During the previous two decades, cross-border mergers and acquisitions (M&As) have dramatically raised. It is frequently noted that financial liberalisation laws, governmental regulations, and regional agreements all contribute to cross-border capital reallocation.
Cross-border mergers and acquisitions are becoming more frequent during commercial and economic cycles. Companies from different countries can now collaborate to create a cohesive organisation with the primary goal of advancing their business plan on the international market as a result of globalisation.
Businesses have been able to develop operations in other nations—when it could have been extremely challenging to do so due to market and logistical constraints—thanks to cross-border mergers and acquisitions. But in order to ensure that cross-border mergers and acquisitions will be successful and sustained for the duration of operation in this new market, a number of requirements must be properly addressed[1].
This paper gives a general overview and understanding of the cross-border mergers and acquisitions. It further tells about the need and scope of cross-border mergers and acquisitions. Along with that, it also mentions regarding the cross-border mergers in India.
Introduction
There has been a significant increase in cross-border mergers and acquisitions in recent years (M&As), which has accelerated industry globalisation and changed the industrial structure of the world. In the 1990s, there was a definite movement in foreign direct investment away from greenfield investments and towards mergers and acquisitions. The value of cross-border M&As surged by over sixfold between 1991 and 1998, and particularly large-scale unions became increasingly prevalent during this period.
Cross-border mergers and acquisitions largely involve OECD countries and businesses, despite the fact that non-OECD countries have expanded their stake. M&As are happening across a variety of industries, including high-tech disciplines, mature manufacturing sectors, and service sectors, and they reflect the need to restructure and boost core businesses’ worldwide competitiveness.
Simply put, a cross-border merger occurs when two businesses with different geographic locations join to form a third business. An Indian corporation might link forces with a foreign business, or the opposite, in a cross-border merger. A company from another country may be bought by an organisation (another corporation) from a different nation. The neighbourhood business may be owned by the state, the public, or private individuals.
When a cross-border merger or purchase is carried out by investors from outside the country, transfer of authority and control over the combined or acquired company will follow. When two companies from separate countries merge, their assets and liabilities are pooled to create a new legal entity. In contrast, a cross-border purchase involves the transfer of a local company’s assets and liabilities to a foreign company (foreign investor), at which point the local company will immediately become connected with the foreign company.
It involves two nations:
The country of origin of the acquiring company (the entity making the acquisition) is the Home Country.
The nation in which the targeting company is located is the Host Country.
Now, cross-border M&As must be considered one of the core drivers of industrial development. Instead of greenfield investment, mergers and acquisitions now make up the vast majority of waves of foreign direct investment, making them a key tool for enduring corporate involvement across international borders. This has been backed by a greater variety of business collaborations, such as unofficial alliances for R&D and other strategic goals.
The variables that affect the propensity for cross-border M&As are intricate and differ by industry. An ongoing economic boom in nations like the United States raises the amount of money available for industrial acquisitions abroad and draws additional foreign investment, additionally contributing to the globalisation of capital markets.
Global competition, market restrictions caused by an imbalance between supply and demand, as well as extra factors in some important industrial sectors are driving restructuring. The globalisation of businesses is made easier by technical innovation, particularly in the information technology domain. These businesses also seek to quickly capitalise on market opportunities and pool investment in R&D costs.
By broadening, businesses are increasingly attempting to capitalise on intangible assets, such as technology, people, and brand identities, by expanding their regional operations and buying complementary assets elsewhere. Government initiatives including investment liberalisation, privatisation, and regulatory reform have led to an increase in the number of industrial targets that are offered for purchase.
When smart and efficient restructuring results in improved efficiency without excessive market concentration, cross-border mergers and acquisitions may be profitable for the business and beneficial for the home and host countries. The broad spillover effects of such M&A advantages on the economy are becoming increasingly elusive.
They can help revive struggling businesses, local economies, and job creation are achieved through restructuring and technology investment, and enhanced efficiency. However, there has been a wide range in the readiness of states to permit M&As involving foreign corporations. In other cases, weak element and product markets may offset the beneficial impacts of mergers and acquisitions on economic growth and job creation.
