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