NAVIGATING CROSS-BORDER MERGERS AND ACQUISITIONS IN INDIA

In today's globalized business landscape, companies often seek opportunities beyond their domestic borders to expand their reach, diversify their portfolios, and gain a competitive edge. One strategic approach to achieving these goals is through cross-border mergers and acquisitions (M&A). In this article, we will delve into the intricacies of cross-border M&As in India, exploring the legal framework, regulations, benefits, risks, and real-world examples.

# UNDERSTANDING CROSS-BORDER MERGERS AND ACQUISITIONS

Cross-border M&As involve the merger or acquisition of a company located in one country by an entity from another country. These transactions can involve various types of companies, including private, public, or state-owned. The fundamental outcome of cross-border M&As is the transfer of control and authority in operating the merged or acquired company.

In a merger, the assets and liabilities of the two merging companies from different countries are combined to create a new legal entity. In an acquisition, there is a transformation process of assets and liabilities of the local company to the foreign company (foreign investor), and the local company becomes affiliated with the foreign entity.

To understand the legal terminology, the country where the acquiring company originates is known as the "Home Country," while the country where the target company is located is referred to as the "Host Country."

# LEGAL FRAMEWORK IN INDIA

India has a comprehensive legal framework governing cross-border mergers and acquisitions. Key laws and regulations include:

- Companies Act, 2013: This act forms the backbone of corporate governance and regulations for mergers and acquisitions in India.

- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: Securities and Exchange Board of India (SEBI) regulates acquisitions of shares and takeovers in India.

- Foreign Exchange Management (Cross Border Merger) Regulations, 2018: These regulations provide guidelines for cross-border mergers, ensuring compliance with foreign exchange rules.

- Competition Act, 2002: This act regulates anti-competitive practices and ensures fair competition in the market.

- Insolvency and Bankruptcy Code, 2016: It governs insolvency proceedings, which may affect M&A deals.

- Income Tax Act, 1961: Tax implications play a significant role in cross-border M&As, and this act outlines the taxation aspects.

- Department for Promotion of Industry & Internal Trade (DPIIT): DPIIT oversees foreign direct investment (FDI) and trade policies, affecting cross-border deals.

- Transfer of Property Act, 1882: This act deals with property transfers and may apply in asset acquisitions.

- Indian Stamp Act, 1899: Stamp duty considerations are crucial in M&A transactions.

- Foreign Exchange Management Act, 1999 (FEMA): FEMA governs foreign exchange regulations applicable to cross-border transactions.

- IFRS 3 Business Combinations: International Financial Reporting Standards (IFRS) provide guidelines for accounting and financial reporting in M&As.

# SECTION 234 OF COMPANIES ACT, 2013

One of the critical provisions regarding cross-border mergers in India is Section 234 of the Companies Act, 2013. This section allows for schemes of mergers and amalgamations between Indian companies and companies incorporated in foreign jurisdictions. It also permits foreign companies to merge into Indian companies, subject to regulatory approval.

The Central Government, in consultation with the Reserve Bank of India (RBI), has the authority to make rules related to cross-border mergers under this section. This provision has significantly expanded the scope of cross-border M&As in India by allowing both inbound and outbound mergers.

# BENEFITS OF CROSS-BORDER MERGERS

Cross-border mergers offer a plethora of advantages for companies, including:

1. Diversification

Mergers often lead to product diversification. Cross-border mergers take this a step further by offering geographical diversification, allowing companies to establish a global presence.

2. Cost Effectiveness

Entering new markets can be costly. Cross-border mergers provide companies with existing infrastructure and resources in the host country, leading to cost-effectiveness.

3. Technological Advancement

Mergers enable the sharing of intellectual properties and technical know-how, enhancing technological capabilities.

4. Efficient Distribution

Cross-border mergers create extensive distribution networks that transcend borders, improving market reach and customer access.

5. Tax Implications

Tax planning and benefits are often integral to cross-border mergers, leading to potential tax advantages for involved entities.

6. Regulatory Landscape

Companies must navigate different regulatory environments in host countries, which can be challenging yet rewarding in terms of market access.

7. Political Scenario

Assessing the political stability and business-friendliness of a host country is crucial before entering into a merger.

# Risks Associated with Cross-Border Mergers

While cross-border mergers offer significant benefits, they also come with risks, including:

1. Complex Tax Implications

Despite Double Tax Avoidance Agreements (DTAAs), tax implications in host countries can be complex and may require hiring local professionals.

