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Cross Border Merger: The Procedure And Challenges

What Is Merger

Merger is a kind of arrangement under Section 230 of the Companies Act 2013, which takes place through the consolidation of shares of different classes and then its division into separate classes. Therefore, Cross Border Merger would fall into such category of Arrangement.

The concept of Merger is specifically defined in explanation (i) to Section 232 of the Act, which provides for two kinds of mergers - first, ‘merger by absorption’ wherein one existing company absorbs or takes over the another existing company or more than one existing company and second, ‘merger by formation of a new company’ wherein two or more existing companies come together, consolidate their assets and convert themselves into single new entity.

What Is Cross Border Merger

In very simple words, it can be defined as a combination of businesses of two or more companies incorporated in two or more countries. Companies of different jurisdiction basically go through this process in order to enhance their growth and elevate their standard to compete in International market.

Section 234 of the Companies Act 2013 defines it as a merger between company or companies registered under the Act or previous Companies Act and the company incorporated outside India in the notified foreign jurisdictions.

The Companies Act, 1956

The Act respecting the cross border merger (CBM) was very limited, since it only recognized the situation where resultant company i.e. transferee company would be an Indian entity and not vice versa [i] and so the Act in this respect, with the growing needs of Indian economy had become outdated since it was not in line with the impliedly encouraged principles of globalization.

The Companies Act, 2013

Now only with the enactment of the Companies Act 2013, both Inbound Merger where resultant company is an Indian company [ii] and Outbound Merger where resultant company is foreign company [iii] were facilitated, since the Act provides that “subject to the provisions of any other law for the time being in force, a foreign company may with the prior approval of Reserve Bank of India, merge into a company registered under this Act or Vice Versa” [iv]

The Procedure And Compliance

The Companies Act, 2013:

Application under Section 230 of the Act, has to be made to the Tribunal by either of the party to CBM and on such application, Tribunal may call the meeting of members or creditors or both, for the purpose of obtaining approval of the proposed scheme through voting by such members or creditors or both and entertaining the objections which may be raised by them.
Along with the application, certain necessary information relating to the company and its business, especially ‘certificate by Company’s auditor as to accounting treatment of the Company’ has to be filed before the Tribunal, so that, it can ascertain the colorable nature of proposed scheme, if so exists.

The notice for such meeting along with the creditors and members, if required shall also be sent to the Central Government of India, Income Tax Authority, Reserve Bank of India (RBI), Security and Exchange Board of India (SEBI), Competition Commission of India (CCI), the Registrar, respective Stock Exchanges, the Official Liquidator. Each of them on receiving such notice shall be allowed to raise objections to such proposed scheme within thirty days.

The merger would become binding, if three-fourth of the creditors in their debt value or members in their shares value, as the case may be, vote in favor of such CBM or if the scheme is otherwise approved by the Tribunal. The requirement of ‘meeting of creditors’ would not be there if the creditors holding at least 90% value of total outstanding debt, approved the scheme of CBM by way of an affidavit.

The Competition Act, 2002:

Regardless of any other procedure under any other law, the Competition Act under Section 6 requires merging companies, if such merger meets the threshold limit, qualifying to be a combination under Section 5, to give notice to the CCI, within thirty days of approval of proposed scheme of merger by the Board of directors of the companies involved or execution of any agreement or other document in furtherance of acquisition proceedings.

This law further provides the waiting period of two hundred and ten days from the day of giving notice to CCI, for the purpose of holding an investigation under Section 29 and 30 as to check the existence of any possibility of its appreciable adverse effect on competition.

If the CCI under Section 31 of the Act, is satisfied as to the answer in negative for the question of appreciable adverse effect then it shall approve the scheme, but where it concludes after thorough analysis that the merger is likely to have such effect then such scheme has to be disapproved by the CCI except where there is a scope for modification in such scheme as to make it fit for approval.

Inbound Merger

The functional aspects for inbound merger have been primarily provided in Regulation 4 of Foreign Exchange Management (Cross Border Merger) Regulations, 2018.

Transfer or Issue of securities - It is to be understood that when the foreign company merges into an Indian company, the resultant Indian company needs to pay the consideration to the other party, which could be done by any of the following methods-
a. Paying off the ascertained value of the total assets of the other party, either in cash or in depository receipt or partly in cash and partly in depository receipts, or
b. By issuing its securities to the shareholders of the other party, or
c. Through both the modes.

