M&A Evolution in India: Cross Border Mergers – A Perspective

published on 1 August 2022 | reading time approx. 5 minutes

Amidst the significant challenges posed by the pandemic which led to economic downturn due to significant disruptions caused all across the world. Yet, we continue to witness an increase in the number of M&A deals that have transpired globally. Almost all the sectors have been adversely affected as domestic demand and exports sharply plunged, however, the market has shown strong signs of resilience and recovery. The sharp rise in deal volumes in 2021 for cross border M&A in comparison to earlier years has made it evident of the substantial action undertaken on M&A front.

With the intention of liberalizing and simplifying the extant FDI policy by offering ease of doing business assisted by change in economic reforms in the country, India is expected to continue to be an attractive destination for foreign investment. The introduction of conducive incentive scheme and policies has also played a vital role in providing a boost to the India economy. All of these factors have caused the foreign player to re-think and transform their business and investment structure model thus giving rise to potential surge in cross border M&A opportunities both inbound and outbound.

Cross border M&A deals have been the key consideration of the overwhelming FDI inflow in India. In order to tighten the ties between the boundaries it was essential to create an environment for cross border merger transactions between the countries.

Applicable Regulations

Generally, such cross border mergers are primarily regulated by the Indian corporate law and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 or Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as may be applicable (represented as ‘Foreign Exchange Control Regulations’).

The Indian corporate law which governs mergers in India has stipulated necessary rules, compliances and procedures to be observed for effecting any mergers in India. In furtherance, the Foreign Exchange Control Regulations prescribes compliances with the entry routes, pricing guidelines and sectoral caps or investment limits, as the case may be and the other conditionalities, as may be applicable.

Cross border merger were previously, restricted only to merger of foreign companies with Indian companies and not vice versa. Consequently, the existing regulations have evolved and paved the way to enable cross border merger i.e. inbound merger (cross-border merger of a foreign company into an Indian company) and outbound merger (cross-border merger of an Indian company into a foreign company), subject to prior approval from the Reserve Bank of India (‘RBI’) [i.e. Indian Central Bank].

Subsequently, the Indian Central Bank notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (commonly known as ‘Merger Regulations’), laying down the framework in relation to cross border mergers. These regulations facilitated relaxation to transaction done in compliance with such merger regulations to be considered as deemed prior approval of the Indian Central Bank. This has created an optimistic influence in accelerating such cross-border mergers and acquisitions.

Inbound merger

It indicates ‘merger of a foreign company with an Indian company. Typically, in a merger the amalgamated / surviving company issues its securities to the shareholders of the amalgamating / merging company. In inbound merger, Indian company would be required to issue its own securities presumably to a non-resident shareholder of the foreign company.

Outbound merger

It indicates ‘merger of an Indian company with a foreign company.’ In outbound merger, foreign company would be required to issue its own securities presumably to a resident shareholder of the Indian company.

A comparative summary of applicable provisions for inbound merger and outbound merger is enumerated in table below:

For an optimal display of the table, please use a desktop PC.