2. Regulatory Challenges

Host countries have different laws and regulations, making compliance complex and potentially risky.

3. Political Uncertainty

Unstable political environments in host countries can create difficulties in conducting business.

# EXAMPLE OF CROSS-BORDER MERGER: TATA - CORUS DEAL

An illustrative example of a cross-border merger is the acquisition of Corus Group Plc by Tata Steel Limited (TSL). This historic deal marked the largest overseas acquisition by an Indian company at the time.

TSL offered to pay 455 pence per share of Corus in 2006, eventually securing the deal for US$ 13.70 billion in 2007. This acquisition elevated Tata Steel to the position of the fifth-largest steel producer globally, granting access to Corus' distribution network in Europe. The merger created Tata-Corus, with a capacity to produce 27 million tons of steel annually.

# LEGAL JUDGMENTS AND CASES

One landmark legal judgment in the context of cross-border mergers is the Vodafone International Holdings v Union of India decision in 2012. This case pertained to taxation of transfer of shares between two non-resident companies by virtue of which the controlling interest of an Indian resident company was acquired. The Supreme Court clarified the doubt over imposition of taxes in such situations and shed light on the following:

• The parameters of tax planning

• Business entities are permitted to structure their transactions in such a way so as to reduce their tax liability, in the absence of any law prohibiting them from doing the same

• Lifting of corporate veil

• Business transactions should be looked at holistically

While commenting upon the creation of subsidiaries through the process of mergers and acquisitions, the SC said that “the legal position of any company incorporated abroad is that its powers, functions and responsibilities are governed by the law of its incorporation. No multinational company can operate in a foreign jurisdiction save by operating as a good local citizen. If the owned company is wound up, the liquidator, and not the parent company, would get hold of the assets of the subsidiary. The difference is between having power or having a persuasive position”.

# CROSS-BORDER DEMERGER (CASE STUDY)

In a case involving Sun Pharmaceutical Industries Limited, a scheme of arrangement under Section 230-234 of the Companies Act, 2013, in the form of a demerger, was filed before the National Company Law Tribunal (NCLT)Ahmedabad Bench. The Scheme contemplated transfer of two specified investment undertakings of Sun Pharmaceutical Industries Limited to two overseas Resulting Companies, viz. Sun Pharma (Netherlands) B.V., and Sun Pharmaceutical Holdings USA Inc. Since, Petitioner Company is listed company having its shares listed on BSE Limited and National Stock Exchange of India Limited therefore the company sought the approval of the Stock Exchanges and SEBI which provided their no objection to the Scheme of Demerger. On presentation of Petition before NCLT meetings of equity shareholders and unsecured creditors were convened, whereby scheme was approved by majority of equity shareholders and unsecured creditors. However, Regional Director (North Western Region) took the following observation on scheme of demerger–

(i) Section 234 refers to cross border mergers and amalgamations and not to demergers.

(ii) Section 2 (19AA) of the Income Tax, 1961 is violated and same will not amount to tax neutral transaction.

(iii) Company to comply with provisions of FEMA and RBI.

Petitioner company while replying to aforesaid observation held that, scheme of arrangement, either in the nature of merger or demerger and the petitioner demerged company has complied with the applicable frame work under FEMA and RBI guidelines. Hence, there was deemed approval of RBI to the Scheme. While going through the provisions of Section 234 it is evident that same applies to cross border mergers ofIndian companies with foreign companies and vice versa and the provisions mention only about the words ‘’Merger’’ and/or ‘’Amalgamation’’ so the Section 234 do not provide for or rather restrict the demerger of the Indian Companies with foreign company. In addition to the above, Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is silent on ‘Demergers’ and mentions only ‘Mergers’ and ‘Amalgamations’. Moreover, Foreign Exchange Management (Cross Border Merger) Regulations, 2018 are applicable to the mergers andamalgamations of the Indian companies with the foreign companies only. Thus, the NCLT rejected the scheme

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

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018, play a pivotal role in regulating cross-border mergers. These regulations define key terms, outline compliance requirements, and provide guidance on inbound and outbound mergers. They also address valuation of companies involved and reporting obligations.

  

Refer it below the FEM(CBM) Regulation, 2018 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11235&Mode=0

 

# Conclusion

Cross-border mergers and acquisitions are complex but essential strategies for companies seeking to expand globally. India's legal framework and regulations have evolved to accommodate both inbound and outbound mergers, offering opportunities for companies

 

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.

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