The Reserve Bank of India (RBI), through a notification dated 20 March 2018, notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Regulations). The Regulations are intended to facilitate ‘cross border mergers’ i.e., any merger, amalgamation or arrangement between an Indian company and a foreign company in accordance with the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 (Companies Rules) issued under the Companies Act, 2013.
Key features and implications of the Regulations are as follows:
- Inbound Merger:
- An ‘inbound merger’ means a cross border merger where the resultant company is an Indian company. In an inbound merger, the issue or transfer of any security by the resultant company to a person resident outside India would have to be in accordance with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.
A ‘resultant company’ is either an Indian company or a foreign company which takes over the assets and liabilities of the companies involved in the cross border merger.
- In case of the foreign company being a joint venture (JV) or wholly owned subsidiary (WOS) of the Indian company or where the inbound merger of the JV or the WOS results into an acquisition of the step down subsidiary of the JV or the WOS of the Indian party by the resultant company, then such acquisition would have to be in compliance with Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (ODI Regulations).
- The guarantees or outstanding borrowings of the foreign company from overseas sources which become the borrowings of the resultant company or any borrowings from overseas sources entering into the books of the resultant company would have to conform, within a period of 2 (two) years, to the External Commercial Borrowing norms or Trade Credit norms or other applicable foreign borrowing norms.
- Also, where the asset or security outside India is not permitted to be acquired or held by the resultant company under the Foreign Exchange Management Act, 1999 (FEMA), rules or regulations, the resultant company would have to sell such asset or security within a period of 2 (two) years from the date of sanction of the merger scheme by National Company Law Tribunal (NCLT) and the sale proceeds would have to be repatriated to India immediately through banking channels.
2. Outbound Merger:
- An ‘outbound merger’ means a cross border merger where the resultant company is a foreign company. In an outbound merger, a person resident in India may acquire or hold securities of the resultant company in accordance with ODI Regulations provided a resident individual may acquire or hold securities outside India when the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme laid down in the FEMA or rules or regulations framed thereunder.
- The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant company would have to be repaid as per the merger scheme sanctioned by the NCLT.
- Also, where the asset or security in India cannot be acquired or held by the resultant company under the FEMA, rules or regulations, the resultant company would have to sell such asset or security within a period of 2 (two) years from the date of sanction of the merger scheme by the NCLT and the sale proceeds would have to be repatriated outside India immediately through banking channels. However, it would be permissible to repay the Indian liabilities from sale proceeds of such assets or securities within the period of 2 (two) years.
3. Miscellaneous:
The Regulations also provide for, inter alia, provisions relating to branch offices, valuation and reporting requirements. It also provides that cross border mergers compliant with the provisions of the Regulations would be deemed to have prior approval of the RBI as required under the Companies Rules.
The full text of the Regulations can be accessed at:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/CBM28031838E18A1D866A47F8A20201D6518E468E.PDF