A cross -border Merger is a transaction wherein, two firms keeping their home operations intact, agree to an integration of the companies on a relatively equal basis. Blending such operations would make the two companies have capabilities that create competitive advantages for both and ensures success in the global marketplace. A cross-border Acquisition is a transaction through which an expanding firm buys either a controlling stake or totally acquires an existing company incorporated in a foreign country . Cross Border M&As can be resorted to by companies for a variety of reasons namely: To access Foreign markets through an established brand and gain greater market share For the purposes of Eliminating or minimizing Competition Overcoming entry barriers to enter a new market more rapidly Reduce Tax liabilities and Reducing the cost of new product development.
In the first 10 years since Indias independence, the economy was quite receptive to foreign investments. Thereafter, India‟s foreign trade policy changed and it became a closed economy marking the beginning of the license raj. Post 1991, after liberalization of India foreign trade policy, increasing emphasis was laid on cross border mergers as an effective business expansion tool. Every M&A strives to seek substantial control of a private or public company and involves complex legal issues like due-diligence, defining Contractual obligations of the parties, structuring exit options etc that require effective government regulation. However, expert opinion sought by the Indian Government on regulating cross border M&A‟s have asserted that, though regulation of such mergers is beneficial in the national interest but over-regulation may result in adverse effects on the economic development and future investment prospect by foreign entities in the Indian market.
Cross Border Mergers in India can be of two types-i) Inbound and ii) Outbound In-bound cross border M&A‟s essentially means investment in Business enterprises by persons resident outside India Regulation 20 of the Foreign Exchange Management Act, permits non-resident Indians to purchase shares on a rights basis or convertible debentures of an Indian Company subject to the following conditions The said offer of shares on a rights basis must not exceed the permissible limits or sectoral caps approved by the Foreign Direct Investment Scheme The existing shares or debentures of a company so converted for issuing to non- resident individuals or entities must be duly acquired and held by such individuals and entities in person The aforementioned offer of shares to non-resident entities must be at a price less than that offered to resident share-holders. The same regulation provides that an Indian Company can issue its shares on a rights basis to its employees resident outside India or to the employees of its Joint Venture/Subsidiary abroad.
Regulation 7 of the FEMA provides that once a scheme for Merger or Amalgamation has been approved by the Court, the transferee company (which may be the survivor or a new company) may issue its shares to the shareholders of the transferor company resident outside India, subject to the condition that the percentage of non-resident shareholding in the transferee company doesn‟t exceed the permissible limits approved by RBI. FEMA Regulation 9 permits Non-residents other than non-resident Indians (“NRIs”) or Overseas Corporate Bodies (“OCBs”) to transfer shares / convertible debentures of an Indian company to any non-resident, provided : The transferee has obtained prior permission of the Indian government, if he had any previous venture or tie-up in India through investment in any manner or a technical collaboration or trademark agreement in the same or allied field in which the Indian company whose shares are being transferred is engaged.
Schedule 1 to the FEMA regulations permits any Indian company which is not engaged in the activity or manufacture of items listed in Annexure A (like defense, print media, broadcasting, postal services, courier services etc.) to the FDI Scheme to issue its shares to a non-resident or a foreign entity (whether incorporated or not) on a repatriation basis, provided: The issuer company does not require an industrial license; The shares are not being issued for acquiring existing shares of another Indian company If a non resident to whom the shares are being issued intends to be a collaborator, he should have obtained prior approval of the Indian Government, if he had any previous investment/collaboration/tie-up in India in the same or allied field in which the Indian company issuing the shares is engaged. A trading company incorporated in India may issue shares or convertible debentures to the extent of 51% of its authorized share capital, to persons resident outside India subject to the following condition That remittance of dividend to such shareholders resident outside India is made only after such company has secured registration as an export/trading/star trading /super trading house from the Directorate General of Foreign Trade, Ministry of Commerce, of the Indian Government.
Schedule 1 also stipulates a ceiling of 10% of the total paid-up equity capital or 10% of the paid-up value of each series of convertible debentures, and provides that the total holdings of all Foreign Institutional Investors/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid up value of each series of convertible debentures. Under the Portfolio Investment Scheme, a domestic asset management company or a portfolio manager registered with SEBI as a Foreign Institutional Investor has been permitted by the RBI to make investments on behalf of non-residents who are foreign citizens and bodies corporate registered outside India, provided such investment is made out of funds raised or collected or brought from outside India through normal banking channel. Such investments are restricted to 5% of the equity capital or 5% of the paid-up value of each series of convertible debentures within the overall ceiling of 24% or 40% as applicable for FIIs for the purpose of the Portfolio Investment Scheme.
Press note 5 of 2009 issued by RBI talks about Indirect Foreign Investment that stipulates: If an Indian investing company is “owned” or “controlled” by “non-resident entities”, then the entire investment by the investing company into the subject downstream Indian investee company would be considered as indirect foreign investment. Provided that, Where an indirect foreign investment is made in wholly owned subsidiaries of operating-cum-investing companies, such investments will not be considered as in-direct foreign investment in the operating-cum-investing company. The exception was made since the downstream investment of a 100% owned subsidiary of an operating-cum-investing (holding) company is akin to investment made by the holding company and the downstream investment should be a mirror image of the holding company.
