Cross border mergers seminar informative ppt

1. PVR Rajendra Prasad, FCA
PnP Consulting
Hyderabad Singapore Dubai
Cross Border Mergers & Acquisitions
FEMA Challenges
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2. Cross Border Mergers – Law in brief
• The Companies Act, 2013 – Section 234, notified with effect from 13th April, 2017
and the Companies (Compromises, Arrangements and Amalgamations) Rules,
2016 ( as amended)
Provides permission for Cross Border Mergers subject to prior approval of Reserve Bank of
India.
• On 26.04.2017, Reserve Bank of India issued draft regulations on Cross Border
Mergers for comments from the public.
• The Foreign Exchange Management (Cross Border Merger) Regulations, 2018
(FEMA 389/2018) dated 20.03.2018 are notified w.e.f. 20.03.2018.
As per the Regulations, Merger transactions in compliance with these Regulations shall be
deemed to have been approved by Reserve Bank of India. In other cases involving non
compliance require prior approval of Reserve Bank of India.
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3. Cross Border Merger
 A Cross Border merger is a merger of two companies located in
different countries.
 A Cross Border Merger could involve an Indian company merging
with a foreign company or vice versa.
 If the Resultant Company formed due to merger:
is an is a
or
Inbound Merger Outbound Merger
Indian Company Foreign Company
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4. Cross Border Merger – Key FEMA
Issues
Compensation
Outstanding Borrowings / Guarantees
Assets or Securities
Offices
Valuation
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5. Cross Border Merger – Compensation
Inbound Merger:
Cash Payment Permitted as per the Scheme sanctioned by NCLT
Issue of Shares or Securities
May issue or transfer any Security and / or
a foreign security as per FEMA 20(R)
Challenges:
1. As per FEMA 20(R), Foreign Security is not permitted to be issued by an Indian
Company. Only Depository Receipts are permitted – Eg ADR, GDR or Unlisted
Depository Receipts.
2. Foreign Listing :Presently, Indian companies are not permitted to list on foreign Stock
Exchanges and Vice Versa – However, SEBI is actively considering to permit foreign
listing of Indian Companies and vice versa.
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6. Cross Border Merger – Compensation
Challenges:
1. FEMA 120 – Transfer of Shares are permitted only when the sale proceeds are
repatriated into India. In case of JV/WOS getting merged with the Indian parent
then repatriation is not possible.
2. FEMA 120 – Regulation 6 and 7 are applicable for all inbound mergers even
though they are not JV/WOS of the Indian Party.
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Inbound Merger
 In case the foreign company is a Joint Venture (JV) or Wholly Owned Subsidiary
(WOS) of the Indian company – then Indian company shall comply with
conditions specified in FEMA 120 for transfer of shares.
 In case the merger results into acquisition of Stepdown Subsidiaries of JV/WOS
of the Indian Party by the resultant company, then such acquisition shall be in
compliance with Regulation 6 and 7 of FEMA 120.
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7. Cross Border Merger – Compensation
Challenges:
1. Generally, Indian company shareholders will be individuals and this limit of USD 250,000
will be a drag on the outbound mergers.
2. In case of Parent in India getting merged with JV/WOS, will have major issues with respect
to linkage with LRS limits. Trust structures are used to overcome this limitation. Is it legal ?
3. Whether an Individual can set up a trust abroad using LRS remittances – (Mr.Raghav Bahl –
Bloombergquint – London Property – Letter to Finance minister – Dt. 12th June 2019).
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Outbound Mergers
 A Person Resident in India may acquire or hold securities of the Resultant Foreign
Company in accordance with FEMA 120.
 A Resident Individual may acquire securities of the Resultant Foreign Company provided
the Fair Market Value of such securities is within the limits prescribed under Liberalized
Remittance Scheme (LRS) (presently, USD 250,000 per financial year).
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8. Cross Border Mergers – Outstanding
Borrowings / Guarantees
Inbound Mergers Outbound Mergers
 Guarantees, Outstanding borrowings or any
borrowing from overseas source entering into the
books of the resultant Indian Company shall conform
to FEMA 3(R) (ECBs) or FEMA 3(R) (Loans in INR) or
FEMA 8 (Guarantees) within 2 years.
 Guarantees or outstanding borrowings of the Indian
company which become the liabilities of the
resultant foreign company shall be repaid as per the
Scheme sanctioned by the NCLT.
 No remittance towards repayment of such liability is
permitted from India within 2 years.
 The Resultant foreign Company shall not acquire any
liability in Indian Rupees not in conformity with
FEMA.
 End use Restrictions shall not apply.  No objection certificate from Lenders in India of the
Indian company to be obtained.
Challenges:
1. In case of inbound merger, it is not clarified whether the period of 2 years from the date of entering the books
or the date of sanction of Scheme by NCLT.
2. The period of 2 years will be too short to unwind liabilities and may have impact on valuations.
3. In case of outbound mergers it appears that Indian companies with outstanding borrowings / Guarantees may
not fit into the merger process.
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9. Cross Border Mergers – Assets or
Securities
Inbound Mergers Outbound Mergers
 The resultant Indian company may acquire,
hold and transfer any asset or security outside
India, which is permitted by FEMA
Regulations.
 The resultant foreign company may hold and
transfer any asset / security in India, which is
permitted under the FEMA Regulations.
 In case of any asset or security not permitted
under FEMA regulations, then shall sell such
asset or security within 2 years from the date
of Sanction of Scheme by NCLT.
 In case of any asset or security, which is not
permitted under FEMA Regulations, then shall
sell such asset or security within 2 years from
the date of Sanction of Scheme by NCLT.
 Repayment of ‘not permitted’ Liabilities
outside India can be extinguished out of sale
proceeds of such ‘not permitted’ assets or
securities.
 Repayment of ‘not permitted’ Indian Liabilities
can be made out of the sale proceeds of such
‘not permitted’ assets.
Challenges:
Prescribed transition time period of 2 years will adversely impact the valuations of the assets.
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10. Cross Border Mergers – Offices
Inbound Mergers Outbound Mergers
 An Office outside India of the foreign
company shall be deemed to be the
branch / office of the Indian resultant
company and shall comply with
provisions of FEMA 10 (R).
 An office in India of the Indian company
shall be deemed to be the branch /
office of the foreign resultant company
and shall comply with provisions of
FEMA 22(R)
Challenges:
In case of outbound mergers, the activities of branch office in India are with limited scope.
Except IT/ITES services and trade, no other activity is permitted. This will severely restrict
the scope of outbound mergers.
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11. Cross Border Mergers – Other
Challenges
 Demerges – Interestingly, FEMA Regulations permit
demergers, however, Companies Act has not given
demergers permission for cross border mergers.
 Fast Track facility not available for Cross border
mergers.
 Capital gains exemption not available for outbound
mergers.
 Several other Indian legislations not in sync with
Global Statues will be a drag on the Cross border
mergers.
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12. Thank you!
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