Cross-border mergers and the Companies Act, 2013

Reforms by the Indian government in the first decade of this millennium together with long pent-up aspirations of Indian corporations to go global have led to a significant number of outbound acquisitions. This along with the constant need of companies to strengthen their business and broaden their horizon by preserving and optimizing capital makes it inevitable that such companies will explore cross-border mergers.

Cross-border merger in the Indian context would mean merger of a foreign company into an Indian company or vice versa. Under the Companies Act, 1956, it was only permitted to merge a foreign company into an Indian company (albeit subject to foreign exchange laws) and not the other way round, as section 394(4)(b) of that act defined “transferee company” to mean only companies incorporated in India.

Under the Companies Act, 2013, this embargo has been lifted and it seems a green signal has been given for outbound mergers as well. Section 234 of the 2013 act makes the provisions of Chapter XV (Compromises, Arrangements and Amalgamations) applicable mutatis mutandis to mergers and amalgamations between Indian companies and companies incorporated in jurisdictions notified by the central government, and further provides that a foreign company may, with prior approval of the Reserve Bank of India (RBI), merge into an Indian company or vice versa. Section 234 and other provisions of Chapter XV have however not yet been notified and the National Company Law Tribunal (which has been challenged in the Supreme Court) is yet to be set up.

The proposal to permit outbound mergers, though moot at this stage, throws up some interesting questions. While the provisions pertaining to domestic mergers and amalgamations clearly permit compromises and arrangements such as demergers, slump sales, etc., section 234(2) only permits a foreign company to merge into an Indian company or vice versa (with the prior approval of RBI).

There is no obvious reason for this distinction between domestic and cross-border mergers. The 1956 act permits cross-border demergers and slump sales insofar as they pertain to compromises and arrangements where an Indian company is the transferee company.

Another provision that may require a relook is the restriction under section 234 that only permits payment of consideration in cash or depository receipts, or partly cash and partly depository receipts. While the restriction on payment through issuance of shares and other securities (apart from depository receipts) in outbound cross-border mergers is understandable, the reasons for extending such a restriction to inbound cross-border mergers (i.e. where the transferee company is Indian) are not clear, especially since such mergers could be (and were) carried out under the 1956 act. Some of the issues highlighted above can be addressed through the rules that are to be framed under this chapter but such rules have inherent limitations and cannot supplant the legislation or run contrary to its clear provisions.

Amendments required

Effective implementation of the cross-border merger provisions will require amendments to Indian foreign exchange, securities and tax laws. Under extant foreign exchange regulations, a foreign company has limited avenues to establish a place of business in India. Typically this is done through branch offices, project offices, liaison offices, wholly owned subsidiaries, joint ventures, etc. If outbound cross-border mergers are permitted, we may end up with a situation where a foreign company could have business undertakings, operations or properties in India without having a direct physical presence in such a form. While the 2013 act contains specific provisions in Chapter XXII with respect to treatment of foreign companies doing business in India, the foreign exchange regulations will have to be reworked to take into account such eventualities.

The Securities and Exchange Board of India (SEBI) will also need to modify some of its regulations to cater to outbound mergers. If Indian depository receipts can be issued by the foreign transferee company to shareholders of the Indian transferor company, subject to the swap ratio being fair, there may not be many other hurdles from a securities law perspective. However, if consideration is paid in cash then a merger may be viewed as a back-door delisting of an Indian listed company, and SEBI may object under its vetting provisions notified in May 2013.

Certain other securities regulations, including delisting regulations, may also need to be modified to take into account provisions of the 2013 act. Further, tax laws may need to be amended to make outbound mergers tax-protected in the same way as domestic mergers. This will pose challenges in terms of sharing of information between revenue officers of the two countries concerned.

While it is unclear how the proposed cross-border merger provisions will be laid out under various laws, cross-border merger may become a useful tool for companies to undertake expansion and restructuring activities.

Kalpataru Tripathy is a partner, Promode Murugavelu is a principal associate and Medha Kumar is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.