FEMA regulation 6 permits an Indian company to make direct investments in a joint venture or a wholly owned subsidiary outside India, without seeking the prior approval of RBI subject to the fulfillment of the following conditions: Total financial investment of such company shall be capped at USD 50 Million or its equivalent in a block of 3 financial years including the year in which the investment is made, except investments in a Joint Venture/Wholly Owned subsidiary in Nepal or Bhutan. The total financial commitment to be made by an Indian Company for investments in Nepal or Bhutan must not exceed a total 1,200 crore rupees in a block of three years including the year on which the investment is made. The Indian company must route all its transactions relating to the investment in the joint venture or the wholly owned subsidiary through only one branch of an authorized dealer to be designated by it. However different branches can be designated for the purposes of onward transmission to RBI The investment must be made in a foreign entity engaged in the same core activity carried on by the Indian investing company; Such Indian investing company is not on the RBI‟s caution list or under investigation by the Enforcement Directorate.
An Indian Company can also invest in a foreign company that is engaged in the same core activity by exchanging ADRs/GDRs issued to the foreign company in accordance with the ADR/GDR Scheme for the shares so acquired and the fulfillment of the following conditions: The Indian company has already made an ADR/GDR issue and that such ADRs/GDRs are currently listed on a stock exchange outside India. The extent of the investment by an Indian company must not exceed the higher of an USD 100 Million or an amount equivalent to 10 times the export earnings of the Indian company during the preceding financial year. The Indian Company must have at least 80% of its annual average export earnings or an amount equivalent to at least 1,000 Million rupees in the previous 3 financial years from the activities/sectors included in Schedule 1 to the FEMA regulations. The ADR/GDR issue is backed by a fresh issue of underlying equity shares by the Indian company The total holding in the Indian company by non-resident holders must not exceed the prescribed sectoral cap.
In Accordance with FEMA Regulation 11, an Indian Company is also entitled to make direct investment outside India by way of capitalization in full or part of the amount due to it from a foreign entity that includes:- Payment for export of plant, machinery, equipment and other goods/software to the foreign entity; Fees, royalties, commissions or other entitlements of the Indian party due from the foreign entity for the supply of technical know-how, consultancy, managerial or other services, However where export proceeds have remained unrealized beyond a period of 6 months from the date of export, such proceeds cannot be capitalized without the prior permission of RBI. An Indian company exporting goods/software/plant and machinery from India towards equity contribution in a Joint Venture or Wholly Owned Subsidiary outside India is required to declare them on a prescribed form as stipulated by RBI and identifying the same as “Exports against equity participation in the JV/WOS abroad”.
In India, the Monopolies and Restrictive Trade Practices Act, 1969 („MRTP‟) was the first enactment that came into effect on June 1, 1970 with the object of controlling monopolies, prohibiting monopolistic and restrictive trade practices and unfair trade practices. Prior to 1991, the MRTP also contained provisions regulating mergers and acquisitions. In 1991, the MRTP was amended, and the provisions regulating mergers and acquisitions were deleted. A committee was appointed in October 1999 to examine the existing MRTP Act for shifting the focus of the law from curbing monopolies to promoting competition and to suggest a modern competition law. The Competition Act, 2002 was enacted to replace the existing Act, under which the Competition Commission of India („CCI‟) has been established to control anti- competitive agreements, abuse of dominant position by an enterprise and for regulating certain combinations. The Competition Act essentially contemplates two kinds of anti competitive agreements – horizontal agreements or agreements between entities engaged in similar trade of goods or provisions of services, and vertical agreements or agreements between entities in different stages / levels of the chain of production, in respect of production, supply, distribution, storage, sale or price of goods or services.
Certain combinations defined under the Competition Act are considered to affect competition in India and are regulated by the CCI, such as: An acquisition where the transferor and transferee jointly have entered into a merger or amalgamation where the resulting entity has, (i) assets valued at more than Rs. 10 billion or turnover of more than Rs. 30 billion, in India; or (ii) assets valued at more than USD 500 million in India and abroad, of which assets worth at least Rs 5 billion are in India, or, have a gross turnover of more than 1500 million USD of which turnover in India should be at least Rs 15 billion. An acquisition or a merger or amalgamation where the group to which the acquired entity would belong, has (i) assets valued at more that Rs. 40 billion or turnover of more than Rs 120 billion, in India; or (ii) assets valued at more than USD 2 billion in the aggregate in India and abroad, of which assets worth at least Rs 5 billion should be in India, or turnover of more than USD 6 billion, including at least Rs 15 billion in India. the Competition Act has now made it mandatory for entities entering into such combinations, to give prior notice to the CCI in the prescribed format within 30 days of the approval of the combination or the execution of any agreement or other document for acquisition. The combination will become effective only after the expiry of 210 days from the date on which notice is given to the CCI, or after the CCI has passed an order approving the combination or rejecting the same.
The lengthy waiting period for seeking approval of the Competition commission in India may impact time lines in the closing of mergers and acquisitions, and the cost involved in waiting out the period of 210 days. However, the wording of the proposed clause seems to suggest that if the CCI delays an order longer than the prescribed 210 days, the combination would be deemed to have been approved by the CCI, therefore removing the uncertainty of waiting for the completion of a potentially elongated regulatory process, as well as forcing the regulators to act in an expeditious manner. Some positive steps taken by Indian Regulatory authorities to strengthen the domestic regime for Cross Border Mergers and Acquisitions include, a press release that says that RBI will now treat all such Indian companies merging with overseas firms will continue as entities resident in the country under FEMA and the provisions under FEMA will be accordingly amended. Further payment by foreign companies to shareholders of listed Indian companies being merged can be now be made in the form of cash, shares or Indian Depository Receipts (“IDRs”) issued by the overseas companies. However, such IDRs do not carry with them voting rights and effective changes have to be made in the Indian laws to allot voting rights or some sort of management control to Indian Shareholders.