FOREIGN EXCHANGE MANAGEMENT (CROSS BORDER MERGER) REGULATIONS, 2018

[Mr. M. GOVINDARAJAN]

Chapter XV of the Companies Act, 2013 (‘Act’ for short) deals with compromises, arrangements and amalgamations.  For this purpose the Central Government framed Companies (Compromises, Arrangements and Amalgamation) Rules, 2016.   The Reserve Bank of India also made a regulation in relating to merger, amalgamation and arrangements between Indian companies and foreign companies called as ‘The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (‘Regulations’ for short).  These regulations came into effect from 20.03.2018.

Cross border merger

Regulation 2(iii) defines the expression ‘cross border merger’ as any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies (Compromises, Arrangements and Amalgamation) Rules, 2016.

Foreign company

Regulation 2(iv) defines the expression ‘foreign company’ as any company or body corporate incorporated outside India whether having a place of business in India or not.  The explanation to this regulation provide that for the purposes of outbound mergers, the foreign company should be incorporated in a jurisdiction as indicated below-

• whose securities market regulator is a signatory to International Organization of Securities Commission's Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI, or
• whose central bank is a member of Bank for International Settlements (BIS), and
• a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATE) as:

•  a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
• 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.

Mergers

These regulations deals with two types of mergers viz., inbound mergers and outbound mergers.  The expression ‘inbound merger’ is defined under Regulation 2(v) as a cross border merger where the resultant company is an Indian company.  The expression ‘outbound merger’ is defined under Regulation 2(vii) as a cross border merger where the resultant company is a foreign company.  The expression ‘resultant company’ is defined under Regulation 2(ix) as an Indian company or a foreign company which takes over the assets and liabilities of the companies involved in the cross border merger.

Restriction

Save as otherwise provided in the FEMA or rules or regulations framed there under or with the general or special permission of RBI, no person resident in India shall acquire or transfer any security or debt or asset outside India and no person resident outside India shall acquire or transfer any security or debt or asset in Indian on account of cross border mergers. 

Pending cross border mergers

Cross border mergers pending before the competent authority as on date of commencement of these regulations (20.03.2018) shall be governed by these regulations.

Inbound merger

In an inbound merger the resultant company may issue or transfer any security and/or a foreign security to a person resident outside India in accordance with the pricing guidelines, entry routes, sectoral caps, attendant conditions and reporting requirements for foreign investment as laid down in Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2017.

Where the company is a joint venture/wholly owned subsidiary of the Indian company, it shall comply with the conditions prescribed for transfer of shares of such joint venture/wholly owned subsidiary by the Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004.

Where the inbound merger of the joint venture/wholly owned subsidiary results into acquisition of the Step down subsidiary joint venture/wholly owned subsidiary of the Indian party by the resultant company, then such acquisition shall be in compliance with Regulation 6 and 7 of the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004.

Deemed branch office

An office outside India of the foreign company, pursuant to the sanction of the cross border merger shall be deemed to be the branch outside India of the resultant company in accordance with the FEM (Foreign Currency Account by a person resident in India) Regulations, 2015.  Accordingly the resultant company may undertake any transaction as permitted to a branch office under the aforesaid regulations.

Guarantee or outstanding borrowings

The guarantees or outstanding borrowings of the foreign company from overseas sources which become the borrowing of the resultant company or any borrowing from overseas sources entering into the books of resultant company shall conform, within a period of 2 years to the ECB norms or Trade credit norms or other foreign borrowing norms, as laid down in FEM (Borrowing or Lending of Foreign Exchange) Regulations, 2000 or FEM (Borrowing or Lending in Rupees) Regulations, 2000 or FEM (Guarantee) Regulations, 2000, as applicable.

No remittance for repayment of such liability is made from India within such period of two years.  The conditions with respect to end use shall not apply.

Acquisition by resultant company

The resultant company may acquire and hold any asset outside India which an Indian company is permitted to acquire under the provisions of FEMA, rules or regulations framed there under.  Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed there under.

Where the asset or security outside India is not permitted to be acquired or held by the resultant company, the resultant company shall sell such asset or security within a period of 2 years from the date of sanction of the scheme by National Company Law Tribunal and the sale proceeds shall be repatriated to India, immediately, through banking channels.  Where any liability outside India is not permitted to be held by the resultant company the same may be extinguished from the sale proceeds of such overseas assets within the period of two years.

The resultant company may open a bank account in foreign currency in the overseas jurisdiction for the purpose of putting through transactions incidental to the cross border merger for a maximum period of two years from the date of sanction of the Scheme by the NCLT.

Outbound merger

In an outbound merger

• a person resident in India may acquire or hold securities of the resultant company in accordance with FEM (Transfer or Issue of any Foreign Security) Regulations, 2004;
• a resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme as laid down in the FEMA or rules or regulations framed there under;

Deemed branch office

An office in India of the Indian company, pursuant to the sanction of the cross border merger shall be deemed to be the branch outside India of the resultant company in accordance with the FEM (Establishment in India or a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.  Accordingly the resultant company may undertake any transaction as permitted to a branch office under the aforesaid regulations.

Guarantee or outstanding borrowings

The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant company shall be repaid as per the scheme sanctioned by the NCLT in terms of the Rules.  The resultant company shall not acquire any liability payable towards a lender in Indian in Rupees which is not in conformity with FEMA or Rules or regulations framed there under.  A No objection certificate should be obtained to this effect from the lenders in India of the Indian company.

Acquisition by resultant company

The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the provisions of FEMA, rules or regulations framed there under.  Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed there under.

Where the asset or security in India is not permitted to be acquired or held by the resultant company, the resultant company shall sell such asset or security within a period of 2 years from the date of sanction of the scheme by National Company Law Tribunal and the sale proceeds shall be repatriated outside India, immediately, through banking channels.  Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of 2 years shall be permissible.

The resultant company may open a Special Non Resident Rupee Account (SNRR Account)  in accordance with the FEM (Deposit) Regulations, 2016 for the purpose of putting through transactions under these regulations.  The account shall run for a maximum period of two years from the date of sanction of scheme by NCLT.

Valuation

The valuation of the Indian company and the foreign company shall be done in accordance with Rule 25A.

Reporting

The resultant company and/or the companies involved in the cross border merger shall be required to furnish reports as prescribed by RBI.

Deemed approval

Any transaction on account of a cross border merger shall be deemed to have prior approval by RBI as required under Rule 25A.  A certificate from the MD/WTD and Company Secretary, if available, of the company(ies) concerned ensuring compliance to these regulations shall be furnished along with the application made to NCLT under the Rules.

Miscellaneous

The compensation by the resultant company to a holder of a security of the Indian company or the foreign company may be paid in accordance with the scheme sanctioned by NCLT.  The companies involved in the cross border merger shall ensure that the regulatory actions, if any, prior to merger, with respect to non compliance, contravention, variation of FEMA or Rules or Regulations framed there under shall be completed.