An overview of Foreign Exchange Management (Cross Border Merger) Regulations, 2018

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An overview of Foreign Exchange Management (Cross Border Merger) Regulations, 2018
30 May 2018

Introduction

The Reserve Bank of India (RBI) has notified Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Regulations). The Regulations govern mergers, amalgamations and arrangements between Indian companies and foreign companies vide a notification dated 20 March 2018.

The Indian Ministry of Corporate Affairs has already notified Section 234 of the Companies Act, 2013 read with rule 25A Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the Act) with effect from 13 April 2017 facilitating cross border mergers and amalgamations between Indian and foreign companies.

Key definitions under the Regulations

  1. Cross border merger: Means any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with the Act.
  2. Indian company: Means a company incorporated under the Act or under any previous company law.
  3. Foreign company: Means any company or body corporate incorporated outside India whether having a place of business in India or not. The definition provides a further explanation that for the purposes of outbound mergers, the foreign company should be incorporated in jurisdictions specified under the Act.
  4. Inbound merger: Means a cross border merger where the resultant company is an Indian company.
  5. Outbound merger: Means a cross border merger where the resultant company is a foreign company.
  6. Resultant company: Means an Indian company or a foreign company which takes over the assets and liabilities of the companies involved in the cross border merger.

Inbound mergers

Pursuant to an inbound merger, any issue of securities to a person resident outside India by the resultant company must be in compliance with the pricing guidelines, entry routes, sectoral caps and reporting requirements prescribed under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.

Specific provisions of the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 must also be complied by the resultant company in the following circumstances:

  • Where the transferor foreign company is a joint venture (JV)/ wholly owned subsidiary (WOS) of the Indian company, and
  • Where the merger results in acquisition of step-down subsidiary of JV/ WOS outside India.

An office/branch of the foreign (transferor) company outside India shall be deemed to be a branch/office outside India of the resultant company in accordance with the Foreign Currency Account Regulations.

Any guarantee/borrowing of the foreign (transferor) company from overseas sources which becomes/enters into the books of account of, the resultant company shall conform to the External Commercial Borrowing (ECB) norms or Trade Credit norms or other foreign borrowing norms and other applicable norms within a period of two years. A time period of two years has been prescribed for above compliances. No remittances for repayment can be made within these two years. Further, the conditions with respect to end-use shall not apply to such borrowings.

The resultant company may acquire, hold and transfer any asset outside India for which an Indian company is otherwise permitted under the provisions of Foreign Exchange Management Act, 1999 (FEMA).

If any asset or security is not permitted to be acquired or held, the resultant company shall sell such asset or security within a period of two years from the date of sanction of the merger scheme and repatriate (immediately) sale proceeds to India through banking channels. Similarly, where any liability outside India is not permitted to be held by the resultant company, the same must be extinguished from the sale proceeds of such overseas assets within a period of two years.

The resultant company may maintain a bank account in foreign currency in the overseas jurisdiction for transactions incidental to the cross border merger for a maximum period of two years from the date of sanction of the merger scheme.

Outbound mergers

  1. Pursuant to an outbound merger, a person resident in India may acquire or hold securities of the resultant company in accordance with the Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004.
  2. In case a shareholder of the transferor Indian company is a resident individual, the fair market value of foreign securities must be within the limits prescribed under the Liberalised Remittance Scheme.
  3. Any office of the Indian company in India shall be deemed to be a branch office of the resultant company in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. Such office may undertake all such transactions permitted to a branch office under the above mentioned regulations.
  4. The guarantees/borrowings of the Indian Company which become the liability of the resultant company must be repaid as per the sanctioned merger scheme.
  5. The Regulations provide that the foreign resultant company must not acquire any liability payable to Indian lender which is not in conformity with the FEMA. Further, a no-objection certificate must also be obtained from the Indian lenders of the Indian company.
  6. The resultant company is permitted to acquire, hold and transfer as a result of outbound merger, any asset in India which a foreign company is allowed to acquire under the provisions of the FEMA.
  7. The asset or security which may not be permitted to be acquired or held by a resultant company in accordance with the FEMA, the resultant company may sell such asset or security within a period of 2 (two) years from the date of the sanction of the merger scheme. The proceeds from sale of such asset or security must be repatriated outside India. The proceeds of such sale may also be used for repayment of liabilities in India within the two year period.
  8. The resultant company is permitted to open a special non-resident rupee account for a maximum period of two years from the sanction of the merger scheme.

Other provisions

  1.  Deemed approval: The Act requires a prior approval from the RBI for undertaking cross border mergers. As per the Regulations, all cross border transactions in compliance with the Regulations shall be deemed to have been approved by RBI.
  2. Compliance certificate: A certificate from the managing director/whole time director and company secretary, if available, confirming compliance of the Regulations must be furnished along with the merger application.
  3. Payment of compensation: Compensation by the resultant company to the holder of a security of a foreign company or an Indian company, as the case may be, must be in accordance with the sanctioned merger scheme.
  4. Rectifying non-compliances: Companies involved in cross border mergers must, prior to merger, ensure that all regulatory actions are taken for rectifying non-compliances, violations, contraventions.
  5. Valuation: Valuation must be conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company. Further, such valuation must be in accordance with internationally accepted principles on accounting and valuation.

Conclusion

The notification of the Regulations laying down the framework with respect to the cross border mergers is a positive step, which may encourage and facilitate international mergers.

Given that the Regulations deal with a new practice area, a clarity relating to procedures and timelines might develop, based on the practical experience.

It is expected that cross border mergers will function as an additional structuring mechanism, thereby offering flexibility to structure corporate transactions in an efficient manner.