PROJECT PREPARED DURING

INTERNSHIP

1
CERTIFICATE

2
 ACKNOWLEDGEMENT

I am using this opportunity to express my gratitude to everyone who supported me throughout

the course of the project. I am thankful for their aspiring guidance, invaluably constructive
criticism and friendly advice during the project work. I am sincerely grateful to them for sharing
their truthful and illuminating views on a number of issues related to the project.

I greatly appreciate the motivation and understanding extended for the project work, by my
mentors, who responded promptly and enthusiastically to my requests for frank comments,
despite their congested schedules. I am indebted to all of them, who did their best to bring
improvements through their suggestions.

3
 ABSTRACT

A merger is a corporate strategy wherein two or more companies get amalgamated to form a new
company in order to enhance the financial and operational strengths of the companies. It has also
been used as a means to save weakening businesses in order to save the businesses from
incurring extra-normal losses.

A merger is a deal to unite two existing companies into one new company. There are several
types of mergers and also several reasons why companies complete mergers. Most mergers unite
two existing companies into one newly named company. Mergers and acquisitions are
commonly done to expand a companys reach, expand into new segments, or gain market share.
All of these are done to please shareholders and create value.

The research will be mainly focused on the recent notification which brought into force the cross
border merger of two companies. The aim of the paper will be to understand the introduced
changes.

The research will be carried on by following doctrinal method of research by referring to various
articles written by different authors, books, reading statutes concerning the issues discussed and
giving my own opinion.

Keywords: Companies Act 2013, Cross Border Merger

4
 INTRODUCTION

A merger is a corporate strategy wherein two or more companies get amalgamated to form a new
company in order to enhance the financial and operational strengths of the companies. It has also
been used as a means to save weakening businesses in order to save the businesses from
incurring extra-normal losses.

A merger is a deal to unite two existing companies into one new company. There are several
types of mergers and also several reasons why companies complete mergers. Most mergers unite
two existing companies into one newly named company. Mergers and acquisitions are
commonly done to expand a companys reach, expand into new segments, or gain market share.
All of these are done to please shareholders and create value.1

Chapter XV of the Companies Act 2013 titled Compromises, Arrangements and

Amalgamations enlists the procedure and conditions to be followed in order to carry on a
merger or such acts. Recently, the Ministry of Corporate Affairs of the Government notified
Section 234 of the Companies Act, 2013 via notification2 Dated April 13, 2017 enabling cross
border mergers w.e.f. April 13, 2017.

CROSS BORDER MERGERS

The initiative of cross border merger was first recommended in the 2005 Committee Report on
Company Law headed by Dr. Jamshed J. Irani3 which was constituted with the objective to
suggest reforms in the Company Law. The new provision envisages a scheme of amalgamation
providing for, amongst others, payment of consideration, including by way of cash or depository
receipts or a combination of those.

1
Available at http://www.investopedia.com/terms/m/merger.asp#ixzz4nfhjRbPo
2
[F. No. 1/37/2013 CL.V] available at: http://www.mca.gov.in/Ministry/pdf/section234Notification_14042017.pdf
3
Chapter V, Points 21 and 22 available at http://reports.mca.gov.in/Reports/23-
Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf

5
The scheme of merger may provide for payment of consideration to the shareholders of the
merging company in the form of cash or depository receipts or partly in cash and partly in
depository receipts. So far as using depository receipts as a mode of consideration in cases of
Outbound Mergers is concerned, the same remains to be tested under the extant legal framework
and the Indian markets. Another point to be noted is that if the mode of consideration for the
merger will be cash or depository receipts, ramifications from Indian income tax laws standpoint
will need to be evaluated as such a scheme may not qualify as a tax neutral scheme.

The difference between Inbound Merger and an Outbound Merger may be noted as follows:

S.No. Basis Inbound Merger Outbound Merger

When a company formed under
When a company formed under any
the Companies Act of India
Companies Act of India merges
merges with another company
1. Meaning with another company formed
formed under a foreign
under the same Act is known as an
Companies Act is known as an
inbound merger.
outbound merger
Wherein, the resultant company
Resultant after the merger takes place is a Here, the resultant company is a
2.
Company company formed under the foreign company.
Companies Act of India.
Under the Companies Act of
Earlier, under the Companies Act
2013, Section 234 lays down
3. Companies Act of 1956, only Inbound Mergers
Outbound mergers which have
were allowed.
been recently notified.

Section 234: Merger or Amalgamation of company with foreign company

6
1) The provisions of this chapter unless otherwise provided under any other law for the time
being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations
between
Companies registered under this Act and
Companies incorporated in the jurisdictions of such countries as may be
notified from time to time by the Central Govt.

Provided that the Central Government may make rules in consultation with the
RBI, in connection with mergers and amalgamations provided under this section.

