New Rules for Cross Border Mergers of Indian Companies

Introduction

The ministry of corporate affairs of India has notified Section 234 of the Companies Act, 2013 which deals with the provisions for amalgamation or merger of an Indian company with a foreign company through their notification dated 13 April 2017. Further, insertion of Rule 25A to the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016 have opened doors for outbound mergers of Indian companies with foreign companies which was not allowed in previous company law legislation (Companies Act, 1956). This article shall highlight important provisions of newly notified law.

The Conditions

Prior approval from the Reserve Bank of India (RBI) will be required for merger of a foreign company, incorporated in notified jurisdictions with an Indian company and vice versa. In line with the same, the RBI has also released draft regulations for cross border mergers on 26th April 2017 and public comments on the same are invited till 9 May, 2017.

The valuation of the continuing entity should be done by member of a recognized professional body and a report should be prepared as per internationally accepted standards of accounting and valuation and shall be submitted to RBI.

Approvals from shareholders, creditors, national company law tribunal (NCLT), securities and exchange board of India (SEBI), Industry specific regulators and income tax authorities should be obtained as per provisions of Section 230-232.

The scheme drawn for the proposed merger and amalgamation may provide for payment in depository receipts, cash or partly in both to the shareholders of the merging company.

Permitted Jurisdictions

Rule 25 A states that an Indian company may merge with a foreign company incorporated in specified jurisdiction, after complying with the provisions of Companies Act, 2013 and the rules thereto. The specified jurisdictions are:

1. A jurisdiction whose securities markets have signed the memorandum of understanding with the International Organization of Securities Commission’s or the SEBI.
2. A jurisdiction whose central bank is a member of the Bank for International Settlements (BIS).
3. A jurisdiction which is not identified as a jurisdiction combating with the financing of terrorism activities or having a strategic anti money laundering by the Financial Action Task Force (FATF).
4. Any such jurisdiction which has not achieved specified sufficient progress or has not committed to the action plan with FATF to address the deficiencies.

Brief Procedure

• The company must be authorized through its Memorandum and Articles of Association to undergo cross border merger and amalgamation.
• Draft scheme for the merger should be prepared and approval of board of directors should be obtained.
• Once, the approval from the board is obtained, the company should seek approval from the RBI.
• After obtaining RBI approval the company should file an application with NCLT to call a meeting of shareholders and creditors (if any) to approve the scheme of merger and amalgamation. The NCLT have the right to approve or reject the company’s application.
• If the NCLT approves, company’s application to conduct the meeting the company should give notice to members/ creditors and it should also be published on company’s website, newspapers and the notice of the meeting should also be given to the SEBI and stock exchanges where company’s shares are listed.
• The notice should also be given to regulatory authorities e.g. income tax authorities, Registrar of Companies (RoC) and other sectoral regulatory authorities.
• The reports for result of meeting should be filed with NCLT within three days of the meeting. If the scheme is approved by majority stakeholders, the petition for compromise and arrangement shall be made within seven days of filing the report of result of meeting.
• The tribunal after verifying the compliance shall pass an order and make provision for the merger and amalgamation. The company should file a copy of this order with RoC within 30 days of receipt of order.

The Final Word

These recent developments shall pave the way for the companies seeking outbound merger. On the other hand, detailed approval requirements minimize the risk of frauds and money laundering and ensures the complete protection of stakeholder’s interests. These amendments shall be gladly received by corporate fraternity as it opens the door for spreading the wings internationally.