CROSS-BORDER REGULATIONS A STEP TOWARDS GLOBAL INTEGRATION

I

n the last few months, India has witnessed

significant legal transformation in foreign exchange

control norms and the merger/acquisition regime,

which should enable Indian companies to gain from

the world economy. The Government of India has

abolished the Foreign Investment Promotion Board (“FIPB”)

and handed over the government approval mechanism to respective administrative Ministries/Departments. This should simplify the approval mechanism and make it easier

for foreign companies to invest in Indian companies covered

by sectors wherein government approval was required.

On April 13, 2017, the government issued the following

announcements:

• notification

  of Section

  234 of the Companies

  Act, 2013

  (“Act”) (merger or amalgamation of a company with a

  foreign company in the specified jurisdictions), and

• insertion

  of new sub-rule

  25A (merger

  or amalgamation

  of a foreign

  company

  with a company

  and vice-versa)

  in the Companies

  (Compromises,

  Arrangements

  and

  Amalgamations) Rules, 2016 (“Compromise Rules”).

With these developments, Indian companies will have

additional ways to have a presence in overseas jurisdictions.

Outbound mergers will also allow Indian companies to get

access to overseas listing of their business by merging with

a foreign-listed company.

Cross-border

mergers/acquisitions

are also

regulated by the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act, 1999 (“FEMA”) read along

with regulations, guidelines, directions issued by RBI. On April 26, 2017, RBI published the draft Foreign Exchange Management (Cross-Border Merger) Regulations, 2017 (“Draft Regulations”).

As per Regulation 8 of the Draft Regulations, if all

requirements stipulated in the Draft Regulations and Rule

25A of the Compromise

Rules are completed,

then the cross-

border merger transaction would be deemed to have been

approved by RBI. However, there is no timeframe stipulated

for RBI to respond

to an application

under

Rule 25A of the

Compromise

Rules,

or for deemed

approval

by RBI, while

under

Rule 8 (3) of the Compromise

Rules,

30 (thirty)

days’

time is available to statutory authorities to send their

representation

to the National

Company

Law Tribunal

(“NCLT”) on the application made to them by the applicant,

and if no such representation

is received

by NCLT from such

statutory authorities then it shall be presumed that the

authorities have no representation to make on the proposed

scheme of compromise or arrangement.

Inbound Mergers

In case of an inbound merger/acquisition, the Draft

Regulations provide that upon sanction of the scheme of

merger

by NCLT, the resultant

company

may issue or transfer

securities to a person residing outside India in accordance

with the Foreign Exchange Management (Transfer or Issue

of Security

by a Person

Resident

outside

India)

Regulations,

2000.

All borrowings or impending borrowings of a foreign

company from overseas sources, which would become the

borrowings of the resultant company in India, shall be in

conformity with the parameters stated under the external

commercial borrowing norms or trade credit norms or

other foreign borrowing norms as laid down under the

Foreign

Exchange

Management

(Borrowing

or Lending

in

Foreign Exchange) Regulations, 2000 or Foreign Exchange

Management (Guarantee) Regulations, 2000 as applicable.

The resultant company in India shall acquire and hold

assets outside India as permitted under the provisions of

FEMA and rules and/or regulations framed thereunder.

For instance, the resultant company may acquire

immovable property outside India for its business and

for residential purposes for its staff in accordance with

Regulation

5 of the Foreign

Exchange

Management

(Acquisition and Transfer of Immovable Property outside

India) Regulations, 2015.

Outbound Mergers

The resultant company in the specified foreign jurisdiction

may acquire and hold any asset whether movable/

immovable in India, which a foreign company is permitted

to acquire under the provisions of FEMA and rules

and/or regulations framed thereunder, including the

Foreign Exchange Management (Acquisition and Transfer

of Immovable Property in India) Regulations, 2000.

Other Provisions Of The Draft Regulations

In case of both inbound and outbound mergers/acquisitions,

the resultant company is required to sell such assets or

securities which are prohibited from being acquired under

the provisions of FEMA and rules and/or regulations framed

thereunder within a period of 180 (one hundred and eighty)

days from the date of sanction

of the scheme

of cross-

border merger. The proceeds from such sale are required

to be repatriated either to or from India, as the case may

be. The Draft Regulations are silent as to what happens if

the resultant company does not conduct such sale in the

stipulated time.

The valuation of the Indian company and foreign company

for the purpose

of a cross-border

merger

are required

to be

done as per internationally accepted pricing methodology

for valuation

of shares

on arm’s-length

basis,

which

is

required to be duly certified by a chartered accountant/

public accountant/merchant banker authorized to do so in

either jurisdiction.

The Draft Regulations require all transactions arising due

to cross-border

merger

to be reported

to RBI by the Indian

company

and foreign

company

involved

in the cross-border

merger, as may be prescribed from time to time.

We await

the final Foreign

Exchange

Management

(Cross-

Border Merger) Regulations, 2017 to be issued and notified

by RBI.

Disclaimer

– The views expressed in this article are the personal

views of the authors and are purely informative in nature.