03 四月 2018

Cross-border Mergers – Analysis of FEMA provisions

by Mallika Shekhar


On 13th April 2017, the Ministry of Corporate Affairs (MCA) notified Section 234 of the Companies Act, 2013 and inserted a new Rule 25A (merger or amalgamation of a Foreign Company with Indian company and vice-versa) in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Compromises Rules), paving way for merger and amalgamation of a Foreign Company with an Indian company and vice-versa. Since Rule 25A required prior approval of the Reserve Bank of India (RBI) for cross-border merger, without corresponding procedural aspects in place, cross-border merger could not take-off.   Now, with the RBI notifying the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations/Regulations) for mergers amalgamation and arrangement between Indian and foreign companies on 20th March 2018, this gap has been bridged.

Crucial definitions

The FEMA Regulations cover both inbound and outbound investments. The term “Inbound Merger” means a Cross Border Merger where the Resultant Company is an Indian company whereas “Outbound Merger” means a Cross Border Merger where the Resultant Company is a Foreign Company. The “Resultant Company” means an Indian company or a Foreign Company which takes over the assets and liabilities of the companies involved in the cross-border merger. FEMA Regulations define “Cross Border Merger” as any merger, amalgamation or arrangement between an Indian company and a Foreign Company in accordance with the Compromises Rules. The term “Foreign Company” has been defined as any company or body corporate incorporated outside India in a jurisdiction specified in Annexure B to Compromises Rules whether having a place of business in India or not.


Cross-border merger: Procedural aspects

Inbound Mergers

When the Resultant Company is an Indian Company, the following procedure becomes applicable:

i. Issue/Transfer of securities :

The issue or transfer of any security and/or a foreign security, to a person resident outside India should be made in accordance with the pricing guidelines, entry routes, sectoral caps, attendant conditions and reporting requirements for foreign investment as laid down in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO). However, this is subject to the following conditions:

  1. where the Foreign Company is a joint venture (JV) or a wholly owned subsidiary (WOS) of the Indian company, it shall comply with the conditions prescribed for transfer of shares of such JV/ WOS by the Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (TIFS); 
  2. where the Inbound Merger of the JV/WOS result into acquisition of the Step-down subsidiary of JV/ WOS of the Indian party by the Resultant Company, then such acquisition should be in compliance with Regulation 6 and 7 of TIFS which provide for permission for direct investment in certain cases and investment by Indian party engaged in financial services sector respectively.


ii. Borrowings :

Any borrowing of the Foreign Company from overseas sources that becomes the borrowing of the Resultant Company shall conform within a period of two years, to Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.

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