INTRODUCTION
A cross border merger is a merger of two companies which are located in different countries resulting in a third company. It could involve an Indian company merging with a foreign company or vice versa. The local company can be private, public, or state-owned company. Earlier only those cross-border mergers were allowed, where the transferee company was an Indian company and the transferor company was a foreign as per Indian law.
CROSS BORDER MERGER
Cross border merger will result in the transfer of control and authority in operating the merged company. Assets and liabilities of the two companies involved are combined into a new legal entity in terms of the merger, while in terms of acquisition, there is a transformation process of assets and liabilities of local company to foreign company, and automatically, the local company will be affiliated.
As per the applicable legal terminology, the country where the origin of the companies that make an acquisition are referred to as the ‘Home Country’, whereas countries where the target company is situated is referred to as the ‘Host Country’.
Inbound mergers are those where the resultant company is an Indian company i.e. foreign company merging into an Indian company, whereas Outbound mergers are where the resultant company is a Foreign company i.e. Indian company merging into a foreign company.
LAWS GOVERNING 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
RECENT CROSS BORDER MERGERS AND ANALYSIS
Recent examples of cross border M&A deals, the Jet-Etihad deal and the Air Asia deal in the aviation sector in India are good examples of how cross border M&A deals need to be evaluated. For instance, there is both support and resistance to the Jet-Etihad deal as well as for the Air Asia deal. This has made other foreign companies weary of entering India.
On the other hand, if we consider the cross-border M&A deals in the reverse direction i.e. from emerging markets to the developed world, the Chinese oil major SNOPC had to encounter stiff resistance from the US Senate because of security concerns and potential issues with ownership patterns. Of course, the recent Unilever takeover of its subsidiaries around the world is an example of a successful deal.
The clear implications of these successes as well as failures is that there must be a process that is structured and standardized in each country and by each firm on how to approach the M&A deal. Otherwise, there are chances of hostility creeping into the process and vitiating the economic atmosphere for all stakeholders. More than this, the due diligence must be carried out before any such deals are considered.
CONCLUDING REMARKS
Finally, there has been a huge outcry from civil society in almost all the emerging markets. This has been mainly due to audience anger at crony capitalism and tiny elite group cornering all the benefits. Therefore, the most essential condition before cross border M&A is that there must be regulatory scrutiny about the ownership patterns and the holding structures.
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