After much ado, India has finally permitted cross-border mergers, acquisitions, and amalgamations. The Reserve Bank of India released the structural framework for mergers and acquisitions between Indian and foreign companies. It notified the Foreign Exchange Management (Cross-Border Merger) Regulations 2018 regarding the same. Earlier, according to the Companies Act, business organisations were required to seek prior approval from the Indian central bank for cross-border mergers, but after the implementation of such regulations, the provision of deemed approval from the RBI applies. This implies that a company on following the new regulations would have gotten an approval of the RBI.
Various rules and regulations
The FEMA (Cross-Border) Regulations cover both outbound and inbound mergers and acquisitions. When an Indian company acquires a foreign company and the resultant entity is an Indian company, it is known as an inbound merger; whereas, when the business of an Indian company is amalgamated with that of a foreign company, the resultant company will be foreign. In the case of an inbound merger, any branch or office of the foreign company located anywhere in the world will be considered the resultant company’s branch or office. In the case of an outbound merger, the branches of the Indian company will be considered as that of the resultant foreign company. The assets and liabilities permitted to be acquired will be held in India or abroad as the case may be. However, when the asset or security is forbidden to be held by the resultant company, the provisions state that the resultant company shall sell such asset or security within a period of 2 years from the date of sanction of the Scheme of cross-border merger. The sale proceeds shall be paid outside India immediately, in case of an outbound merger and to India in the case of an inbound merger.
To conduct transactions incidental to the cross-border merger, the resultant company is allowed to have a bank account in an overseas jurisdiction for a period not exceeding 2 years. Additionally, the law requires that all valuations have to be conducted in accordance with internationally accepted pricing methodology and accounting standards. The new regulations should be read along with the provisions of the Companies Act.
Assessing the impact
The Reserve Bank’s latest approval is going to increase the ease of doing business in India. For instance, foreign companies would not be required to have a separate entity existing in India after merging with an Indian company. Similarly, Indian companies operating abroad can merge their foreign operations with other domestic companies in that country.
The array of bidders would widen as well as foreign investors and bidders will now be able to take part in insolvency proceedings. This can be greatly beneficial as it would allow for better pricing decisions regarding the assets to be sold off. But, strict adherence to the timeline prescribed under the Insolvency and Bankruptcy Code will be imperative in attracting foreign bidders.
The biggest advantage is going to be an increase in foreign investment. Foreign direct investment, specifically, is going to get a boost. This will augment the Make in India plan. An increase in FDI becomes even more important as foreign investors are pulling out of the Indian bond market. There are two main reasons behind this, fear of profligacy by the Central Government which has revised its fiscal deficit targets for the coming two years, and higher interest rates abroad which imply better returns. Over $1 billion has been pulled out of Indian debt in March’18. In times like these, cross-border mergers will help balance India’s Capital Account.
One must not ignore the flip side of this new regulation, the resultant company can be foreign as well, in the case of an outbound merger. That may imply losing out on business to other nations that have better environments for investors and entrepreneurs.
The ball is in India’s court
The move by RBI is a welcome decision. However, it leaves the ball in the Government of India’s court, how well does India play the field in ranking upon ease of doing business and attract investors to our country. This opportunity must not waste precious resources and fully exploit such opportunities to make fruitful gains.
Source – Qrius