Examples include the agreements between:
Jet-Etihad and Air Asia in the aviation industry
Daimler-Chrysler merger in the automobile sector
Airtel acquiring Zen Telecommunication Company in South Africa
Factors Required For Initiating Mergers And Acquisitions
Cross-border mergers and acquisitions rely on an array of success variables that need to be carefully taken into account if the business goals of all parties are to be fully realised. The way on either side of the boundaries where mergers and acquisitions take place, business is conducted occur must logically differ. Some of the elements that must be taken into account before beginning and executing international mergers and acquisitions.
Proper Management
In every company or corporation, administration is the most crucial area that needs to be attended to; if this area is overlooked, severe consequences result. Using methods to plan and then carry out tasks in the right way is what is meant by proper management. In layman’s terms, it means carrying out the implementation of strategy throughout an entire organisation.
Every difficult task is made simpler and more efficient with proper management. To achieve a smooth conclusion, it requires the foundation of appropriate management strategies. It is difficult to manage cross-border mergers and acquisitions properly, but it is feasible if you handle and identify some of the crucial areas. These crucial areas include market analysis, characteristics of human resources, and the integration and development of products.
Good management includes all areas of human resources, not only those that relate to a company’s personnel. Employees and human resources are inextricably interwoven, and without the former, a company cannot function. Employees are crucial to the success of a company. These personnel experience a sense of unease and trepidation about their jobs when it involves international mergers and acquisitions, and this could impair their performance, which would immediately harm the firm’s performance. As a result, it is suggested that you must deal with proper administration of human resources while starting cross-border mergers and acquisitions.
Cultural Integration
Cultural integration is the process through which a member of one culture accepts elements of another without sacrificing or disregarding their own. In cross-border mergers and acquisitions (M&A), a business from one nation chooses to follow the customs of another nation while maintaining its own. Because it preserves unity and ensures social stability, cultural integration is crucial.
By fostering a social structure where people share the same thoughts and ideals, cultural integration also aids in keeping society cohesive. The main issue for the businesses under this element is that one business from either side of the border has a different perspective on business culture than another business on the different side of the border. There may be a probability of viewpoint conflicts as a result.
Only if a team is established to manage and examine how cultural integration will be conducted out, with topics like company ideologies and market position being addressed, can these conflicts be resolved.
Business Policies
Each nation has its own distinct set of business regulations. The business’s organisational structure is covered in full in these policies, along with who should carry out each task and how. Businesses must follow certain rules, or “business policies,” in order to operate. It is a study of duties, success in decision-making, and the various roles that people play.
Due to the varied business practises used in a foreign country, it is likely that the purpose of the firm may be hampered in cross-border mergers and acquisitions. This is because they were familiar with the business rules or regulations of their own country. The new company regulations in the new economy do, in reality, require some time for it to adapt to.
Taxation
One of the most important and challenging components of running a business is taxes. And because there are distinct tax regimes in foreign and home nations, cross-border mergers and acquisitions become more complicated and complicated. There are many differences involved, and the hardest issue is encountered when enterprises that function in the domestic market and those who do business abroad pay different tax rates.
The fact that a company operating in a foreign country must pay more tax than its rivals, who are referred to as the locals, seems a little unfair. Since the majority of funds are used to pay taxes, which is unjust in terms of tax payment, establishing long-term profitability continues to be uncertain. Hence, it should be emphasised that the taxation element of the country should be thoroughly addressed before attempting cross-border mergers and acquisitions.
When it comes to cross-border mergers and acquisitions, the tax payment effects are more severe. Depending on the country’s government, the penalties could be anything. They have the authority to sanction, punish, or prohibit the company from conducting business in the nation if the required tax payments are not made. Understanding and following all the requirements and recommendations regarding when and how the tax should be paid to government before entering the field will help you overcome this challenge.
General Business Condition in the Country
A variety of indications in the nation where a firm is located will determine how prosperous it is. One of the most crucial and significant concerns when conducting business is market security. Security is the main issue in this context because cross-border mergers and acquisitions involve significant financial investments.
