India’s stand on cross border M&As – Dawn of a New Era

May 19,2017
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Nilesh Vichare (Executive Director, EY)

Historically, Companies Act, 1956 (‘the 1956 Act’) permitted merger of a foreign company with an Indian company (colloquially also referred to as inbound merger). However, reverse merger of an Indian company with a foreign company (referred to as outbound merger), was prohibited.

Companies Act, 2013 (‘the 2013 Act’) which replaced the 1956 Act, recognised outbound mergers for the first time in the Indian history. When the draft provisions of the 2013 Act were released, a wave of positive economic sentiment was witnessed. India was addressing to globalised business needs of the modern world and paving way for a larger merger and acquisition landscape.

Another noteworthy modification by the 2013 Act was that, since December 2016 the power to sanction all scheme matters of Compromise, Arrangements and Amalgamations was granted to a quasi-jurisdictional body, the National Company Law Tribunal (‘NCLT’) and correspondingly the powers of the Jurisdictional High Court were revoked.

Though NCLT has been the approving body for domestic mergers since December 2016, section 234 of the 2013 Act governing cross border mergers had not been notified. This led to a temporary lull in law where neither the Jurisdictional High Court nor the NCLT could approve cross border mergers.

Notification from the Ministry of Corporate Affairs (‘MCA’) on 13 April 2017, finally permitting cross border merger (ie section 234 of the 2013 Act), eased this anxiety. As per the notification, cross border mergers (both inbound and outbound) will need RBI approval in addition to approval of the NCLT.

Since there were no provisions under the current FEMA law which provided a mechanism to facilitate RBI approval on cross border mergers, a consequential FEMA notification was expected. On 26 April 2017, the RBI released draft guidelines for cross border mergers which were open for public comments until 9 May 2017.

Primarily the essence of the RBI guidelines is that a merger route cannot be a mode in which companies may be able to seek exemptions from current FEMA guidelines (such as Foreign Direct Investment (FDI), External Commercial Borrowing (ECB), Liberalised Remittance Scheme (LRS) or the Overseas Direct Investment (ODI). For instance, in cases of inbound mergers, issue of shares to non-resident should be in compliance with FDI guidelines

Given this, it appears that mergers of large conglomerates with their foreign parent companies still does not seem to be possible under the guidelines.

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