Structuring Cross-Border Mergers and Acquisitions

Cross-border mergers and acquisitions (M&A) involve companies from different countries coming together. It can be two firms from different countries forming a new entity or a company in one country buying another in another. There are many things that should be considered when structuring these agreements including laws, regulations, cultures and financials among others. The Ministry of Corporate Affairs notified the Companies Act 2013 Section 234 which allows for cross-border mergers on April 13^th2017. So, before this could take place the Reserve Bank of India had to enact laws that would enable it.

Regulatory Framework

In India, cross-border transactions are primarily governed by

Outbound and Inbound Mergers

There are two possible types of cross border mergers, Inbound or outbound mergers are both possible types of cross-border mergers. An inward merger is a cross-border merger in which the resulting entity is situated in India. Outbound merger is the term used for a cross-border merger where the resulting entity is a foreign corporation. In this case, a resultant organization either Indian or foreign company takes over assets as well as liabilities of firms involved in such mergers across national borders.

Key requirements of the Cross-Border Regulation In the event of inward mergers

a) Securities Issuance

As a consideration, the Indian business would issue or transfer securities to the transferor entity’s shareholders, which might include both Indian and non-Indian citizens. The issue of securities by a person residing outside of India must follow the price standards, sectoral caps, and other applicable guidelines set forth in the Cross-Border Regulation. If the foreign firm is a joint venture or a wholly-owned subsidiary, it must adhere to the criteria set out in the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. Furthermore, if the inward merger of the JV/WOS leads to the Resultant Indian business acquiring one or more step-down subsidiaries of the Indian party, such purchase must comply with Regulations 6 and 7 of the ODI Regulations.

b) Assets and Liabilities Vesting

Any borrowings or guarantees of the transferor firm will become the resulting business’s borrowings or guarantees. To comply with the external commercial borrowings’ compliance, a two-year timetable has been specified. In such instances, the end-use restrictions would not apply.

Any asset purchased by the resulting corporation can be transferred in any way allowed by the Act or regulations. If such an asset is not authorized to be purchased, the resulting firm must sell it within two years of the National Company Law Tribunal (NCLT) issuing the decision, and the sale profits must be immediately returned to India through banking channels. Where the resultant business is not authorized to have any obligation outside of India, the liability may be eliminated from the sale profits of such foreign assets within two years.

c) Valuation

The valuation shall be performed in accordance with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, that is, by Registered Valuers who are members of recognized professional bodies in the transferee company’s prescribed jurisdictions, and in accordance with internationally accepted accounting and valuation principles.

d) Outside India, there is a branch/office.

In line with the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015, a foreign company’s office/branch outside India shall be regarded to be the resultant company’s office outside India.

The Cross-Border Regulation’s Key Provisions in the Case of Outbound Mergers

Securities Issuance

As a consideration, the Foreign Company would issue securities to the Indian entity’s shareholders, who might include both Indian and non-Indian residents. If shares are purchased by a person who is a resident of India, they will be subject to the RBI’s ODI Regulations.

Assets and Liabilities Vesting

The guarantees or borrowings of the resulting business must be repaid according to the NCLT-approved arrangement. Furthermore, they should not take on any obligation that is not in accordance with the Act or the rules. The Indian company’s lenders in India should provide a no-objection certificate to this effect.

Any asset acquired may be transferred in any way permitted by the Act or the rules enacted thereunder. If the resultant firm is unable to hold or purchase it, it must be sold within two years of the NCLT’s approval of the plan, and the sale profits must be quickly transferred outside India through banking channels. It is allowed to repay Indian debts with revenues from the sale of such assets or securities within two years.

Establishing a Bank Account

For a maximum of two years, after the NCLT approves a plan, the resultant firm is allowed to create a Special Non-Resident Rupee Account (SNRR Account) for the purpose of supervising activities relating to the merger.

Valuation

The valuation shall be carried out in accordance with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, that is, by registered valuers who are members of recognized professional bodies in the transferee company’s prescribed jurisdictions, and in accordance with internationally accepted accounting and valuation principles.

Merger OR Amalgamation of the company with foreign company: Procedure under section 234 of the Companies Act of 2013

• Unless otherwise specified by any other legislation in force at the time, the provisions of this Cross-border merger shall apply mutatis mutandis to schemes of mergers and amalgamations involving businesses registered under this Act.
• And Companies formed in the territories of such nations like the Central Government may notify from time to time. Provided that The Central Government may adopt regulations in connection with mergers and amalgamations under this provision, in conjunction with the Reserve Bank of India.
• (2) Subject to the requirements of any other legislation in effect at the time, a foreign company may merge with a company established under this Act or vice versa with the prior consent of the Reserve Bank of India.
• In addition, the terms and conditions of the merger scheme may provide, among other things, for payment of consideration to the merging company’s shareholders in cash, Depository Receipts, or a combination of cash and Depository Receipts, as the case may be, according to the scheme to be drawn up for the purpose.
• After getting previous Reserve Bank of India permission and following with the provisions of sections 230 to 232 of the Act and these regulations, a foreign company established outside India may combine with an Indian business.
• After receiving previous Reserve Bank of India permission and following with the provisions of sections 230 to 232 of the Act and these regulations, a business may combine with a foreign company established in any of the jurisdictions listed in Annexure B.

Conclusion

The world’s industries have been reshaped by a rapid increase in cross-border mergers and acquisitions. As per the Companies Act, 2013, and the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, a cross-border merger and acquisition definition can be basically referred to any merger, amalgamation or arrangement between an Indian company and a foreign company. In simple terms, it is the coming together of two companies from different nations to create a third entity.

It may be achieved through partnership between an Indian and overseas firm or vice versa i.e., either way; one country’s organization buys another nation’s establishment which can be either government owned enterprises or public sector units etc. where one jurisdictional organization purchases corporation situated within its borders while located elsewhere abroad.