Understanding The Compliances For Cross-Border Mergers In India

Introduction:

Cross-border mergers, encompassing both inbound and outbound mergers, require adherence to a wide array of legal, regulatory, and procedural compliances under various statutes and rules in India. The governing framework primarily includes the Companies Act, 2013 (CA 2013), the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (Merger Rules), the Reserve Bank of India’s (RBI) Merger Regulations, and relevant provisions of the Foreign Exchange Management Act, 1999 (FEMA), among others. This compliance structure ensures that cross-border mergers are executed in a legally sound manner.

Key Provisions Under CA 2013 and Merger Rules

Section 234 of CA 2013 read with Rule 25A of the Merger Rules mandates prior RBI approval for cross-border mergers unless the transaction complies with the FEMA Merger Regulations. Transactions adhering to these regulations are deemed to have received RBI approval, streamlining the process. Additionally, compliance with Sections 230-232 of CA 2013 is necessary for NCLT (National Company Law Tribunal) sanctioning of the merger. These sections deal with schemes of arrangement, requiring detailed disclosures and approvals from the involved companies’ boards, creditors, and shareholders.

Rule 25A of the Merger Rules specifies additional obligations, including the submission of a certificate by the managing director or a full-time director along with the company secretary (if available) confirming adherence to the Merger Regulations. Furthermore, the merger scheme must clearly outline the terms of consideration to shareholders in cash, depository receipts, or a combination thereof.

FEMA Merger Regulations and RBI Compliance

The FEMA Merger Regulations, introduced in 2018, categorize cross-border mergers into inbound and outbound types. In inbound mergers, where the resulting company is an Indian entity, securities issued to non-resident shareholders must align with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Outbound mergers, where the resulting company is a foreign entity, require adherence to the Foreign Exchange Management (Overseas Investment) Rules, 2022. Both frameworks provide detailed procedures for the transfer of securities, valuation, reporting, and asset acquisition.

Compliance with these rules ensures proper alignment with foreign exchange regulations and mitigates legal and financial risks. Any deviation from these prescribed requirements necessitates obtaining prior approval from the Reserve Bank of India (RBI). This approval acts as a safeguard to address potential regulatory issues. By defining clear guidelines, the FEMA Merger Regulations facilitate structured execution of cross-border mergers while ensuring adherence to statutory mandates.

Valuation Standards

Valuation is a critical aspect of cross-border mergers, ensuring compliance with established global standards. Rule 25A of the Merger Rules requires that valuation for outbound mergers be conducted by professionals recognized in the transferee company’s jurisdiction. This process must adhere to internationally accepted accounting and valuation principles, providing consistency and reliability in the valuation process. Jurisdictional considerations are equally important. Section 234(1) of the Companies Act, 2013, restricts cross-border mergers to foreign jurisdictions notified by the Central Government. This limitation ensures that such mergers align with Indian legal standards and minimizes risks related to jurisdictions that lack regulatory frameworks or cooperative mechanisms. These provisions collectively establish a framework for structured and legally sound cross-border mergers.

Sectoral Compliance and Reporting Obligations

Sector-specific guidelines under FEMA and the Companies Act are crucial for ensuring compliance. For instance, mergers in regulated sectors like banking, insurance, and telecommunications may necessitate additional approvals from respective sectoral regulators. These approvals are supplementary to the overarching requirements under CA 2013 and FEMA. Furthermore, reporting obligations are integral to maintaining transparency. The resultant company must adhere to FEMA’s reporting requirements, including the filing of Form FC-GPR (Foreign Currency- Gross Provisional Return) for inbound mergers and equivalent documentation for outbound mergers. Timely submission of these reports is critical to avoid penalties and ensure the merger’s legality.

Treatment of Borrowings and Guarantees

The transfer of liabilities in cross-border mergers requires adherence to regulatory requirements, particularly concerning borrowings and guarantees. In inbound mergers, foreign borrowings of the merging foreign entity are transferred to the resultant Indian company. This company must ensure compliance with FEMA regulations within a two-year timeframe. During this period, remittances from India for liability repayment are restricted, and conditions on the end-use of funds apply. Outbound mergers, on the other hand, transfer the liabilities of the merging Indian company to the resultant foreign entity. These liabilities must be settled as outlined in the scheme approved by the National Company Law Tribunal (NCLT). Additionally, any liabilities in Indian currency must comply with FEMA regulations, and no-objection certifications from Indian lenders are mandatory where applicable.

Asset Transfers and Bank Accounts

Asset acquisition and disposal in cross-border mergers are subject to FEMA regulations. If any acquired assets do not comply with FEMA provisions, they must be sold within two years of the NCLT-sanctioned merger scheme. The proceeds from such sales must be repatriated to India or transferred abroad, depending on the asset’s location and applicable regulations. This requirement ensures regulatory consistency and prevents non-compliant assets from remaining within the system. Additionally, the resultant company is permitted to maintain bank accounts in the foreign or Indian jurisdiction for a maximum period of two years. These accounts facilitate the settlement of outstanding transactions, the transfer of sale proceeds, and the completion of merger-related obligations.

Tax Implications

Tax compliance is a significant aspect of cross-border mergers. Inbound mergers benefit from exemptions under the Income Tax Act, 1961, such as capital gains tax relief under Section 47 and the carry-forward of tax losses under Section 72A. Conversely, outbound mergers face stricter tax treatment, potentially resulting in higher liabilities for Indian companies and their shareholders. The Competition Act, 2002 (CA02), adds another layer of compliance, particularly for large-scale mergers that could impact market competition. Merging entities must notify the Competition Commission of India (CCI) if asset or turnover thresholds are exceeded. The CCI assesses the merger’s impact and may impose conditions to prevent anti-competitive practices.

Additional Declarations and Approvals:

Cross-border mergers involving entities in countries sharing a land border with India require additional declarations under Rule 25A (4) of the Merger Rules. Furthermore, no-objection certificates (NOCs) from creditors, regulators, and sectoral authorities are prerequisites for NCLT approval. A notable feature of the FEMA Merger Regulations is the concept of deemed RBI approval for transactions meeting prescribed conditions. This provision reduces procedural delays and fosters a streamlined process. However, the resultant company is granted a two-year period to achieve full compliance with FEMA regulations, allowing sufficient time to resolve outstanding issues and align operations with regulatory norms.

Safeguards for Shareholders and Market Integrity:

The Merger Rules and FEMA Regulations prioritize shareholder interests, mandating clear disclosures and fair valuation practices. Provisions like the issuance of depository receipts and adherence to internationally accepted valuation standards ensure that shareholders receive equitable treatment. Market integrity is further bolstered through SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, which govern foreign acquisitions of Indian companies.

Conclusion:

Cross-border mergers in India require compliance with various statutes, rules, and regulations. The process includes obtaining approvals from the National Company Law Tribunal (NCLT) and the Reserve Bank of India, along with meeting requirements under FEMA, SEBI, and the Competition Commission of India. These regulations govern aspects such as valuation, securities issuance, liabilities, and jurisdictional limitations. Companies undertaking such mergers must conduct detailed legal and financial due diligence to address regulatory expectations and minimize risks.

King Stubb & Kasiva,
Advocates & Attorneys

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