When it comes to the issuance of securities [v], the resultant Indian company is to be guided by the ‘FDI Regulations 2017’[vi] in respect of pricing guidelines [vii], entry routes, sectoral caps, attendant conditions [viii] and reporting requirements [ix] for foreign investment. While if the merging foreign company is Joint Venture/wholly owned subsidiary of an Indian company then the resultant Indian Company has to comply with the ODI Regulations 2004 [x]

Holding assets outside India - Apart from issuing securities, the transferee Indian company may on account of CBM also hold or acquire any asset outside India, if permitted under the Foreign Exchange Management Act, 1999, its rules, regulations and may further perform any transaction in respect of the same.[xi] And if any such asset is not permitted to be acquired, it shall be sold off within two years from the approval of the CBM scheme by the Tribunal and the sale proceeds to be repatriated to India through Banking Channels. [xii]

Office of the transferor foreign company outside India shall be deemed to be a branch office of transferee Indian company in the process of execution of CBM scheme, Hence any transaction may be performed through such office, so permitted to it under Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015 [xiii]

Moreover Overseas borrowings of such transferor company becomes the liabilities of resultant company and therefore it needs to confirm to the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowing norms, as laid down under Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, within two years of approval of the scheme. [xiv]

Outbound Merger-

Regulation 5 of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, facilitates the process of CBM when resultant company is a foreign party and provides that the said process shall be guided by ODI Regulations 2004 in respect of holding the securities of transferee foreign company by existing Indian shareholders of transferor company, if securities are being issued to them as consideration.

Borrowings of transferor Indian company shall be repaid by the resultant company in accordance with the terms of the scheme so approved by the Tribunal, however where such repayments are to be made to an Indian lender in rupees then the resultant company should obtain no objection certificate from such lender regarding conformity with the FEMA, rules and regulations made thereunder.

It further provides that office of transferor Indian company may be deemed to be a branch office of transferee foreign company and therefore such transferee company would be able to transact business from such deemed branch office as permitted under 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.

The resultant foreign company may also hold or acquire assets in India on account of CBM, if permitted under FEMA and may further perform transactions in respect of the same. And if holding of any asset is not permitted then such asset shall be sold off within two years from the date of the approval of the CBM scheme.

It is a legal duty of the Indian party holding securities in resultant company to receive share certificate as an evidence of investment and repatriate to India all the receivables on such shares held by it and report to the RBI every year within specified time. [xv]

Transferee foreign company should further ensure that valuation of the assets or shares are being done by the valuers of recognized professional body in accordance with the internationally accepted principles on accounting and valuation. [xvi] Law is silent on this aspect in case of an inbound merger.

Notified foreign jurisdiction for outbound merger[xvii] is as follows-
(i) Whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with SEBI, or
(ii) Whose central bank is a member of Bank for International Settlements (BIS), and
(iii) A jurisdiction, which is not identified in the ‘public statement of Financial Action Task Force (FATF) [xviii] as:
(a) A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
(b) A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

This jurisdiction has been specified to create a sense of accountability, assure the credibility on part of such foreign acquirer company and avoid any risk towards which Indian party could be exposed if foreign party would not belong to such specified jurisdiction,. However, ‘such foreign company need not have any place of business in India’[xix] in order to be eligible for absorbing an Indian Company.

Law again does not specify any such jurisdiction for foreign company, in case of an inbound merger.

There can be number of reasons behind the transaction of such merger which could definitely vary from company to company according to their goals, however from the past experiences of such transaction, ‘following common rationales’[xx] may be safely drawn out-
a. Growth - Achieving growth through merger is less time consuming method than that by internal changes and diversification.

b. Synergy- ‘Working Together’ always fetches better results and therefore, when two companies combine their assets and business operation, they are most likely to achieve their set goals more effectively.

c. Profitability- After merger, resources of the company are likely to get optimized through the increased volume of production, which would ultimately lead to the reduction in production cost and increase in profit.

d. Market Power- Acquisition of a company who has a good market base surely facilitates the goal of an acquirer company to attain dominance in such market.

e. Access to Resources- An acquirer company may get the control over raw materials, innovation, technology and other local resources in the jurisdiction of acquiring company.

f. Global Market- The very primary purpose of any company for CBM would be to get elevated at international market and to compete with international firms.

As stated that purpose of such CBM may not always be those as commonly understood and this can be best deduced from the acquisition of Zain Group (a Kuwait based telecommunication company) by Bharti Airtel an Indian telecommunication company, whose ‘financial performanc

Legal Challenges And Loopholes
The very first challenge is quite apparent that, there might be various conflicts in the compliance laws of concerned jurisdictions. Not every country confers even statutory recognition on cross border merger.

Section 47(vi) and (vii) of the Income Tax Act 1995 exempts inbound merger from taxation, while law is silent on the issue for outbound merger and therefore the transaction of such outbound merger would be taxed till corresponding amendments are also brought to the said Act in consonance with the Companies Act 2013.

