M&A UPDATE
27 April 2017
The Reserve Bank of India (“RBI”) has, on April 26, 2017, issued draft guidelines on Foreign Exchange Management (Cross Border Merger) Regulations, 2017 (“RBI Cross Border Merger Regulations”). This Regulations follows the recent notification of Ministry of Corporate Affairs operationalising section 234 of the Companies Act, 2013 in relation to cross-border mergers. Please click here to see our earlier Alert on the subject.
The RBI has sought views and comments on the draft regulations from members of public, including the stakeholders and experts in the area latest by May 9, 2017 through email at [email protected] with the subject “Cross Border Merger – Comments/Suggestion”.
Key features of the draft the RBI Cross Border Merger Regulations are as under:
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Particulars
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Inbound Merger
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Outbound Merger
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Mechanics
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A merger or amalgamation of foreign company with an Indian company
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A merger or amalgamation of Indian company with a foreign company
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Issue / Acquisition of securities pursuant to cross-border merger
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Any issue or transfer of securities by an Indian Company to the non-resident shareholder pursuant to the inbound merger shall continue to be in accordance with the current FEMA regulations
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A person resident in India may acquire or hold securities of the Foreign Company pursuant to the outbound merger in accordance with current regulations pertaining to investment in Joint Venture / Wholly Owned Subsidiary abroad or the Liberalized Remittance Scheme (“LRS”), as applicable
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Conditionalities on Borrowings
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Any borrowing or impending borrowing of the foreign Company from overseas source which becomes the borrowing of the Indian Company pursuant to inbound merger shall continue in conformation with the existing FEMA regulations in regard to External Commercial Borrowings, Trade Credits and other Foreign Borrowing norms
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Foreign Company shall be liable to repay outstanding borrowings or impending borrowings as per the Scheme sanctioned by the National Company Law Tribunal (“NCLT”) pursuant to the outbound merger.
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Acquisition / Holding of assets or securities
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An Indian Company may acquire and hold any assets/securities outside India pursuant to the inbound merger which an Indian Company is permitted to acquire under the current provisions of the Act, rules or regulations framed by the RBI
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Foreign Company may acquire and hold any assets/securities in India pursuant to the outbound merger which foreign Company is permitted to acquire under the provisions of the Act, rules or regulations framed by the RBI
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Transfer of assets / securities not permitted to be acquired / held
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In a situation where an Indian Company not permitted to acquire or hold any assets/securities outside India which is forming part of the foreign Company under inbound merger, such assets/securities can be transferred by the Indian Company within a period of 180 days from the date of sanction of the Scheme of cross border inbound merger and sale proceeds shall be repatriated to India immediately through banking channels for making inbound merger permissible under the Act or rules or regulations framed by the RBI
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In a situation where foreign Company not permitted to acquire or hold any assets/securities in India which is forming part of an Indian Company under outbound merger, such assets/securities can be transferred by the foreign company within a period of 180 days from the date of sanction of the Scheme of cross border outbound merger and sale proceeds shall be repatriated outside India immediately through banking channels for making outbound merger permissible under the Act or rules or regulations framed by the RBI
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Valuation of Companies involved in cross border merger
- The valuation of the Indian Company and the foreign Company for the purpose of cross border merger shall have to be done as per internationally accepted pricing methodology for valuation of shares on arm’s length basis. This valuation should be duly certified by Chartered Accountant / public accountant / merchant banker as may be authorized to do so in either jurisdiction.
Reporting
- Any transaction arising due to cross border merger shall require to be reported to the RBI in the same manner in which it is otherwise required to be reported under the Act or rules or regulations framed by the RBI.
- The Indian Company and the foreign Company involved in the cross-border merger shall be required to furnish reports as may be prescribed by the RBI which are yet awaited.
Deemed Approval
All cross-border mergers undertaken in accordance with these regulations shall be deemed to be approved by the RBI as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016. In the event, the above guidelines are complied with, no separate approval is required in the case of cross-border mergers/demergers/arrangements, from the RBI.
As mentioned above, currently the RBI has rolled out the draft guidelines only and has invited comments on the same from public, stakeholders and experts in the field. You may post your queries in regard to these rules to BDO India and we shall consider representing your queries to the RBI.