of this Cross-border merger shall apply mutatis mutandis to schemes of mergers and amalgamations involving businesses registered under this Act.

2.    And Companies formed in the territories of such nations like the Central Government may notify from time to time. Provided that The Central Government may adopt regulations in connection with mergers and amalgamations under this provision, in conjunction with the Reserve Bank of India.

3.    (2) Subject to the requirements of any other legislation in effect at the time, a foreign company may merge with a company established under this Act or vice versa with the prior consent of the Reserve Bank of India.

4.     In addition, the terms and conditions of the merger scheme may provide, among other things, for payment of consideration to the merging company's shareholders in cash, Depository Receipts, or a combination of cash and Depository Receipts, as the case may be, according to the scheme to be drawn up for the purpose.

5.     After getting previous Reserve Bank of India permission and following with the provisions of sections 230 to 232 of the Act and these regulations, a foreign company established outside India may combine with an Indian business.

6.    After receiving previous Reserve Bank of India permission and following with the provisions of sections 230 to 232 of the Act and these regulations, a business may combine with a foreign company established in any of the jurisdictions listed in Annexure B.

7.    The transferee company must ensure that the valuation is carried out by valuers who are members of a recognized professional body in the transferee company's jurisdiction and that the valuation is carried out in line with globally accepted accounting and valuation standards. In order to receive Reserve Bank of India clearance under clause (a) of this sub-rule, a declaration to that effect must be included in the application.

 OTHER APPROVALS

(i)   Whose securities market regulator is a member of the International Organization of Securities Commissions.

(ii)  Whose central bank is a member of the Bank for International Settlements (BIS), and

(iii)                 Whose central bank is not identified in the public statement of the Financial Action Task Force (FATF) as:

·       A jurisdiction with strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which countermeasures are in place, or

·       A jurisdiction with strategic Anti-Money Laundering or Combating

 EVALUATION OF POST-MERGER PERFORMANCE

Only the post-merger performance of the merged businesses can fully analyze cross-border mergers. To evaluate post-merger performance, the following parameters might be used:

1. Refunds: A comparison of the returns generated by the business before and after the merger should be conducted. The merger is considered successful if the combined firm earns considerably greater profits.

2. Cash flow and operational efficiency: If cash flow improves considerably after a merger and this enhanced cash flow is used to improve operational efficiency, the newly formed business is functioning effectively.

3. Stock market reaction: If the stock market reacts positively to the merger news, the merger seems to be a good move

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This is 22nd article in the series on #mergersandacquisitions by our student researchers Swasti Patoria, Annapurna Prabhu, Astha Agarwal, Aayomi Sharma, Amrutha Alapati and Aradhya Singh, students of Jindal Global Law School (JGLS) Symbiosis Law School, Pune and Symbiosis Law School, NOIDA

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