Cross-border mergers: the changing contours

The significance of a friendly and facilitating regulatory framework is highlighted by the success of the Bharti-Zain deal that followed earlier unsuccessful attempts by Bharti-Airtel to merge with MTN. Several regulations and legal provisions are expected to come into force this year that stand to significantly impact cross-border M&A involving Indian entities.

Expecting change

The current framework pertaining to mergers, which is covered under sections 391-394 of the Companies Act, 1956, is set to undergo a significant change with legislators introducing an enabling provision in the Companies Bill, 2009. The bill seeks to provide for Indian companies to act as the transferor and merge with a foreign company, the transferee. This is a structure that is not permitted under current regulations.

Under section 394 of the Companies Act, 1956, an Indian company can only be a transferee, and while it provides that a foreign company may merge into an Indian company, the reverse is not permitted. This is at times seen by Indian companies as an impediment to their growth and expansion in overseas markets. Section 205 of the Companies Bill, 2009, seeks to permit companies registered under this act and companies incorporated in other jurisdictions to amalgamate with one another and to remove the restriction against an Indian company being a transferor company.

Faster amalgamation

In section 202 of the bill, the court’s role is sought to be broadened from being merely supervisory to include measures that may be taken by it for the implementation of the amalgamation scheme. Section 201(5) provides that the court shall intimate all concerned regulatory bodies of any amalgamation and invite any comments and objections to the same. This makes the amalgamation process faster and more organized.

A notable change being sought by the Companies Bill, 2009, with regard to mergers is through section 204, which provides for the amalgamation of “certain companies”. This section has been included to give statutory effect to the law laid down in various cases such as Andhra Bank Housing Finance Ltd v Andhra Bank and In Re Vibank Housing Finance Ltd, that a transferor company can amalgamate with a transferee parent company, which might be a body corporate, if the scheme is to take place between a holding company and a subsidiary company, where the holding company is the body corporate. This section makes express provision for the regulation of amalgamations between holding and subsidiary companies.

Changes to FEMA

In the event that the Companies Bill, 2009, is passed in its present form, simultaneous amendments to the Foreign Exchange Management Act would need to be made, in order to complete the regulatory framework that enables the merger of an Indian company with a foreign company. The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20), through regulation 7, grants general permission share issues to shareholders of the transferor company resident outside India, following a court approved scheme of merger or amalgamation of two or more Indian companies.

Seeking approval

Foreign direct investments are permitted only in accordance with the regulations under the exhaustive legislation in FEMA 20. Any deal outside its ambit requires prior government approval acting through the Foreign Investment Promotion Board (FIPB) or the Secretariat of Industrial Assistance. This makes any merger of an offshore entity acting as the transferor with an Indian company clearly outside the ambit of FEMA 20. As such, these transactions require FIPB approval, which has been granted on a case-by-case basis, such as the approvals granted to Moschip Semiconductor Technology.

Even though the Reserve Bank of India has not issued any formal clarifications in this respect, press reports suggest that the central bank appears amenable to amend FEMA to finally permit shareholders of Indian companies to contribute their Indian assets to foreign companies and be stakeholders at that level. While the precise form of this amendment has not been clarified, there are discussions on allowing an Indian company to continue as a branch of a foreign company post merger and consequently have it comply with the provisions of FEMA in respect of remittance of funds, business activities, repatriation of profits, etc.

Whether the proposed structures will result in consolidation of Indian companies with their global counterparts or in the draining of Indian businesses and parking of wealth by Indians in global markets remains to be seen. But for now the legislature and regulators look set to provide greater flexibility in structuring cross-border M&A.

Harry Chawla is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co, where Niti Paul is a principal associate. The views expressed in this article are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.