The process of merger is not that easy which it appears merely from Foreign Exchange Management rules and regulations, rather number of other regulatory bodies are also involved in the transaction, such as Security exchange authorities, Competition authorities of concerned jurisdictions. Whenever such transaction is proposed to be performed then cooperation between such authorities of two or more jurisdictions is highly recommended.

A CBM in order to be governed by the Competition Act 2002 must meet the threshold limit given in Section 5 of the Act. Further Section 6(1) of the said Act provides that a combination (includes cross border merger) which if, even has a tendency to cause appreciable adverse effect on competition shall be void, however there are no clear and cut formula to figure out such possibility. And therefore any such merger which is not qualifying under Section 5 as a combination, even if causing appreciable adverse effect on competition in India, would not be governed by the Act. [xxii]

The companies Act 2013 was a step towards smooth acceptance of CBM, which is evident from the inclusion of outbound merger, but it still needs to deal with the CBM more specifically and separately from the domestic merger and amalgamations. And same goes with the Competition law as well, since there is no bifurcation of procedure between domestic and cross border merger.

Corporate sector in India is surely moving towards the stage where globalization and its principles are intended to be accepted by the state through favorable legislations but, due to existence of multiple technical legislations governing the concerned subject, it is almost impossible to attain the most desirable stage with one attempt.

As discussed in the article that the very first step was the enactment of the Companies Act 2013 itself, the scope of which was further broadened with the insertion of Rule 25A to the Companies (compromise, arrangement and amalgamation rules) 2017 in respect of outbound merger. In the same line, another major development was the issuance of regulations called ‘Foreign Exchange Management (Cross Border Merger) Regulations, 2018’. However, in order to compete at global platform effectively and to fill the loopholes, corresponding amendments are required to be brought in the Competition and Income Tax legislation.

[i] Section 394(4), The Companies Act 1956 (1of 1956).
[ii] Regulation 2(v), Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Notification No. FEMA.389/2018-RB).
[iii] Regulation 2(viii), Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Notification No. FEMA.389/2018-RB).
[iv] Section 234(2), the Companies Act 2013 (18 of 2013).
[v] Regulation 4(1), Foreign Exchange Management (cross border merger) Regulations 2018 (NN. FEMA.389/2018-RB)
[vi] Foreign Exchange Management (transfer or issue of securities by a person resident outside India) Regulations 2017 (Notification No. FEMA 20(R)/ 2017-RB).
[vii] Regulation 11, FEM (Issue or transfer of a security by a person resident outside India) 2017 (NN. FEMA 20(R)/ 2017-RB).
[viii] Regulation 16, FEM(issue or transfer of security by a person resident outside India) 2017 (NN. FEMA 20(R)/ 2017-RB).
[ix] Regulation 13, FEM (issue or transfer of security by a person resident outside India) 2017(NN. FEMA 20(R)/ 2017-RB).
[x] Foreign Exchange Management (issue or transfer of foreign securities) Regulations 2004 (NN. FEMA 120/ RB-2004).
[xi] Regulation 4(4), FEM (Cross Border Merger) Regulations, 2018 (Notification No. FEMA.389/2018-RB).
[xii] Regulation 4(5), FEM (Cross Border Merger) Regulations, 2018 (Notification No. FEMA.389/2018-RB).
[xiii] Regulation 4(2) FEM (Cross Border Merger) Regulations, 2018 (Notification No. FEMA.389/2018-RB).
[xiv] Regulaion 4(3) FEM (Cross Border Merger) Regulations, 2018 (Notification No. FEMA.389/2018-RB).
[xv] Regulation 15 of the FEM (transfer or issue of foreign securities) Regulations 2004 (NN. FEMA 120/ RB-2004).
[xvi] Rule 25A of Companies (compromise, arrangement and amalgamation) amendment Rules 2017
[xvii] Annexure B, Rule 25A of Companies (compromise, arrangement and amalgamation) amendment Rules 2017
[xix] Explanation, Section 234, The Companies Act 2013 (18 of 2013).
[xx] Samit Kumar & Maity Datta, Legal issues and challenges of cross-border merger and acquisition under the companies Act 2013, International Journal of Law ISSN: 2455-2194 Impact Factor: RJIF 5.12 Volume 4; Issue 2; March 2018, 09-14.
[xxi] Sayyad Saadiq Ali, K. Hema Divya & Dr. J. Pardha Saradhi, Financial Performance Analysis of Bharti Airtel in the Context of Pre and Post Acquisition of Zain Group (A Kuwait Basis Telecommunication Company), International Journal of Engineering Technology Science and Research IJETSR ISSN 2394 - 3386 Volume 4, Issue 8 August 2017, 126-141.
[xxii] Kenneth Joe Cleetus, Critical Evaluation of the Provisions Relating to Cross Border Merger under Companies Act,1956 and Competition Act,2002,

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