Cross Border Mergers
Cross border mergers are increasing significantly with the shrinking of the globe. Moreover, India is gradually climbing the ease of business rankings and is becoming a favored business destination. Such a Conducive economic environment has spurred the growth of cross border mergers.
MEANING OF CROSS BRODER MERGER & ACQUISITION
A cross border merger explained in simplistic terms is a merger of two companies which are located in different countries resulting in a third company. A cross border merger could involve an Indian company merging with a foreign company or vice versa.A company in one country can be acquired by an entity (another company) from other countries. The local company can be private, public, or state-owned company. In the event of the merger or acquisition by foreign investors referred to as cross-border merger and acquisitions.
Cross border merger will result in the transfer of control and authority in operating the merged or acquired company. Assets and liabilities of the two companies from two different countries are combined into a new legal entity in terms of the merger, While in terms of Coss border acquisition, there is a transformation process of assets and liabilities of local company to foreign company (foreign investor), and automatically, the local company will be affiliated.
Legal terminology in the cross border M&A’s
It involves two countries according to the applicable legal terminology:-
A.) The state where the origin of the companies that make an acquisition (the acquiring company) in other countries: – “Home Country”.
B.) A country where the target company is situated refers to as the “Host Country”.
Benefits of Cross Border Mergers & Acquisitions
–Expansion of markets
– Geographic and industrial diversification
– Technology transfer
– Avoiding entry barriers & Industry consolidation
– Tax planning and benefits
– Foreign exchange earnings & Accelerating growth
– Utilisation of material and labour at lower costs
– Increased customers base & Competitive advantage
Challenges with Cross Border Mergers & Acquisitions
– Legal issues in different countries
– Accounting challenges & Taxation aspects
–Technological differences
– Political landscape & Strategic issues
– Overpayment in the deal
– Failure to integrate & HR challenges
Cross-border mergers and acquisitions have been rapidly ascending in quantum and value in recent years.
Laws govern cross border mergers in India
Section 234 of the Companies Act, 2013 notified by the Ministry of Corporate Affairs provides the legal framework for cross border mergers in India. This has been brought into effect from 13th April, 2017, hence operationalising the concept of cross border merger.
The following laws govern cross border mergers in India:
- Companies Act, 2013
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
- Foreign Exchange Management (Cross Border Merger) Regulations, 2018
- Competition Act, 2002
- Insolvency and Bankruptcy Code, 2016
- Income Tax Act, 1961
- The Department of Industrial Policy and Promotion (DIPP)
- Transfer of Property Act, 1882
- Indian Stamp Act, 1899
- Foreign Exchange Management Act, 1999 (FEMA)
- IFRS 3 Business Combinations
TYPES OF CROSS BORDER MERGERS
The most popular types of mergers are horizontal, vertical, market extension or marketing/technology related concentric, product extension, conglomerate, congeneric and reverse.Recently, the concept of inbound and outbound mergers was also introduced in the Companies Act, 2013 as part of Section 234 of the Act.
Inbound M&A’s
In this process foreign company mergers with or acquires an Indian company.
E.g. Daichii Acquiring Ranbaxy
Outbound M&A’s
In this process an Indian company merger with or acquires a foreign company.
E.g. Tata steel Acquires Corus
KEY REGULATION FOLLOWS IN CROSS BORDER MERGER:-
| S.No. | BASIS | INBOUND MERGER | OUTBOUND MERGER |
| 1 | Transfer of Securities | The resultant company can transfer any security including a foreign security to a person resident outside India in accordance with the provisions of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017
However, where the foreign company is a JV/ WOS of an Indian company, such foreign company comply with the provisions of FEMA, ODI Regulations. |
For the securities being issued to persons resident in India, the acquisition should be compliant with the ODI Regulations.
Securities in the resultant company may be acquired provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme. |
| 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 | The borrowings of the transferor company would become the borrowings of the resulting company. The Merger Regulations has provided a period of 2 years to comply with the requirements under the External Commercial Borrowings (ECB) regime.
But, FEMA does permit hedging of loan taken from outside Bank in Indian Books. |
The borrowings of the resulting company shall be repaid in accordance with the sanctioned scheme. |
| 4 | Transfer of Assets | Assets acquired by the resulting company can be transferred in accordance with the Companies Act, 2013 or any regulations framed there under for this purpose
. If any asset is not permitted to be acquired, the same shall be sold within 2years from the date when the NCLT had given sanction. The proceeds of such sale shall be repatriated to India. |
Assets which cannot be acquired or held by the resultant company should be sold within a period of 2 years from the date of the sanction of the scheme. |
| 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. |
PROCEDURE OF “MERGER OR AMALGAMATION OF COMPANY WITH FOREIGN COMPANY” u/s 234 of Companies Act, 2013—
(1) The provisions of this Cross border merger unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act. (Check important note below).
And, companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.Provided that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.
(2) Subject to the provisions of any other law for the time being in force, a foreign company, May with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa.
And, the terms and conditions of the scheme of merger may provide, among other things, 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, as the case may be, as per the scheme to be drawn up for the purpose.
(3) A foreign company incorporated outside India may merge with an Indian company after obtaining prior approval of Reserve Bank of India and after complying with the provisions of sections 230 to 232 of the Act and these rules.
(4) A company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure B after obtaining prior approval of the Reserve Bank of India and after complying with provisions of sections 230 to 232 of the Act and these rules
(5) The transferee company shall ensure that valuation is conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under clause (a) of this sub-rule.
OTHERS APPROVAL
(i) Whose securities market regulator is a signatory to International Organization of Securities commissions. Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI, or
(ii) Whose central bank is a member of Bank for International Settlements (BIS), and
(iii) A jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as:
(a) A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
(b) A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
POST-MERGER PERFORMANCE EVALUATION
Cross border mergers can be truly assessed only by evaluating the post-merger performance of the merged entities. The following parameters may be used to assess the post-merger performance:
1. Returns: A comparative analysis of the returns being generated by the entity pre and post-merger should be carried out. If the merged entity is earning significantly higher returns than the merger is deemed successful.
2. Cash flow and operational efficiency: If post-merger the cash flow significantly increases and this increased cash flow is put to use to obtain operational efficiency, this too shows that the newly created entity is performing well.
3. Stock market reaction: If the stock market reaction to the announcement of merger is positive then the merger appears to be a positive step.
IMPORTANT NOTE :-
For normal merger procedure you can check my previous post & link of same is :-
https://taxguru.in/company-law/merger-meaning-checklist.html
DISCLAIMER: The entire contents of this article have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws.
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