In addition to protecting the company, security also entails having access to reliable insurance coverage, offering a place where business can be conducted without interruption, requesting guarantees from the relevant government agency that it would provide assistance when needed, etc. In cross-border mergers and acquisitions, the lack of these assurances could be deadly for the acquiring company because security is the first thing to investigate before entering.
Laws In India That Control Cross-Border Merger And Acquisition
The legal foundation for cross-border mergers in India is provided under Section 234 of the Companies Act, 2013, as promulgated by the Ministry of Corporate Affairs. The idea of a cross-border merger has now been operationalised as this was put into force on April 13, 2017. In India, the following laws apply to cross-border mergers:
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Competition Act, 2002
The 2016 Insolvency and Bankruptcy Code
The 1961 Income Tax Act
Industry Policy and Promotion Department (DIPP) 1882
Transfer of Property Act 1899
Indian Stamp Act
The 1999 Foreign Exchange Management Act (FEMA)
IFRS 3 Business Combinations
Kinds of Cross-Border Merger[7]
S. No.
Basis
Inbound Merger
Outbound Merger
1
Transfer of Securities
The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, as well as other relevant conditions, permit subject to adherence to pricing guidelines, sectoral limitations on foreign investment, and other applicable criteria, an Indian firm may offer or transfer any security to a person located outside of India.
According to the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Rules, 2004, a resident of India is allowed to own securities of the foreign company under the merger regulations. In addition, provided the stock’s fair market value is under the limitations specified by the Liberalised Remittance Scheme (also known as “LRS”), a resident individual may purchase securities outside of India.
2
Branch/Office outside India
The foreign company’s office or branch outside of India shall be deemed to be the resultant company’s office outside of India under the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015.
A branch office of the resulting firm in India may be classified as an office of an Indian company under the Foreign Exchange Management (Establishment in India of a Branch Office, Liaison Office, Project Office or Any Other Place of Business) Regulations, 2016.
3
Borrowings
As a result of a merger, a foreign corporation may not guarantee or borrow money on behalf of an Indian company unless it complies with the external commercial borrowing regulations within two years. The conditions regarding end-use shall not apply, and this is subject to the restriction that no payments would be received from India during that time. Any office of the foreign company outside of India must be in compliance with the merger’s permission if it is regarded as a “branch office” of the Indian company.
Any borrowing by the Indian firm that, as a result of the foreign business borrows money as a result of the merger, which must be returned in accordance with the merger proposal’s provisions that was accepted. The foreign firm may only purchase Indian borrowings that are compliant with the relevant legislation, and only after receiving a no-objection certificate from the Indian lenders.
4
Transfer of Assets
As long as they are owned by the foreign company, the Merger Laws permit an Indian corporation to hold assets outside of India; however, everything that is not permitted to be purchased or held must be sold inside two years of the merger’s approval. The sale’s revenues must be returned to India.
The foreign business may also own Indian assets, and everything that is not allowed to be bought or held must be disposed of within two years of the acceptance of the merger.
5
Opening of Bank Accounts
For a maximum of two years, the resulting company may open a foreign currency bank account in the foreign jurisdiction to conduct business related to the cross-border merger.
The resulting foreign business may now open a Special Non-Resident Rupee Account for a length of two years in compliance with the FEMA (Deposit) Regulations, 2016, in order to ease the outbound merger.
6
Tax Treatment
In cases of inbound mergers, which are treated as tax-neutral mergers, the Indian tax legislation expressly provides for exemptions from capital gains taxes for the merging or combining company and its shareholders, subject to specific conditions being met. Additionally, it must be determined whether the foreign company’s business loss and depreciation might be carried over and used as there is now no such option. Clarity on such beneficial provisions is needed.
The merging firm and its shareholders may be subject to tax on capital gains if there is no equivalent Indian tax relief for outbound mergers. The risk of opening a permanent establishment in India is another issue that the foreign company must be aware of. Likewise, while contemplating such outbound mergers, it is necessary to consider if competent management might be placed under Indian law.
