Ministry of Corporate Affairs (MCA) has recently vide notification dated 13th April, 2017 has notified Section 234 of the Companies Act, 2013 (‘Act’) which deals with Merger or amalgamation of company with foreign company now allowing the merger or amalgamation of Company with foreign company. The corresponding rules have also been notified in consultation with Reserve Bank of India (RBI) for implementation of the said section. MCA has issued the Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017 inserting Rule 25A and Annexure B in prescribing rules in the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 in relation to operation of section 234.

Regulatory Compliances

Section 234 of the Act provides for amalgamation of a foreign company incorporated in notified jurisdiction with a company incorporated under the provisions of the Act or under the provisions of the earlier Companies Act, 1956 and vice versa. It also provides that both inbound merger and outbound merger should be subject to prior approval of RBI and application of the other provisions of Chapter XV of the Act. Section 394 of the Companies Act, 1956 allowed inbound mergers only, there was no provision for outbound merger under the Companies Act, 1956.

Further, section 234 provides that a Scheme prepared for inbound merger/outbound merger may inter alia provide for payment of cash or issue of depository receipts or both as consideration to the shareholders of the merging company. For the purpose of Section 234, ‘Foreign Company’ means any company or body corporate incorporated outside India whether having a place of business in India or not.

Rule 25A prescribes as follows:

a) A foreign company, incorporated in any jurisdiction outside India, may merge with a company incorporated in India (“inbound merger”).

b) A company incorporated in India may merge with a foreign company incorporated in jurisdictions specified in Annexure “B” (“outbound merger”).

c) Both inbound merger and outbound merger require prior approval of RBI.

d) Both inbound merger and outbound merger should comply with the provisions of section 230 to 232 of the

Act.

e) Concerned companies should file application with National Company Law Tribunal (NCLT) under provisions of section 230-232 of the Act and Rule 25A for obtaining approval of the NCLT.

f) In relation to outbound merger, the transferee company should ensure that the valuation conducted by valuers (being members of a recognized professional body in the jurisdiction of the transferee company) is in accordance with internationally acceptable principles of accounting and valuations and a declaration to that effect is filed with the RBI.

Annexure “B” specifies following jurisdictions in relation to outbound merger:

i a jurisdiction whose securities market regulator is a signatory to the International Organisation of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A) or a signatory to a bilateral MoU with Securities and Exchange Board of India; (or)

ii a jurisdiction whose Central Bank is a member of the Bank of International Settlements (BIS)

And

iii a jurisdiction, not identified in the public statement of the Financial Action Task Force (FATF) as:

a) a jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply; or

b) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

List of jurisdictions covered under Annexure “B” indicate that outbound mergers seem to be possible with foreign companies incorporated in jurisdictions such as Mauritius, Netherlands, Singapore, Cayman Islands, Abu Dhabi, DIFC (Dubai), UAE, United Kingdom, United States etc.

Rolling out draft Regulations for Cross Border Mergers by RBI

RBI has proposed fresh Regulations under Foreign Exchange Management Act, 1999 for Cross Border Mergers on April 26, 2017 and has Invited comments from stakeholders. The draft guidelines proposed to be issued on cross border merger transactions pursuant to the Rules notified by Ministry of Corporate Affairs through Companies (Compromises, Arrangements and Amalgamation) Amendment Rules, 2017 on April 13, 2017. The Reserve Bank of India has proposed these Regulations under the Foreign Exchange Management Act, 1999 (FEMA) in order to address the issues that may arise when an Indian company and a foreign company enter into Scheme of merger, demerger, amalgamation, or rearrangement. These Regulations stipulate conditions that should be adhered to by the companies involved in the Scheme. The Regulations shall be named Foreign Exchange Management (Cross Border Merger) Regulations.

Impact on the Industry

Notifying the Section 234 of the Act has no doubt a big move as earlier only inbound merger were permitted whereas now with the notification outbound merger has also been legalized. This paves way for a broader Merger & Acquisition landscape as the option of outbound mergers are now open to companies incorporated in India. It will further facilitate Indian Companies in expanding their horizons for achieving growth, be it for consolidation, acquisitions or internal restructuring. This in return shall ease out the listing of Indian Securities on overseas stock exchanges, and enable provision of exit mechanism to non-resident investors.

Though, this is a welcome move but it shall require alignment of these provisions with other applicable Indian laws and thus comply with such other regulations RBI has already rolled out the draft regulations for stakeholder’s comments and suggestions. Further, under Indian Income Tax Laws, since the capital gain tax benefit is presently available only in case of inbound mergers, one awaits the corresponding changes to the Indian Income Tax Laws with respect to any reliefs for the merging company, its shareholders and the merged company.