The concept of outbound mergers came into fashion after 1991 when globalization emerged in India. The concept of outbound mergers was not present in the Companies Act, 1956. The Companies Act of 1956 included the concept of the merger of a foreign company with an Indian Company, known by inbound mergers but it did not contain the concept of vice-versa. This meant that if an Indian Company could have wished to merge with a company situated outside India, it was not allowed to do so in the absence of any regulation governing it. The reason which caused hurdle in the path of outbound mergers was the Monopolistic and Restrictive Trade Practice Act, 1869. Fewer companies came together for transacting business. With the globalization in 1991, restrictive trade practices of body corporate were replaced by severe domestic and global competition in the corporate sector. This reversionary trend was further headed by increasing demand for foreign products and services. The companies started qualifying themselves in the field of core competence and diversifying investments into other sectors when they did not find any competitive advantage over prior investments. This opened the gate for mergers and acquisitions in India.
PROVISIONS UNDER COMPANIES ACT, 2013
In India, the largest legislation formulated for governing the companies was the Companies Act of 1956 but it was yet inadequate in terms of dealing with the outbound mergers in India. The old section of 394(4) in the Companies Act of 1956 provided that a transferee company should be a transferee company incorporated under the Companies Act, 1956 and a transferor company could be any company, irrespective of the fact where it is incorporated or not. The provisions containing amalgamations and restructuring of the companies have been provided from sections 230 to 240 of the Companies Act, 2013. Section 234 of the Companies Act of 2013 provides for cross border or outbound merger of an Indian Company with a company situated outside India. For that matter, an Indian Company would be required to receive permission from the Reserve Bank of India for merging with a foreign entity. The scheme of mergers may include for the payment of consideration to the shareholders of the merging company in cash or in depository receipts, or partly in cash and partly in depository receipts, or partly in cash and partly in depository receipts. Another set of rules for governing the outbound mergers were introduced in 2016 in the form of amendment in the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, and thereafter, inserting a new section 25A on April 13, 2017. Section 25A specifically provides that a foreign company incorporated outside India may merge with an Indian Company after obtaining prior approval from the Reserve Bank of India and in addition to compliance under sections 230 to 232 of the Companies Act, 2013.
REGULATIONS BY RBI UNDER FOREIGN EXCHANGE MANAGEMENT ACT, 1999
In order to bring on par the laws dealing with outbound mergers with the foreign exchange regulations, the Reserve Bank of India issued a notification pertaining to the outbound mergers under its power under section 47 of the Foreign Exchange Management Act, 1999 (FEMA) in
2018. The regulations of Foreign Exchange Management (Cross Border Regulations) of 2018 contain the provisions of merger, demerger, amalgamation, and arrangement between Indian Companies and foreign companies. Clause 5 of the regulation provides for the outbound mergers where the resultant company is a foreign company. The procedure which is required to comply for successful outbound mergers are as follows:-
(1) A person resident in India may acquire or hold securities of the resultant company under Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
(2) A resident individual may acquire securities outside India provided that the fair market value of the securities is within the limits prescribed under the Liberalized Remittance Scheme laid down in the Act or rules.
(3) An office in India of the Indian company may be deemed to be a branch office in India
(4) The borrowings of the Indian company which become the liabilities of the resultant company shall be repaid as per the Scheme sanctioned by the NCLT
(5) The foreign company is allowed to acquire and hold any asset in India which a foreign company is permitted to acquire under the provisions of the Act, rules, or regulations.
(6) The resultant company shall sell assets or securities within a period of two years, if not permitted under the Act, from the date of sanction of the Scheme by NCLT.
(7) The resultant company may open a Special Non-Resident Rupee Account (SNRR Account), it shall be run for a maximum period of two years from the date of sanction by NCLT.
- Foreign Jurisdiction- According to Annexure B of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, an Indian Company can only engage in an outbound merger with a foreign entity of a country only if the market regulator of that particular country is a signatory to the international organization of Securities commission and whose central bank is a signatory to Banks for International Settlements (BIS), or that foreign company lies in a jurisdiction whose public statement is on the radar of Financial Action Task Force (FATF) . It is almost impossible for the foreign entities of the countries to comply with all the conditions mentioned under Annexure B.
- Inclusion of Demerger- The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 as well as section 234 of the Companies Act, 2013 mentions the mergers of the companies but both are silent on the provision of a demerger. When RBI issued a draft regulation of foreign exchange Management (Cross Border Merger) in 2017, the definition of a cross border merger included “demerger” but the same was not notified in the regulations of 2018. The NCLT in the case of Sun Pharmaceutical Industries Ltd. opined that section 234 of the Companies Act, 2013 does not include the concept of outbound demergers.
- Taxation on Outbound Mergers – Section 47 (vi) of the Income Tax Act, 1961 provides that the companies going for inbound mergers would not be subject to the Corporate gains tax and they would be exempted from the burden of paying corporate gains tax but the same provision is silent about the taxation threshold for companies going for outbound mergers. It means that companies going for outbound mergers may be subject to the corporate gains tax. This is one of the factors that may cause a halt over the outbound mergers. Evidently, the record of the outbound mergers has seen low numbers in the preceding fiscal years 2018 and 2019 according to the World Investment Report 2020 by the United Nations Commission for Trade and Development (UNCTAD).
- Dispute Resolution: - There is no regime in terms of cross border insolvency in India. The application of Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 may have an impact on the Insolvency and bankruptcy proceeding of cross-border mergers. Section 234 of the Insolvency and Bankruptcy Code, 2016 says that the Central government may make any agreements with foreign countries for initiating the procedure of insolvency and bankruptcy proceedings and the central government can only do so if it enters into reciprocal agreements with the foreign countries. Since entering into reciprocal agreements with every foreign country is a tedious procedure, it may have dire consequences on the parties to the dispute. Further, the reciprocal arrangements of the central government do not state the procedure which has to be established in order to conduct the insolvency procedure.
- External Commercial Borrowing (ECB) - There are restrictions on the borrowing powers of the foreign entities under the Foreign Exchange Management (Cross border merger) Rules, 2018. The borrowings by the foreign entities become the borrowings by the Indian Company as well. So, the Indian Company has to comply with External Commercial Borrowing (ECB) regulations. These borrowings entail the maximum maturity period of not less than three years. The maturity period provided for the loan may pose a threat to the overseas borrowing by Indian Companies. The foreign lenders may not find it suitable to provide loans to the Indian Companies with additional compliance with the laws of commercial lending in their countries.
It can be inferred from the discourse that the laws relating to outbound mergers in India are yet inadequately pertaining to numerous legal lacunae. Since the inception of the concept of outbound mergers under the Companies Act of 2013, there have been very few outbound mergers undertaken by the Indian entities. The Indian law does not provide for the demergers of overseas undertakings of Indian Companies and therefore, the companies fail to expand their business. A change should be brought in the tax regime for gaining the trust of foreign investors. Further, a framework of regulation should be introduced with regard to dealing with cross-border insolvency disputes.