7
Valuation
The evaluation of the Indian firm and the foreign company must be done in compliance with the rules under Indian corporate law, according to the Merger Rules.
8
Other Conditions
Additionally, it is stated that a certificate saying the company will adhere to the Merger Rules must be presented with the prescribed authorities and must be signed by the Director, Managing Director, or Company Secretary. Accordingly, making sure that any regulatory measures taken against the merging entities for non-compliance, contravention, or violation of the Foreign Currency Control Rules are successful.
Advantages of Cross-Border Mergers
After a business has achieved a certain degree of success, expanding it might be difficult. Cross-border mergers and acquisitions are particularly effective at accelerating an existing company’s growth. As a company owner, you should think about the various advantages an overseas deal could have for your enterprise.
New opportunities: Comparing a merger or acquisition to creating a company from scratch will save you time and money. If you identify the right foreign market, you might be able to locate the businesses you are interested to purchase and grow in a region where the company already has a sizeable customer base. This strategy for fostering expansion and luring in new customers is rather straightforward. Small countries are frequently great marketplaces for corporate expansion. Another benefit in some circumstances is that the nation might issue you a residency visa, allowing you to move there if you so want.
Access to talent: You acquire the capabilities of the other company when your business merges with it or purchases it. If you’ve had problems locating key individuals in your native nation, this can be a major advantage. Additionally, it might enable you to spend less time and money on training new team members.
Diversification: You can expand your product or service portfolio and, as a result, your market share, with the help of cross-border M&A. When looking for new innovations and technologies to broaden current revenue streams and create new ones, this may be essential.
Distribution: In your local market, your distribution system might be the most effective. Your ability to quickly grow your distribution network through cross-border M&A is superior than trying to enter new markets on your own.
Tax benefits: Many countries offer tax advantages following a purchase or merger. Additionally, international sources of revenue or even transferring your company’s headquarters may offer considerable tax advantages. However, thorough research or professional advice is advised because tax legislation vary from region to region.
Cost savings: Building new amenities for your firm is expensive. It can be much less affordable for your growth attempts to work with some other company with the existing assets you require situated in another nation. In comparison to buying an established company with resources in your own country, it might also be a significant cost-saving solution, depending on the location.
Production capacity: Construction of a production capacity is expensive and time-consuming. If demand increases quickly, it’s possible that you won’t be able to provide it. But, acquiring the production capability through a global agreement enables you to do so far more swiftly than attempting to do so on your own.
More financial power: Transactions involving cross-border M&A give the businesses involved room to grow. The combined revenue from the two firms can be utilised to boost one’s financial position. Therefore, having greater financial influence also leads to less competition and greater client control.
Intellectual property: You can acquire a significant competitive edge by purchasing a foreign entity that possesses patented technologies as the global economy gets more inventive.
Challenges with Cross – Border M&A(s)
In regards to complying with the special circumstances, regulations, norms, etc. that may be relevant under various laws in India, it can be seen that such cross-border mergers are heavily regulated. However, we think that the current legislation lack some clarity or consideration in some areas, which may be a major obstacle for businesses looking into an effective method of cross-border restructuring.
The current Indian company law and cross-border merger regulations recognise transactions involving mergers with foreign companies, but they make no mention of the idea of a cross-border demerger, compromise, or arrangement, which could potentially open up a second avenue for reorganising the corporate transaction.
While inward mergers were always authorised in India, there were a number of examples where foreign corporations merged with Indian enterprises in the past and the required favourable results were obtained. Such a merger deal might only be feasible in nations with corporate laws that permit domestically registered companies to merge with overseas corporations.
So, before evaluating any cross-border structure proposal, it would be necessary to grasp the applicable current regulations as well as the permissibility of cross-border mergers in the foreign jurisdiction. Hence, harmonising the many laws on this subject from India and other countries may also help to lessen the current misunderstanding.
