India has rolled out its regulations to encourage and allow cross-border mergers and amalgamation. This was awaited for long, and could increase foreign direct investment into the nation. The Reserve Bank of India (RBI) has formulated the norms of mergers and amalgamation, and the necessary arrangement between the foreign and Indian companies.
The Foreign Exchange Management (Cross Border Merger) Regulations, 2018, will include both outbound inbound investments. As the RBI has framed the regulations under FEMA, the regulations can be effective now.
By notifying the Section 234 of the Companies Act, 2013, the Ministry of Corporate Affairs had already paved the way for merger and amalgamation of an Indian company with a foreign company and vice-versa. With the notification of FEMA (Cross Border Merger) Regulations, 2018, the last part of legal provisions has finally come in existence; to facilitate both outbound and inbound mergers of companies in India.
The MNCs would be the real beneficiaries of these regulations. In many cases the MNCs want to consolidate the business of a particular region, and need mergers involving an Indian company with companies operating in in foreign jurisdictions. The clarity of law also makes corporate planning possible for all Indian companies having foreign business. The following would happen in the different cases:
Case #1: If there is a case of inbound merger, the rules permit the resultant company to transfer or issue any security to a person, who is a resident outside of India, subject to pricing and sectoral foreign investment conditions as well as FEMA rules.
Case #2: If, however, the case is of outbound merger; as per the rule, resident Indian entities can hold or acquire securities of the resultant company in compliance with FEMA regulations.
Top 6 Points You Cannot Ignore:
- The regulations issued by the RBI clearly say that the valuation of the foreign company and Indian company shall be done as per the Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.
- The central bank has made a statement that any transaction done as per its regulations will be deemed to have its prior approval that will tremendously impact the timeliness of cross border M&As.
- As per the rules, Indian companies can merge their foreign companies with their domestic companies. However, after a merger, foreign companies will not be required to maintain an Indian company. Instead, they fold it up into a single company. There is a strong expectation that this encourage cross-border M&A activity. The move is also expected to have an impact on bankruptcy and insolvency proceedings, since it will encourage foreign bidders to consider purchasing Indian assets.
- RBI has also said that the assets can be held by the Indian entity outside of India, and anything that is not permissible to be held or acquired has to be disposed off in a duration of two years from the sanction date of the National Company Law Tribunal.
- Any borrowing of the foreign entity, because of the merger, becoming the borrowing of an Indian company must comply with the External Commercial Borrowing Regulations within a period of two years.
- This is applicable to the condition that no remittance or repayment from India will be made in such period, and the conditions pertaining to end use shall not apply. Any office in India, belonging to the foreign company, shall be deemed to be a ‘branch office’ of the said foreign company. It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new RBI norms for Cross Border Merger of Companies. Shweta Gupta from MUDS is recognized amongst the most-respected, knowledgeable and yes, pocket-friendly as well. Why not give them a call right now at +91 9911222771 and start a conversation immediately.