The Reserve Bank of India (‘RBI’) has notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (‘Cross Border Merger Regulations’), by way of a notification dated March 20, 2018. Some of the key provisions of the Cross Border Merger Regulations are set out below:

i.  Inbound Mergers: In case of an inbound merger (i.e. a cross border merger wherein an Indian company is the resultant company), the resultant Indian company may issue shares to persons resident outside India, subject to compliance with the requirements prescribed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘FEMA 2017’). Further, if (a) the foreign company in an inbound merger is a joint venture (‘JV’) or wholly owned subsidiary (‘WOS’) of the Indian company; or (b) the inbound merger of a JV or WOS results in the acquisition of a step down subsidiary, then compliance with the provisions of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (‘ODI Regulations’) is required. Some of the key provisions governing inbound mergers are set out below –

•   Acquisition/transfer of assets and liabilities by the resultant Indian Company: If the resultant Indian company acquires any asset or comes to hold any liability outside of India as a result of the inbound merger, which acquisition is not permitted under FEMA, then the resultant Indian company would be required to sell such asset / security or extinguish such liability from the sale proceeds of the overseas assets, within two years of the merger scheme being sanctioned by the National Company Law Tribunal (‘NCLT’).

•   Offices of the foreign transferor company: The overseas office(s) of the foreign transferor company would be deemed to be the offshore branches/office outside India of the resultant Indian company, which will be required to undertake the activities of a branch/office as permitted under the Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015.

•   Borrowings and guarantees of the foreign transferor company: Any borrowings raised or guarantees issued by the foreign transferor company, which come to be held by the resultant Indian company, will have a period of two years to become compliant with the applicable foreign exchange regulations governing external commercial borrowings, borrowing or lending in Rupees or guarantees. No remittance for paying such liability can be made by the resultant Indian company within the two years of the merger scheme being sanctioned by the NCLT. In such cases, end use restrictions will not apply.

With respect to an inbound merger, if the resultant Indian company intends to continue operations outside India post completion of such cross-border merger, then such resultant Indian company will be required to maintain a presence outside India, through an offshore branch or a subsidiary in the manner permitted under foreign exchange regulations.

ii.  Outbound Mergers: In case of an outbound merger (i.e. a cross border merger wherein a foreign company is the resultant company), a person resident in India may hold or acquire securities of the resultant foreign company, in accordance with the provisions of ODI Regulations (including the fair market value of such foreign securities being within the limits prescribed under the Liberalized Remittance Scheme, where the resident Indian is an individual). Some of the key provisions governing outbound mergers are set out below:

•   Offices of the Indian transferor company: Indian offices of the Indian transferor company will be deemed to be branch offices of the resultant foreign company. Transactions can be undertaken out of such Indian branch offices in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.

•   Borrowings and guarantees of the Indian transferor company: The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant foreign company are required to be paid as per the scheme sanctioned by the NCLT. However, the resultant foreign company will not be permitted to acquire any liability payable towards an Indian lender in Rupees which is not in conformity with the provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’).

•   Acquisition/transfer of assets by the resultant foreign Company: If the resultant foreign company acquires any asset or security which it is not otherwise permitted to hold under FEMA, it will be required to sell such asset or security within two years of the merger scheme being sanctioned by the NCLT, and the proceeds of such divestment are required to be repatriated outside India immediately through normal banking channels. However, repayment of Indian liabilities from the proceeds of the sale of such assets or securities within such two year period is permitted.

•   Valuation: In accordance with Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016, valuation for an outbound merger has to be conducted by a valuer who is a member of a recognized professional body in the jurisdiction of the transferee company in accordance with internationally accepted principles on accounting and valuation.

With respect to an outbound merger, if the resultant offshore company intends to continue operations in India post completion of such cross-border merger, then such resultant offshore company will be required to maintain a presence outside India through a subsidiary in the manner permitted under foreign exchange regulations.