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A New Outbound Horizon For Indian Companies

Nimisha Gupta 
on 25 April 2017

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Voila! An Indian Company can legally abode an outbound flight.

# The Point of Authority

The Ministry of Corporate Affairs in consonance with the Reserve Bank of India has inserted certain section and rules in the nascent Companies Act,2013. On 13th April,2017, in lieu to the powers conferred by Section 469 of the Companies Act,2013, MCA notified,

  • Section 234 of the Companies Act,2013
  • Rule 25A inserted in the Companies(Compromises, Arrangements and Amalgamations) Rules,2016.

#The Old Block Road

Earlier in Companies Act, 1956, An Indian Company was prohibited from merging with a Foreign Company.

Though owing to the provisions of Section 391 to Section 394 of the Companies Act, 1956, inbound mergers were allowed i.e. A foreign entity could merge with an Indian Company. This privilege made the merged entity to retain the essence of an Indian company and the same was governed by Indian rules and regulations.

#The New Cross-Border Vision

A major step has been taken to overcome cross country barriers. With the notification of Section 234 of the Companies Act 2013, cross-border mergers can now happen both ways, with a mandatory prior approval of the Reserve Bank of India.

  • Inbound Merger: A foreign company merging with Indian Company.
  • Outbound Merger: An Indian Company merging with a foreign company.

P.S: Outbound mergers are allowed with such foreign entities which are in permitted jurisdiction.

#Permitted Jurisdiction

Annexure B has been inserted to enumerate the scope of foreign companies. The list of permitted jurisdiction includes,

Foreign companies -

a. Whose securities regulator is a signatory of IOSCO or is a signatory to the Bilateral Memorandum with SEBI.

b. Whose Central Bank are affiliated with the Bank for International Settlements.

c. Who are not identified in the public statement of Financial Action Task Force regarding the following matters:

  • Having strategic Anti- money laundering or Combating Financing of Terrorism deficiencies to which counter measures apply.
  • Has not made progress in addressing deficiencies nor has adhered to the action plan developed with FATF for the same.

P.S. No permitted jurisdiction has been enumerated for Inbound Mergers.

#The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017

A new Rule 25A has been inserted regarding ‘Mergers and Amalgamation of a foreign company with a company and vice versa.'

A Transferee Company may merge

i. With prior approval of Reserve Bank of India.

ii. On conformity with the provisions of Section 230 to 232 of the Companies Act,2013.

iii. On getting a valuation by

  • Valuers, who are members of recognised professional institutions in their country
  • Internationally accepted principles of accounting and valuation.

iv. On submission of required Declaration with RBI, an application is filled with the Tribunal.

#The New Horizons

This new path breaking privilege has given Indian companies many advantages -

i. A global expansion: Indian companies get an edge to expand on a global front either for acquisition, consolidation or internal restructuring.

ii. Added benefits: Indian Companies can enjoy the advantages of a ready roadmap for listing, by merging with an offshore listed company.

However, there are certain things which need Ministry's attention :

i. Cross-border Demergers are still not allowed. An Indian company's department cannot be demerged into a foreign company. The entire company would be merged and will stand to lose its identity.

ii. Amendments in ancillary laws are required which regulate the Foreign exchange regulations.

iii. Income Tax reliefs are anticipated for the merging company.

The author is affiliated with QuickCompany which deals in Legal Activities like, Company Registration, Trademark Search, MSME Registration and trademark search, etc..


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