RBI proposed draft regulations for Cross Border Mergers by Somesh Lund

The Reserve Bank of India (RBI) on 28th April, 2017[1] proposed draft of Foreign Exchange Management (Cross border Merger) Regulations, 2017 under Foreign Exchange Management Act, 1999 in relation to cross border mergers and is accepting public comments till 9^th May, 2017. These regulations cover merger, demerger, amalgamation or arrangements between Indian company (ies) and foreign company (ies).

These regulations are proposed in relation to section 234 of the Companies Act, 2013 notified by MCA w.e.f. 13^th April, 2017. Rule 25A was inserted in Companies (Compromises, Arrangements & Amalgamations) Rules, 2016[2] as well.

The proposed regulation prescribes the rules to be followed for Inbound Mergers and Outbound Mergers.

Inbound Mergers:

Inbound mergers are mergers, demergers, amalgamation or arrangements wherein the resultant company is an Indian company. The following draft regulations have been proposed:-

• Any issue of security by the resultant company to a person outside India shall be in accordance with provisions prescribed in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000;
• Any borrowing from an overseas source shall comply with External commercial Borrowing norms;
• The company can hold/transfer assets outside India in accordance with the Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2000[3] ;
• Assets and securities not permitted to be held shall within a period of 180 days from the commencement of the scheme of cross border merger be sold. The sale proceeds shall be repatriated to India immediately through banking channels.
• Restrictions as specified under Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000 needs to be complied with.

Outbound Mergers:

Outbound Mergers are mergers, demergers, amalgamation or arrangements wherein the resultant company is a foreign company.

The following draft regulations have been proposed:-

• A resident Indian can acquire and hold shares of the resultant company in accordance with provisions prescribed in theForeign Exchange Management (Transfer or issue of Foreign Security) Regulations, 2000;
• The resultant company shall repay outstanding borrowings as per the scheme sanctioned by the National Company Law Tribunal;
• The company can hold/transfer assets in India in accordance with the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000[4];
• Assets and securities not permitted to be held shall within a period of 180 days from the commencement of the scheme of cross border merger be sold. The sale proceeds shall be repatriated outside India immediately through banking channels.

In addition to these provisions, the RBI has also prescribed that the valuation for both the companies for the purpose of cross border merger shall be done as per internationally accepted pricing methodology by a Chartered Accountant/public accountant/merchant banker authorized to do so in either jurisdiction.

Finally, any transaction arising due to cross border mergers shall be reported to the Reserve Bank under prevailing rules and regulations. This means if the merger results in any foreign direct investment or results in direct investment outside India or results in availing external commercial borrowings required reporting will be done to RBI.

Transactions undertaken as per the regulations shall be deemed to be approved by RBI as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016

[1] https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3343

[2]www.companiesact.in/download/Arrangements_and_Amalgamation.doc

[3] https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=161

[4] https://www.rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=175

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By: Somesh Lund:-corplaw@vinodkothari.com