The Reserve Bank of India (RBI) has framed new rules for mergers, amalgamation and arrangement between Indian and foreign companies under Foreign Exchange Management Act (FEMA), 1999. The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“RBI Cross Border Merger Regulations”), will cover both inbound and outbound investments. The Regulations come into effect to encourage foreign direct investments into the country to allow cross-border mergers and amalgamation.
The Ministry of Corporate Affairs had already amended Section 234 of the Companies Act, 2013 set to ease the way for merger and amalgamation (M & A) of a foreign company with an Indian company and vice-versa.
As per the Cross Border Merger Regulations in the case of inbound merger, the rules allow the resultant company to issue or transfer any security to a person resident outside India subject to pricing and sectoral foreign investment conditions and FEMA Rules and in case of outbound merger, the rules allow resident Indian entities to acquire or hold securities of the resultant company in accordance with FEMA Regulations. Further, any compensation to the shareholders by the resultant Indian company or foreign company may be paid in accordance with the scheme sanctioned by the National Company Law Tribunal (NCLT).
RBI as per the Cross Border Merger Regulations allow the Indian company outside India to hold the assets and anything which is not permitted to be acquired or held has to be disposed off within a period of two years from NCLT’s sanction date. RBI with a purpose to enhance the cross-border M&A activity, set the rules which will allow Indian companies to merge their foreign businesses with their domestic companies while foreign companies will no longer be required to maintain an Indian company after a merger and instead fold it up into a single entity.
Key features of the RBI Cross Border Merger Regulations are as under:
|Particulars||Inbound Merger||Outbound Merger|
|Mechanics||A merger or amalgamation of foreign company with an Indian company;||A merger or amalgamation of Indian company with a foreign company;|
|Issue / Acquisition of securities pursuant to cross-border merger||Issuance/ transfer of shares to person resident outside India should comply with the pricing guidelines, entry routes, sectoral caps, attendant conditions and reporting requirements as laid down in Foreign Exchange Management (Transfer and issue of Security by a person Resident outside India) Regulations, 2017.
However, if the foreign company is joint venture (“JV”)/ wholly owned subsidiary (“WOS”) of Indian company then conditions prescribed under Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 shall need to be complied by Indian company.
Further, in case the merger of the JV/ WOS results into acquisition of step down subsidiary of JV/ WOS of the Indian party, then Regulation 6 and 7 of Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 shall need to be complied with;
|A person resident in India may acquire or hold securities of the foreign Company pursuant to the outbound merger in accordance with current regulations pertaining to investment in Joint Venture / Wholly Owned Subsidiary abroad or the Liberalized Remittance Scheme (“LRS”), as applicable.
|Office outside/ in India||An office outside India of the foreign company, pursuant to the sanction of the Scheme shall be deemed to be the branch/office outside India of the resultant Indian company in accordance with Foreign Exchange Management (Foreign Currency Account by a person resident in India), Regulations, 2015. Accordingly, the resultant Indian company may undertake any transaction as permitted to a branch/ office under the aforesaid Regulations;||An office in India of the Indian company, pursuant to sanction of the Scheme of cross border merger, may be deemed to be a branch office in India of the foreign company in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business), Regulations, 2016. Accordingly, the foreign company may undertake any transaction as permitted to a branch office under the aforesaid Regulations;|
|Conditionalities on Borrowings||Any borrowing or guarantees of the foreign Company from overseas source which becomes the borrowing of the Indian company pursuant to inbound merger shall conform with the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowings norms within a period of two years.
In the initial two years, the Indian company will not be able to make remittance for repayment of the foreign liability.
Further, end use restrictions for such borrowings shall not apply;
|Foreign Company shall be liable to repay outstanding borrowings or guarantees as per the Scheme sanctioned by National Company Law Tribunal (“NCLT”) in terms of the Companies (Compromise, Arrangement or Amalgamation) Rules, 2016 pursuant to the outbound merger.
However, the resultant foreign company shall not acquire liability payable to lender in India if the same is not in conformity with Foreign Exchange Management Act, 1999 (“Act”), rules or regulations framed by the RBI.
Further, no-objection certificate to this effect shall need to be obtained from the lenders in India of the Indian company;
|Acquisition / Holding of assets or securities||An Indian company may acquire and hold any assets/securities outside India pursuant to the inbound merger, which an Indian Company is permitted to acquire under the current provisions of the Act, rules or regulations framed by the RBI;||Foreign Company may acquire and hold any assets/securities in India pursuant to the outbound merger which Foreign Company is permitted to acquire under the provisions of the Act, rules or regulations framed by the RBI;|
|Transfer of assets / securities not permitted to be acquired / held||In a situation where an Indian company is not permitted to acquire or hold any assets/securities outside India which is forming part of the foreign Company under inbound merger, such assets/securities need be transferred by the Indian company within a period of two years from the date of sanction of the Scheme and sale proceeds shall be repatriated to India immediately through banking channels.
Any liabilities not permitted to be held by the Indian company, the same may be extinguished from the sale proceeds of such overseas assets within a period of two years;
|In a situation where foreign company is not permitted to acquire or hold any assets/securities in India which is forming part of an Indian Company under outbound merger, such assets/securities can be transferred by the foreign company within a period of two years from the date of sanction of the Scheme and sale proceeds shall be repatriated outside India immediately through banking channels.
Repayment of Indian liabilities from sale proceeds of such assets/securities within a period of two years shall be permissible;
|Bank accounts||Pursuant to the Scheme of inbound merger, the resultant Indian company may open a bank account overseas, in foreign currency for a maximum period of two years from the date of sanction of Scheme;||Pursuant to the scheme of outbound merger, the resultant foreign company may open Special Non-resident Rupee (“SNRR”) account in India in accordance with Foreign Exchange Management (Deposits) Regulations, 2016 for a maximum period of two years from the date of sanction of Scheme;|