Cross-Border Mergers in India: Regulatory Challenges and Global Best Practices

Definition

Cross-border mergers, involving Indian and foreign companies as per the Companies Act, 2013 (CA 2013), are key for corporate expansion in a globalized economy. These can be inbound (foreign merging into Indian) or outbound (Indian merging into foreign). The definition includes "arrangements," potentially broadening its scope.

Legal and Regulatory Framework in India: 

The legal framework is extensive. The Companies Act, 2013, particularly Section 234, permits these mergers with prior RBI approval, barring exceptions. Sections 230-232 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, detail the process, including NCLT approval. Before 2013, the Companies Act, 1956, mainly facilitated inbound mergers.

The Foreign Exchange Management Act, 1999 (FEMA), and RBI regulations like the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, govern foreign exchange aspects. These often allow "deemed approval" from RBI under certain conditions. For listed companies, SEBI regulations, such as the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and Listing Regulations, are vital. The Competition Act, 2002, requires CCI approval for mergers exceeding specific thresholds that could harm competition. The CCI also has extra-territorial jurisdiction. Navigating these multiple regulators poses challenges.

Key Regulatory Challenges: 

Regulatory hurdles in India include lengthy approval processes from RBI, NCLT, SEBI, and CCI, often taking months. Mergers involving companies from countries sharing a land border with India face extra scrutiny. Compliance with FEMA regulations on securities, assets, and liabilities transfer requires attention to pricing, sectoral caps, entry routes, and reporting. Ensuring overseas borrowings and guarantees meet FEMA norms within two years is also crucial. Repatriating sale proceeds from non-permitted assets within two years of NCLT sanction adds complexity.

Fair asset valuation and adherence to international accounting principles, as per Companies Rules, are complex with diverse accounting standards. Outbound mergers require valuation by professionals recognized in the transferee company's jurisdiction.  Economic fluctuations can further complicate valuation. Indian companies can only engage in outbound mergers with companies in notified jurisdictions, limiting opportunities. Compliance with foreign jurisdiction laws alongside Indian laws adds to the complexity.  Assessing the impact on competition and securing CCI approval within 210 days can be demanding. The CCI's global merger review mandate adds scrutiny.

Global Best Practices:

Global best practices emphasize streamlined approvals via single-window clearances or faster timelines, as seen in India's recent fast-track merger processes. Clear, consistent regulatory requirements across authorities minimize ambiguity. Facilitating cross-border investment through ease of business, clear guidelines, and predictable outcomes is prioritized. Transparency and stakeholder protection, including minority shareholders, are key, as pursued by SEBI. International harmonization of accounting standards simplifies cross-border mergers.

Key legal sections include Section 234 (cross-border mergers), Sections 230-232 (merger procedures) of the Companies Act, 2013 [4, 6, 8, 22, 29, 30, 31, 2, 4, 6, 7, 8, 9, 12, 29, 31], the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 , and Section 5 of the Competition Act, 2002 (combinations review).

Landmark cases include Vodafone International Holdings v. Union of India (2012), highlighting cross-border transaction complexities. The Right Match Holdings Limited Case (NCLT) showed the "deemed approval" under FEMA. The Sun Pharmaceutical Industries Ltd. Case (NCLT) clarified that demergers are not permitted under the current cross-border merger framework.

Conclusion:

In conclusion, India has established a framework for cross-border mergers, but complexities remain. Multi-layered approvals, FEMA regulations, valuation issues, jurisdictional limits for outbound mergers, and competition law navigation are hurdles. Continued efforts to enhance clarity, simplify procedures, and align with global best practices are crucial for facilitating these mergers and strengthening India's position as a global business hub.

This article is authored by Deepanshu Tembhre. He was among the Top 40 performers in the Quiz Competition on New Criminal Laws organized by Lets Learn Law.