Cross-Border Acquisitions Recent Trends

Regulatory clarity around cross-border demergers and further liberalisation in policies is needed to realise India’s potential in terms of investment opportunities

As for the data provided by the Institute for Mergers, Acquisitions, and Alliances (IMAA), there was a general increase in cross-border M&A deals from 472 in 1985 to 8,500 in 2023. India’s deal value in M&A activity decreased by 27% in 2023 compared to 2022. This indicates that the value of M&A deals in India decreased from US$186 billion in 2022 to US$136 billion in 2023.

There have been several decisions by the courts and tribunals creating certainty around the permissibility of cross-border transactions.

The Companies Act of 2013 formally recognised cross-border mergers in 2017 by notifying Section 234 on ‘Merger or Amalgamation of Company with Foreign Company’. However, such schemes require prior RBI approval and are limited to specific jurisdictions. Accordingly, in 2018, the RBI notified the Foreign Exchange Management (Cross Border Merger) Regulations to implement cross-border mergers. Despite these changes, legal uncertainty remained due to conflicting NCLT rulings on cross-border demergers.

In 2018, the NCLT Ahmedabad approved an inbound demerger of a foreign company with an Indian company interpreting a broad definition of ‘mergers and amalgamations’ under Section 234 of the Companies Act.

However, the same NCLT in 2019 in the case of Morgan Stanley, denied an outbound demerger of Indian undertakings to an overseas subsidiary and said that Section 234 and the related rules do not allow demergers, thereby leaving general cross-border demergers in uncertainty.

To ease, these transactions, in August 2022, the Indian government notified new Foreign Exchange Management (Overseas Investment) Rules and Regulations, replacing the previous 2004 regulations which aimed to simplify the legal framework for overseas investments by Indian entities. These Rules try to create a more conducive environment for Indian entities to invest abroad. They explicitly classify demergers as a permissible route for overseas investments. This potentially reopens the discussion on cross-border demergers and signals the RBI’s willingness to allow such transactions from a foreign exchange perspective.

Nevertheless, following objections raised by the NCLT with reference to the literal interpretation of Section 234 of the Companies Act remained undiscussed.

But the trend does indicate that NCLT has somewhat restricted itself in challenging schemes, which were supported by commercial wisdom and majority approvals. Creditors of the Zee group, including the likes of Axis Finance and Yes Bank objected to a merger between Zee Entertainment Enterprises Limited (ZEEL) and India operations boards which basically represents Sony’s Indian arm — Culver Max Entertainment Private Limited. The oppositions primarily revolved around two crucial issues – the `1,100 crore non-compete fee given by a Sony entity to an arm of Zee (Essel Mauritius) with allegations that it was nothing but a fraudulent device to defraud creditors and the appointment of Punit Goenka as CEO of the merged company despite the SEBI order censuring him from holding directorial positions.

The NCLT rejected these objections saying the creditors who raised them were owed by other Zee group entities and not by Zee Entertainment itself. Hence, they lacked locus standi to object. In addition, the outstanding amounts were contested and not liquidated. The NCLT had said the deal valued Jet at less than half its liquidation value but found that the interests of creditors would be protected as net worth gets transferred with the merged entity. Furthermore, under sections 230-232 of the Companies Act, 2013, objections to a scheme require creditors to meet certain thresholds (5% debt or 10% shareholding), which the objectors failed to meet.

Citing precedent from Miheer H. Mafatlal v. Mafatlal Industries Ltd. JT 1996 (8) 205 (SC), the NCLT noted that it could not interfere with a scheme unless it was “unconscionable, illegal, unfair or unjust.” The NCLT noted that since the majority of shareholders and creditors have approved the scheme, there shouldn’t be any intervention on their part. The objection to the appointment for Goenka, NCLT approved of it however his role was subject to be decided by the board and SEBI rulings in the future.

Another decision by NCLT suggests another trend emphasising the importance of public interest. In the case of Wiki Kids Limited v. Regional Director and Others [Company Appeal (AT) No. 285 of 2017], the National Company u Law Appellate Tribunal (NCLAT) upheld the National Company Law Tribunal’s (NCLT) decision to reject a scheme of amalgamation since no evident public interest was involved.

It observed that Wiki Kids was incorporated in 2004 and does not have any commercial operations or income except for the interest received from fixed deposits. Which had used almost all its paid-up capital — thereby reducing it net worth to `22 lakh. Under the newly proposed share exchange ratio, Wiki Kids shareholders were to get 4 lakh Avantel shares translating into ~ `12.4 crores in value for transfer of business though compared to net worth of only `~1 crore on Wiki Kids books! Since the promoters of Avantel were owning 99.9% Wiki Kids, NCLT observed that it was a clear scheme to benefit the promoters financially by `12 crores and hence against public interest.

On appeal, the Appellants argued that the scheme was in compliance with all legal requirements, and that no objections had been raised by authorities like the Securities and Exchange Board of India (SEBI) or the Income Tax Department. They also claimed that the share exchange ratio was fair, based on expert valuations and potential future business growth. However, the NCLAT rejected these arguments, emphasising the disclaimer in the valuation report, which disclaimed the accuracy of the information provided by the management. The NCLAT ruled that schemes of amalgamation must benefit all shareholders and not just a few. It also affirmed the NCLT’s jurisdiction to assess whether a scheme is fair, even if detailed mathematical analysis is not involved. The tribunal distinguished the case from precedents such as M/s Miheer H. Mafatlal v. Mafatlal Industries Ltd. (supra) and Hindustan Lever Employees’ Union v. Hindustan Lever Ltd.(civil) No. 11006 of 1994 (SC), stating that the facts were different, and the scheme in question unduly favoured the promoters. It is notable that courts, relying on the ruling of the SC in Miheer H Mafatlal have generally held that the scope of judicial review in such matters is highly limited, and not appealable in nature. As long as there are no objections to a scheme no fault or illegality has been pointed out, and relevant documents have been placed before concerned parties at the relevant time, courts have been held not to be in a position to interfere with schemes of arrangement. This is because such schemes are based on the wishes of concerned shareholders, creditors, experts, and professionals, apart from competent authorities, after scrutiny of the accounts and affairs of the companies.

Conclusion and analyses

As India continues to present attractive investment opportunities due to its strong economic growth and large domestic market, cross-border acquisitions are likely to increase. But, regulatory clarity around cross-border demergers and further liberalisation in policies will be needed to realise this potential. The stable GDP growth of the country along with a well-regulated inflation rate has been appealing for overseas investors in any sector. Recent NCLT decisions have highlighted two important trends: A limited scope for challenging schemes backed by commercial wisdom and majority approvals, as seen in the Zee-Sony merger case and an emphasis on public interest in approving schemes of amalgamation, as demonstrated in the Wiki Kids Limited case. Greater clarity in regulations and a more friendly regulatory environment for cross-border M&A would result in higher FDI inflows. When carried out as envisaged, cross-border M&As can spur economic growth by introducing new technologies, know-how and capital.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.