S. No.	Basis	Inbound merger	Outbound merger
1	Transfer of Securities	The Merger Regulations allow an Indian company to issue or transfer any security to a person resident outside India subject to adherence to pricing norms, sectoral caps on foreign investment and other applicable conditions provided under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.	The Merger Regulations allows a resident person in India to hold securities of the foreign company in accordance with the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. Further, a resident individual may acquire securities outside India subject to fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme (‘LRS’).
2	Branch/Office outside India	An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India for in accordance with the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015.	An office of the Indian company in India may be treated as the branch office of the resultant company in India 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.
3	Borrowings	In case of any guarantee or borrowing of the foreign company, which due to the merger becomes the borrowing of an Indian company, must conform to the External Commercial Borrowing Regulations within a period of two years. This is subject to a condition that no remittance or repayment from India will be made within such period and the conditions with respect to end-use shall not apply. Further, any office of the foreign company outside India shall be deemed to be a ‘branch office’ of the Indian company pursuant to sanction of the merger.	Any borrowing of the Indian company, which due to the merger becomes the borrowing of the foreign company, shall be repaid as per the terms of the approved merger proposal. This is subject to obtaining a no-objection certificate from the Indian lenders and the foreign company shall not acquire those Indian borrowings that are not in conformity with the applicable regulations.
4	Transfer of Assets	The Merger Regulations permits an Indian company to hold assets situated outside India, as owned by the foreign company and anything that is not permitted to be acquired or held has to be sold within a period of two years from sanctioning of the merger. The proceeds of such sale shall be repatriated to India.	The Indian assets can also be held by the foreign company and anything that is not permitted to be acquired or held has to be sold within a period of two years from sanctioning of the merger.
5	Opening of bank accounts	The resultant company is allowed to open a bank account in foreign currency in the overseas jurisdiction for a maximum period of 2 years in order to carry out transactions pertinent to the cross-border merger.	The resulting foreign company can now open a Special Non-Resident Rupee Account in terms of the FEMA (Deposit) Regulations, 2016 for a period of 2 years to facilitate the outbound merger.
6	Tax treatment	The Indian tax law clearly provides for capital gains tax exemption, subject to certain conditions being fulfilled, to the amalgamating/merging company and its shareholders in case of inbound mergers considering such mergers as being tax-neutral. Further, it also needs to be assessed whether the business loss and depreciation of the foreign company could be made available for carry forward and utilization, as that there is no clarity on such beneficial provisions.	In absence of similar Indian tax exemption for outbound mergers, capital gains arising from such mergers may be taxable for the amalgamating/merging company and its shareholders. The other challenges that the foreign company needs to be conscious would be the risk of establishing a permanent establishment in India. Likewise, the possibility of place of effective management under the Indian law also needs to be assessed while proposing such outbound mergers.
7	Valuation	The Merger Regulations require the valuation of the Indian company and foreign company to be in accordance the regulations under the Indian corporate law.
8	Other conditions	It is also provided that a certificate is required to be submitted with the prescribed authority, which has to be certified by the Director or Managing Director or Company Secretary, stating the company will comply with Merger Regulations. Consequently, ensuring that regulatory actions of companies involved in the merger with respect to non-compliance, contravention, violation, if any, under Foreign Exchange Control Regulations are completed.

Key challenges

As it can be perceived, such cross border mergers are highly regulated in terms of compliance with the specific conditions, regulations, rules, etc. as may be applicable under various laws in India. However, we believe that the existing regulations lacks certain clarity or considerations in certain aspects which may pose a significant challenge for companies examining an efficient mode of cross border restructuring.

The present Indian company law and Merger Regulations on cross border merger recognizes transaction related to merger with foreign companies, however, it is silent on the concept of cross border demerger, compromise or arrangement which can possibly provide access to an additional mode of restructuring the corporate transaction. While inbound mergers in India, were always permitted, there were several precedents in the past, wherein foreign companies were merged with Indian companies and achieved the desired beneficial outcomes. Such merger transaction may only be possible with countries whose corporate law allows companies registered in their jurisdiction to be merged with foreign companies.

Thus, to assume such merger, it would be crucial to understand the prevalent laws applicable and the permissibility in the foreign jurisdiction for cross border mergers as well before assessing any cross border structuring proposition. Thus, alignment of the different laws in India and foreign jurisdiction on this subject could also possibly reduce the ambiguity which are prevailing as of date.

Generally, for any merger to be sanctioned in India it requires the approval of various regulatory authorities with the final authority being the National Company Law Tribunal (‘NCLT’). Taking into account, the number of cases which are inspected by NCLT currently, which includes long drawn process and time bound insolvency matters, oppression and mismanagement, voluntary liquidation, etc., it has led to a continuous haul or delays in mergers matters. Thus, the benefit of fast-track mergers could be made available in specific situations, such as, in the case of a merger of a wholly-owned foreign subsidiary or small company with its Indian parent company or vice versa.

As highlighted above, the existing tax laws does not provide for specific exemption for outbound mergers and demergers, as available for inbound mergers or demergers. Due to lack of specific exemption for the same would result in substantial capital gains tax liability for the amalgamating / merging company and its shareholders. This may cause the outbound merger or demerger to be less beneficial for companies evaluating overseas investment. Further, the existing conditions in relation to inbound merger may lead to uncertainties in situations of non-possibility of fulfilment of prescribed conditions, which needs to be addressed to avoid protracted litigation.

Conclusion

In spite of the uncertainty involved which are still unaddressed, the existing regulations on cross border mergers in India is a welcome step towards developing business connections by creating a favourable framework to encourage foreign investors. It may likely assist the foreign investor to bid for stressed India companies under the insolvency and bankruptcy process. Alternatively, it will also allow the Indian companies to have access to global markets for their business.

Considering, that the existing laws on cross border mergers are at a nascent stage in India and are still evolving there could be a possibility of relaxation on the restrictions being imposed. Also, providing some enabling provisions to facilitate smooth implementation would also go a long way in structuring cross border transaction. It may be expected that cross-border mergers will present a potential structuring avenue to undertake corporate transactions in an efficient and flexible manner. Hopefully, India will most likely continue to boost the confidence and attract foreign investor for cross border mergers and acquisitions.