Reserve Bank of India (RBI) vide its Notification dated March 20, 2018
provided for the much awaited Foreign Exchange Management (Cross Border Merger)
Regulations (Regulations) with clear and cut out details with respect to both
Inbound and Outbond merger.
These Regulations are the result of discussions, deliberations and market
feedback received by RBI on its draft regulations to govern cross border
mergers. These draft regulations were released by RBI on April 26, 2017.
Section 234 of the Companies Act, 2013 provides for merger of a company with
foreign company with the requirement of taking prior approval from RBI.
Proviso to Section 234(1) of the Companies Act, 2013 lays down that the Central
Government may make rules, in consultation with the RBI, in connection with
merger and amalgamations provided under the same section.
Ministry of Corporate Affairs took a step further by amending the Companies
(Compromises, Arrangements, and Amalgamations) Rules, 2016 (Rules) in the year
2017 by inserting Rule 25A which provides for merger or amalgamation of a
foreign company with an Indian company and vice versa.
Both these provisions require prior approval of RBI for any cross border
However, as per the Regulations merger transactions in compliance with these
Regulations shall be deemed to be approved by the RBI. Regulation 9 of these
Regulations further requires a certificate from the Managing Director/Whole Time
Director and Company Secretary, if available, of the company(ies) concerned
ensuring compliance to these Regulations to be furnished along with the
application made to the respective National Company Law Tribunal (NCLT) under
Inbound Merger (Merger of a foreign company into an Indian company)
Regulation 4 of the Regulations lays down the various provisions with respect to
Inbound Merger which can be briefly described in the following points-
Issuance or transfer of any security and/or a foreign security, as the case may
be, to a person resident outside India should comply with the pricing
guidelines, entry routes, sectoral caps, etc. as laid down in the Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2017.
Joint venture/ wholly owned subsidiary
If a joint venture (JV) or wholly owned subsidiary (WOS) merges with its Indian
parent company, the Indian parent company is required to comply with the
conditions prescribed for transfer of shares of such JV/WOS as provided
under Foreign Exchange Management (Transfer or Issue of any foreign security)
Regulations, 2004 (as amended from time to time) (ODI Regulations). Where such
Inbound merger results in acquisition of one or more step down subsidiaries of
JV/WOS of the Indian parent company, such acquisition must comply with
conditions relating to total financial commitment, method of funding, etc. as
provided under Regulation 6 and 7 of ODI Regulations.
Offices of the foreign company outside India shall be deemed to be branch office
of the Indian company pursuant to sanction of scheme of cross border merger in
accordance with the Foreign Exchange Management (Foreign Currency Account by a
person resident in India) Regulations, 2015.
Guarantees and outstanding borrowings
All guarantees or outstanding borrowings of the foreign company from overseas
sources which will become borrowing of the Indian company shall comply within a
period of two years from the date of sanction of such merger by the NCLT, to the
External Commercial Borrowing norms, Trade Credit norms or any other foreign
borrowing norms as applicable to the case. Further, the conditions with respect
to end-use shall not apply.
Holding of assets and two year time period
With respect to holding any asset or security outside India, only those assets
and securities which are permissible under the provisions of Foreign Exchange
Management Act, 1999 (FEMA Act) , rules and regulations framed therein can be
acquired or held by the resultant company. Where assets or securities outside
India are not permitted, to be acquired or held, by the FEMA Act, a time frame
of 2 years has been granted by the Regulations to sell such assets from the date
of sanction of the merger scheme by NCLT.
Outbound Merger (Merger of an Indian company into a foreign company)
Regulation 5 of the Regulations lays down the various provisions with respect to
Outbound Merger which can be briefly described in the following points-
A person resident in India may acquire or hold securities of the resultant
company in accordance with the ODI Regulations. With such acquisition of
securities outside India, the fair market value of such securities should be
within the limit of USD 2,50,000 as prescribed under the Liberalized Remittance
With similar lining of Inbound merger, any office of the Indian company merging
with the foreign company shall be deemed to be a branch office in India of that
foreign company and would be required to comply with 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. These regulations puts
restriction on activities applicable to a branch office i.e. only certain
permitted activities can be carried out through a branch office such as inter
alia consultancy service, promoting technical or financial collaborations, etc.
Such branch offices might be treated as a permanent establishment (PE)/business
connection of the foreign company, and might get under the ambit of Indian
Profits attributed to the activities conducted by the branch office will be
taxed at the rate of 40%.
Guarantees and outstanding borrowings
All guarantees and outstanding borrowings of the Indian company which gets
transferred to the resultant company shall be repaid as per the Scheme
sanctioned by the NCLT. Further the resultant company shall not acquire any
liability in Rupees towards an Indian lender if it is not in consonance with
FEMA Act and Indian lender shall approve of the same.
Holding of assets and two year time period.
With respect to holding any asset or security in India, only those assets and
securities which are permissible under the provisions of FEMA Act, rules and
regulations framed therein can be acquired or held by the resultant company. If
there is any restriction with respect to such acquisition or holding under the
FEMA Act, those asset or security should be sold within two years from the date
of the sanction of the merger scheme by NCLT.
These Regulations are the first foot steps towards a friendly regulatory
environment in the country with respect to cross border mergers.
The deemed RBI approval for such mergers would be much applauded but somehow the
advantage or relief proposed to be given by it seems to be overshadowed by
Regulation 7(2) of the Regulations which provides for a condition that
regulatory actions connected with non-compliance contravention of FEMA Act,
rules or regulations framed thereunder shall be completed and adhered to prior
to the merger.
With the establishment of branch office(s) in India by foreign company in case
of an outbound merger, transaction costs will surely shoot up with imposition of
tax on profits (generated from Indian business) at the rate of 40% making it
difficult for the resultant merged foreign company to run its business smoothly.
Clarification with such tax implications from the Ministry will help to curb the
Though it took almost one year after the draft regulations were released for
public comments to come up with these Regulations, the time was well utilised by
removing many issues present in the draft regulations and indeed this step by
the Government will help in making a business friendly relation with foreign
countries and further attribute to ease of doing business.
By: Pratyush Jain (4th year law student in the B.L.S. LLB program at Government
Law College, Mumbai)