Strengthening of Foreign Investment in India owing to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018

[Ayush Chowdhury and Rishika Raghuwanshi]

The authors are third-year students at Symbiosis Law School, Pune.

Until now, it was possible for a foreign company to merge with an Indian company, whereas the vice versa was a challenge within the scope of court-sanctioned merger framework set out under the Indian corporate law. This challenge was finally overcome in April 2017 when the company law provisions brought in regulations governing cross border mergers into force.

Following this, the Reserve Bank of India (“RBI”) also issued draft regulations (“Draft RBI Regulations”) wherein it laid down standards of deemed approval from the RBI for mergers across the border. This enabled the companies to merge with foreign companies under specified jurisdictions.

With the Draft RBI Regulations being at an elongated halt for nearly a year’s time, the RBI on March 20, 2018 notified the Foreign Exchange Management (Cross Border Merger) Regulation, 2018[1] vide notification No. FEMA 389/ 2018- RB (“Merger Regulations”).

In this article, the authors would highlight how the Merger Regulations has brought about a change in the context of cross border mergers and how it would impact the economy by bringing foreign investments.

The noteworthy changes brought about by the Merger Regulations are:

Issue or Acquisition of Securities

1. Inbound Mergers

The Merger Regulations clarified that in cases of inbound mergers i.e. where the company is an overseas joint venture (“JV”) or a wholly owned subsidiary (“WOS”) of an Indian company, there arises a need for such company to comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”). This is an additional compliance with a pre-requisite compliance with applicable foreign exchange regulations.

Moreover, the winding up related obligations in the ODI Regulations should be assessed by the JV/WOS. Subsequently, in cases of inbound mergers which lead to acquisition of a step down subsidiary of a JV/WOS, such acquisition must comply with the conditions relating to total financial commitment, method of funding etc. as set out in the ODI Regulations.

Regulations 6 and 7 of the ODI Regulations are mandatory compliances if the merger with the JV/WOS results into an acquisition.

2. Outbound Mergers

The acquisition of securities could be made by a resident of India conforming to the existing regulations relating to investment in a JV/WOS or a liberalized remittance scheme (LRS).

Transfer of Assets/ Securities Estopped to be Acquired

1. Inbound Mergers

The duration to sell the assets not permitted to be held or acquired under FEMA has been increased from 180 days to 2 years from the date of sanction of the scheme. However, it remains to be tested whether such an elongated duration would be optimum for the sale of foreign assets in light of compliances under foreign laws. The referred resultant Indian company would have to seriously evaluate the provisions of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 to hold immovable property outside India. The sale proceeds shall be transferred to India immediately through banking channels.

2. Outbound Mergers

In case of a company not permitted to acquire or hold any asset or securities in India which is part of an Indian Company under an outbound merger, the foreign company can transfer such assets or securities within a period of 2 years from the date of sanction of scheme and the sale proceeds shall be transferred outside India immediately through banking channels.

Borrowings

1. Inbound Mergers

The Merger Regulations henceforth provide a period of 2 years from the date of sanction of the scheme to bring overseas borrowings availed by the resultant Indian company. The clarification expressly provides for non-applicability of end-use restrictions under the Foreign Exchange Management Act, 1999 (“FEMA”) to such overseas borrowings.

Prior to an inbound merger, if there happens to be any borrowing by the foreign company, it shall become the borrowing of the Indian company after the merger which should be in consonance with external commercial borrowing norms. Nevertheless, no remittance for repayment of such overseas borrowings can be made during the two-year period.

2. Outbound Mergers

Pursuant to outbound mergers, while the guarantees or outstanding borrowings of the Indian companies would become the liabilities of the resultant foreign company, the Merger Regulations put down that foreign companies shall not acquire liability in rupees payable to the Indian lenders non-compliant with FEMA; and with reference to this, a No Objection Certificate (NOC) must be availed from the Indian lenders.

Acquisition of Assets

1. Inbound Mergers

After the inbound merger, the resultant Indian company may acquire or hold any assets or securities outside India which it is permitted to acquire under the RBI Act or the rules or regulations thereof.

2. Outbound Mergers

After the outbound mergers, the foreign company may acquire or hold any assets in India which it is permitted to acquire under the provisions of the RBI Act or the rules or regulations thereof.

Location of the Office

1. Inbound Mergers

Under the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2015, any office of the foreign company outside India shall be deemed as a branch or an office of the resultant Indian company, thereby implying that the resultant Indian company would be allowed to undertake any transaction as permitted to a branch or an office.

2. Outbound Mergers

According to the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or Any Place of Business) Regulations 2016, a foreign company may undertake any transaction as permitted to a branch office as any office in India shall be deemed as a branch or an office of the resultant company in India.

Other Consideration under the New Regulations

In both inbound and outbound mergers, a bank account could be opened for a maximum period of two years, and the valuation parameter shall be applicable for both.

Furthermore, in light of cross border mergers, it is deemed that prior approval has been taken and that no separate approval is required from the RBI; the only requirement is to produce a certificate of either the Managing or the Whole time Director and of the CS stating that all cross border regulations under Rule 25A of the Companies (Compromises, Arrangement and Amalgamation) Rules, 2016 have been complied with.

It could be observed that the notification by the RBI of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 is a welcome step which would enable international operations of any company to be increasingly realistic, thus leading to elevation in the ease of doing business in India. The RBI Draft Regulations also stand clarified.

Opposed to the traditional modes of acquisition, investment and joint ventures, enthusiasm in the cross-border mergers is being witnessed. The Merger Regulations are likely to allow Indian companies to merge their foreign business with domestic companies, while foreign companies would no longer be required to maintain an Indian company after a merger but just consolidate into one single entity. The move is like to impact the insolvency and bankruptcy proceedings as it would encourage foreign bidders to buy Indian assets.  The new regime is anticipated to bring in strength to Indian foreign investment, thus imparting confidence to the Indian players to emerge as a strong force in international markets.

[1] Foreign Exchange Management (Cross Border Merger) Regulations, 2018, Notification No. FEMA 389/ 2018- RB, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11235&Mode=0