In India, each merger generally needs the consent of several regulatory agencies, with the National Company Law Tribunal (the “NCLT”) serving as the final regulatory authority. A constant slog or delays in merging cases have resulted from the volume of cases that NCLT is presently inspecting, which includes lengthy processes and urgent insolvency issues, mismanagement and oppression, voluntary liquidation, etc.
Therefore, the benefit of fast-track mergers may be made available in certain situations, such as the merger of a wholly-owned overseas subsidiary or minor firm with its Indian parent company or vice versa.
As was mentioned above, the current tax regulations do not offer the same particular exemption for outbound mergers and demergers as they do the same for mergers or demergers that take place within the country. The combining or merging company and its shareholders would incur significant capital gains tax obligations as a result of the lack of a particular exemption for the same.
This could make the outbound merger or demerger less advantageous for businesses considering international investment. Additionally, the current circumstances surrounding an inbound merger may give rise to doubts in instances when the fulfilment of the requirements is not possible, which is required to be resolved to prevent protracted litigation[9].
Conclusion
Cross Border Merger & Acquisitions is now a big chapter to cover and is regarded as a recent idea. Every day, a brand-new idea with a potentially unique perspective enters the corporate sector. To successfully complete international mergers and acquisitions, a wide range of difficult challenges are addressed.
Cross-border mergers and acquisitions have always been a concrete manifestation of the operating mechanism in the framework of the global market since they allow and enhance the development of economic interaction between enterprises. However, the majority of research into these strategies concentrates on figuring out the advantages and success of putting the organization’s plan into practise, given the ubiquity of mergers and acquisitions in all nations.
Finally, cross-border mergers and acquisitions should be taken seriously due to the frequently grave consequences. So, before beginning, all of the aforementioned elements should be carefully considered. And if the elements are disregarded, problems could develop, changing the way to success[10].
Despite the uncertainties that remain unresolved, India’s current restrictions on cross-border mergers represent a positive step towards expanding trade relations by providing a supportive environment for foreign businesses. The foreign investor may benefit from being able to compete for troubled Indian enterprises during the insolvency and bankruptcy procedure. In addition, it will give Indian businesses access to international markets for their products and services.
Given that India’s laws on cross-border mergers are still in their infancy and are still being developed, there may be a chance that the limits be relaxed. The structuring of cross-border transactions would also benefit from the inclusion of enabling rules that would assist easy implementation. Cross-border mergers could potentially offer a structuring option for carrying out company transactions in a quick and adaptable way. Perhaps India will continue to increase investor trust and draw in foreign capital for international mergers and acquisitions[11].
End Notes:
Cross Border Mergers and Acquisition, available on: https://www.lkouniv.ac.in/site/writereaddata/siteContent/202003291621085882smitasingh_cross_border_m_a.pdf (Visited on April 8, 2023)
Cross-Border Mergers and Acquisitions: Their Role in Industrial Globalisation, available on: https://www.oecd ilibrary.org/docserver/137157251088.pdf?expires=1680947199&id=id&accname=guest&checksum=1F79C6B123A459F2D1FD9F811E1ED3EC (Visited on April 8, 2023)
Cross Border Merger – Meaning, Types, Procedure & Main Rules & Regulation, available at: https://taxguru.in/company-law/cross-border-merger-meaning-types-procedure-main-rules-regulation.html (Visited on April 8, 2023)
Supra Note 2
Essential Factors of Cross-Border Merger and Acquisitions, available on: https://www.legalserviceindia.com/legal/article-7347-essential-factors-of-cross-border-merger-and-acquisitions.html (Visited on April 8, 2023)
Sustainability of cross-border mergers and acquisitions, available on: https://blog.ipleaders.in/sustainability-of-cross-border-mergers-and-acquisitions/ (Visited on April 8, 2023)
M&A Evolution in India: Cross Border Mergers – A Perspective, available on: https://www.roedl.com/insights/india-ma-cross-border-mergers-evolution (Visited on: April 8, 2023)
How your company can benefit from cross-border M&A, available on: https://blog.benchmarkcorporate.com/how-your-company-can-benefit-from-cross-border-ma (Visited on April 8, 2023)
