The enforcement of the relevant provisions pertaining to Cross Border Mergers contained in the Companies Act, 2013 by the Ministry of Corporate Affairs with corresponding provisions in Companies (Compromises, Arrangements and Amalgamation) Rules, 2016, including insertion of the Rule 25A and introduction of draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 has ushered in infinite opportunities of partnerships in the form of mergers, consolidations, acquisitions etc.
What makes this event an epochal one is that the notified provisions and the draft regulations not only provide for inbound cross border mergers, but also outbound cross border mergers unlike the erstwhile Companies Act.
As per the notified provisions prior approval of the Reserve Bank of India is the requisite to go ahead with such mergers. And the draft Regulations issued by the RBI provide that cross-border merger shall be deemed to be approved by the RBI if it is accordance with the draft Regulations. Hence once the regulations are notified there will be reduction in the procedural hassles attached to the cross border mergers.
WHAT IS THE GENERAL ELIGIBILITY OF COMPANIES TO ENTER CROSS-BORDER MERGER ARRANGEMENT?
Ans: Section 234 of the Companies Act, 2013 provides for scheme of mergers and amalgamations between Companies registered under the said Act and Foreign Companies. However, in case of Outbound mergers only Companies which are incorporated in the Jurisdictions of such Countries which are notified by the Central Government are eligible.
ARE ANY SUCH JURISDICTIONS NOTIFIED BY THE CENTRAL GOVERNMENT?
Ans: Yes, pursuant to the insertion of Rule 25A in Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 vide amendment notification dated 13.04.2017 an Indian company can merge with foreign companies located in the following specific jurisdictions only:
Jurisdictions whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A signatories) or is a signatory to a bilateral Memorandum of Understanding with the Securities and Exchange Board of India.rnJurisdictions whose central bank is a member of Bank for International Settlements (BIS).rnJurisdictions that are not identified in the public statement of Financial Action Task Force (FATF) as:rnJurisdictions having strategic anti-money laundering or combating of financing of terrorism deficiencies to which counter measures applyrnJurisdictions that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies. Countries which come under this list include Democratic People’s Republic of Korea, Iran, France, Iraq, Afghanistan, Yemen, Bosnia and Herzegovina, Ethiopia, Lao PDR, Syria, Uganda and Vanuatu as per public statement issued on 24th February 2017.rnHence Cross border merger transactions with such countries is disallowed. Jurisdiction is only for outbound merger and amalgamation.
WHAT ARE THE ADDITIONAL COMPLIANCES STIPULATED IN CASE OF OUTBOUND/INBOUND MERGERS?
Ans: Apart from complying with the provisions stipulated under Section 230 to 232 of the Companies Act, 2013 read with the rules made thereunder the following additional compliances in case of outbound mergers are enumerated in Rule 25A of Companies (Compromises, Arrangements and Amalgamation) Rules, 2016:-
Prior approval of RBI is mandatory in case of cross border mergers.rnIn terms of the said rule Valuation in case of cross border merger, the following must additionally be ensured:rnThe foreign company is required to ensure that valuation is conducted by valuers who are members of a recognized professional body in the jurisdiction of such foreign company.rnThe valuation is conducted in accordance with internationally accepted principles on accounting and valuation.rnA declaration in relation to the above-mentioned points are submitted along with the application to the RBI seeking approval for such merger or amalgamationrnWHAT ARE THE PERMITTED MODES OF CONSIDERATION?
Ans: Consideration can be paid in Cash or in the form of Shares or in the form of Depository Receipts. Consideration can also be partly in one form and partly in the other.
IS MANDATORY FOR SUCH FOREIGN COMPANIES TO HAVE A PLACE OF BUSINESS IN INDIA?
Ans: No, a Foreign Company irrespective of having a place of business in India, in case of Outbound as well as Inbound merger, if it falls under the jurisdiction Notified as earlier stated can merge or be merged with a Company registered in India.
WHAT ARE THE TAX IMPLICATIONS PROVIDED FOR W.R.T. SUCH CASES?
Ans: Under provisions of Indian Tax Laws, In case of Inbound Mergers tax neutral status is declared for the merging Company as well as it’s shareholders in case all the assets and liabilities are transferred and continuity of Shareholders holding minimum 75% shares
Conclusion
It may be concluded that while in the past inbound mergers have generally been implemented for consideration in the form of shares, the new corporate law provisions also permit payment of consideration in the form of depository receipts and cash. In the absence of specific tax provisions for taxing such transactions, the tax implications on the merging company and shareholders remain ambiguous.
Also as regards an overseas merging company, in case it does not have any assets situated in India, there may be no tax implications in India. Similarly, in the hands of shareholders, there would be no capital gains implications on transfer of shares of the merging foreign company in India unless the shareholders are Indian tax residents or such shares derive their value substantially from assets in India (resulting in the trigger of indirect transfer provisions under the Indian tax laws). Nevertheless, non-resident shareholders of the merged Indian company may be able to claim exemption under the relevant tax treaty.
Unlike inbound mergers, the existing framework of Indian tax laws does not provide a taxation mechanism for outbound mergers. Taxation of outbound mergers may be more complex than that of inbound mergers because that the merging company is not an Indian company or the shareholders may not always be Indian residents. However, it can be provided for adjudication and payment of Taxes prior to the dissolution of the Indian Company.
In case of Outbound mergers, the draft RBI guidelines provide that such outbound mergers shall be deemed to be approved by the RBI if they are in accordance with the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, the Liberalized Remittance Scheme, etc., as applicable.
Also Despite these shortcomings bringing into effect new provisions is a progressive move which has the potential to bring global economies closer and open a host of opportunities by facilitating global acquisitions, sale transactions, consolidations and restructuring for Indian companies and provide greater ease and flexibility in making strategic business decisions.