The Foreign Exchange Management (Cross Border Merger) Regulations, 2018

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018

NO PRIOR APPROVAL IS REQUIRED FROM RBI IF CROSS BORDER MERGER IF IT IS IN COMPLIANCE WITH THE FEMA 389/ 2018-RB dated 20 March, 2018.

Section 234 of the Companies Act, 2013 (notified with effect from 13 April, 2017) provided for the cross border merger of Indian and foreign companies. Further, Companies (Compromises, Arrangements and Amalgamation) Rules, 2016, as amended by the Companies (Compromises, Arrangements and Amalgamation) Amendment Rules, 2017 (Co. Rules) were issued. Section 234 provides for prior Reserve Bank of India (RBI) approval in case of cross border merger.

On 26 April, 2017, the RBI issued draft regulations relating to cross border mergers for comments from the public. The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 have now been notified vide notification no. FEMA 389/ 2018-RB dated 20 March, 2018 and are effective from the date of notification. As per the Regulations, merger transactions in compliance with these regulations shall be deemed to have been approved by RBI, and hence, no separate approval should be required. In other cases, merger transactions should require prior RBI approval.

The Cross Border Regulations, 2018 Makes International Merger And Acquisition Transactions More Flexible

The notification of FEMA regulations laying down the framework in relation to cross border mergers is an extremely positive development, which should facilitate international merger and acquisition transactions. Given that the guidelines deal with a new set of transactions, they are likely to evolve based on practical experience, as may be encountered in the due course of time.

The Salient Ingredients of the RBI Regulations are:

The Meaning of Inbound Merger

The resulting company (or transferee) is in India in case of inbound merger.

The Meaning of Outbound Merger

The resulting company (or transferee) is a foreign company in case of outbound merger.

Procedure to be followed by an Indian Company

 In an inbound merger, the Indian company can issue securities in compliance of pricing guidelines and within the limits of applicable sector cap and applicable regulations under Foreign Management Act, 1999 (FEMA).

Compliances under ECB Regulations

A period of two years is provided for compliance with External Commercial Borrowings (ECB) Regulations in respect of loans, borrowings or guarantees of the transferor company outside India.

Other Criteria

Further any asset not permitted to be acquired under FEMA needs to be disposed off twenty-four months immediately after merger.

Deemed Branch Office

 Offices of foreign company will be deemed to be branch office of Indian company post-merger.

Outbound Merger

The resident Indian is allowed to hold securities issued on the basis of fair market value and in terms of Liberalized Remittance Scheme (LRS) of RBI in the case of an outbound merger.

Foreign company can hold assets in India in subject to compliance of FEMA. Offices of Indian company post-merger will be deemed to be branches of the foreign company post-merger.

VALUATION

 Valuation of the Indian company and the foreign company to be conducted by Valuers who are members of a recognized professional body and further to be ensured that such valuation is in accordance with internationally accepted principles on accounting and valuation.

REPORTING TO RBI

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

CERTIFICATION

 A certificate from the Managing Director/Whole Time Director and Company Secretary, if available, of the company concerned ensuring compliance to these Regulations shall be furnished along with the application to be made to the NCLT for approval of the scheme.

Regulatory actions in respect of Non-Compliances under FEMA

 Regulatory actions, if any, with respect to non-compliance, contravention under FEMA shall be completed prior to merger by the companies involved in cross border merger.

Compensation

Compensation by the resultant company, to a holder of a security of the Indian company or the foreign company, as the case may be, may be paid, in accordance with the scheme sanctioned by the NCLT.