India:
Ministry Of Corporate Affairs (MCA) Notifies The Provisions Of Cross-Border Mergers And Acquisitions
04 May 2017
Nexdigm Private Limited
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The MCA on 13 April 2017 notified Section 234 of the Companies
Act, 2013 (the Act) and the Companies (Compromises, Arrangements
and Amalgamation) Amendment Rules, 2017 (Amendment Rules) which
allows the merger of a foreign company with an Indian company and
vice versa.
Previously, the Companies Act, 1956 (the old Act) under Section
394, provided that in any arrangement or reconstruction, an
amalgamated company (transferee company) must be a company within
the meaning of the old Act i.e., it has to be an Indian company.
This meant that a foreign company could not be a transferee
company, which meant the Indian company could not merge with the
foreign company. Thus, it was possible for a foreign company to get
merged with an Indian company, but vice versa was not possible.
Key highlights of the notification:
The notified Section 234 provides enabling provision for mergers
and amalgamations between companies registered under the Act and
companies incorporated in the jurisdictions of such countries as
may be notified from time to time by the Central government. It
also provides for enabling provisions to make rules in consultation
with the Reserve Bank of India (RBI) in this behalf. The key
highlights of this notification are:
- Prior approval of the RBI is required for any
scheme of merger and amalgamation between an Indian company and a
foreign company.
- The section also lays down the criteria for the
discharge of consideration on a merger i.e. payment of
consideration to the shareholders of the merging companies may be
discharged in cash, or in depository receipts, or partly in cash
and partly in depository receipts.
- An Indian company can merge with a foreign
company only if the foreign company falls under
the jurisdiction as specified.
- It has been stipulated that the provisions of the Act shall
apply to cross-border merger or amalgamation schemes with the
necessary changes and compliance with Section 230-232 of the Act
and rules thereunder is mandatory.
- The transferee company has to ensure that the valuation
is conducted by a member of a recognised
professional body in the jurisdiction of the transferee
company and the valuation is in accordance with internationally
accepted standards.
SKP's
Comments
- In the past, there were several precedents, wherein foreign
companies were merged with Indian companies and have derived
certain benefits.
- Although the Act, now specifically allows both inbound and
outbound mergers and amalgamations, but it is silent on the issue
of cross-border demergers, compromises and
arrangements.
- Prior approval of the RBI has been made mandatory for mergers
and amalgamations. It will be interesting to see how the RBI
disposes such application given the fact that it may have certain
implications that will need to be viewed from the perspective of
foreign exchange control, such as the acquisition of immovable
property.
- The Income Tax Act exempts a transaction of amalgamation, where
the amalgamated (i.e. transferee) company shall be an Indian
company. Thus, where an Indian company merges into a foreign
company, under the present law, it shall be a taxable
transaction.
One would expect income tax provisions also to be modified in line
with the changed Company Law provision. Given the intricacies
involved, the Indian Tax Law needs to be realigned to exempt
shareholders from any taxes that may arise on a cross-border
merger.
- The implications of the notified section will also have to be
viewed from the perspective of stamp duty and various other
laws.
- Section 234 of the Act is a welcome step as it will now allow
merging of Indian companies with the foreign companies which were
not allowed previously. However, it does not provide detailed
provisions for merger or amalgamation from an implementation
perspective.
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