2) Subject to the provisions of any other law for the time being in force, a foreign co., may with
the prior approval of the RBI, merge into a co. registered under this Act or vice versa and the
terms and conditions of the scheme or merger may provide, among other things, for the
payment of consideration to the shareholder of the merging co. in cash,
Or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case
may be,

Rule 25A: Merger or amalgamation of a foreign company with a Company and vice versa

1) A foreign company may merge with an Indian Co. after

a. Obtaining prior approval of RBI and
b. After complying with the provisions of S. 230 to 232 of the Act and these rules
2) A. A co. may merge with a foreign co. incorporated in any of the jurisdictions specified in
Annexure B after obtaining prior approval of the RBI + complying with the provisions of S.
230-232 of the Act
B. The transferee company shall ensure that valuation is conducted by
Valuers who are members of a recognized professional body
In the jurisdiction of the transferee company and further that
Such valuation is in accordance with internationally accepted principles on accounting and
valuation.
A declaration to this effect shall be attached with the application made to Reserve Bank of
India for obtaining its approval under clause (a) of this sub-rule.

7
 3) Application be filed before the Tribunal as per provisions of Sections 230-232 of the Act
after obtaining approvals from the RBI under 25A(1) or (2).

Annexure B: Jurisdictions referred to in clause (a) of sub-rule (2) of rule 25A

Jurisdictions

i. Whose securities market regulator is a signatory to International Organization of Securities

Commissions Multilateral Memorandum of Understanding (Appendix A Signatories) a
signatory to bilateralMemorandum of Understanding with SEBI, or
ii. Whose central bank is a member of Bank for International Settlements (BIS), and
iii. A jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF)
as:
a. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of
Terrorismdeficiencies to which counter measures apply; or
b. A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not
committed toan action plan developed with the Financial Action Task Force to address the
deficiencies.

Draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017

In order to harmonize the scope of cross-border mergers with exchange control laws in India RBI
introduced the Draft Foreign Exchange Management Regulations 2017 as on 26th April 2017 for
public consultation, that prescribes certain guidelines to be followed in case of both inbound and
outbound mergers. The regulations provide separate compliances for inbound and outbound
mergers.

Hence, the above can be summarized as follows:

A. A foreign company can merge with an B. An Indian Company can be merged with a
Indian company provided that foreign company provided that

8
o Sections 230-232 of the Companies Act, o The foreign company is in any of the jurisdictions
2013 are complied with, specified below,
o Prior approval of the Reserve Bank of o Prior approval is obtained,
India is obtained, and o Sections 230-232 of the Act, as stated above, are
o the company files an application with complied with,
NCLT in accordance with Sections 230- o The transferee co. ensures that the valuation is
232 of the Act, after obtaining approval conducted by valuers who are members of a
from the RBI. recognized professional body in the jurisdiction of
the transferee company and also such valuation is
in accordance with the internationally acceptable
principles of accounting and valuations and a
declaration to that effect is filed with the RBI,
o An application with NCLT is filed in accordance
with Sections 230-232 of the Act, after obtaining
RBI approval.

Countries like the USA, UK, Russia, Germany, France, Japan, China, Singapore, Mauritius, etc.
will fall within the definition of eligible jurisdictions.

A step further:

According to Section 394 (4)(b) of the Companies Act 1956, the definition of a transferee
company expressly excludes a company which does not fall within the meaning of a company
as defined under this Act. Hence, the definition excluded the companies formed under any other
Act i.e. foreign companies for the purpose of a merger. The resultant company, according to
the old provisions, had to be an Indian company. That is, the earlier Act did not allow merger of
an Indian Company with a foreign company where the resultant company was a foreign
company. However, this Act is wider in scope and allows foreign companies to be resultant
companies hence bringing more advantages to the companies as well as the economy.

9
Cross Border Demergers:

Thought the Section lays down the laws relating to cross border merger, however, it does not talk
about cross border demergers. Keeping in mind that it is a first time move for such mergers,
cross border demergers are an area still to be looked upon.

No provision for fast-track mergers:

Under Section 233 of the Act (applicable to domestic transactions), a mechanism has been
provided for a fast-track process for mergers between two or more small companies, or between
holding companies and their wholly-owned subsidiaries or between other class of companies
which may be prescribed, whereby a relatively simple and shortened process for merger may be
followed without approaching NCLT.

Hence, no such provision has been provided for Cross Border Mergers.

Difficulty in implementation:

As it stands today, the requirement to bring all cross border merger transactions in line with
requirements under Indian foreign exchange laws may also be practically difficult to implement.
For example, in the case of inbound mergers, it may not be possible for the resultant Indian
company to comply with all of the provisions of the external commercial borrowing regulations,
especially loans which already exist on the books of the foreign company. Also, in respect of
outbound mergers, the RBI notification on cross border mergers mandates compliance with all
provisions of the Indian overseas direct investment and liberalised remittance scheme
regulations. The foregoing regulations, inter alia, set out thresholds for overseas investments and
remittances, and such thresholds may impede outbound mergers.4

4
Available at http://corporate.cyrilamarchandblogs.com/2017/05/new-dawn-indias-cross-border-merger-regime/

10
 CONCLUSION

Hence, the introduction of Cross Border Merger is a welcome move and is expected to open the
doors of business opportunities beyond India as well. This step is a move towards globalization
and has the prospects of being developed into a more followed way of merger.

As far as our short sighted eye can view, the new move will bring a lot of benefits. However, we
fail to understand the shortcomings it might bring.

The taxation regime to be followed for such mergers is still undefined. Also, the questions like
whether a demerger is allowed under the said law are yet to be found out. It may make the
procedure to mergers and demergers difficult since it has introduced some additional compliance
which needs to be made along with the older ones.

11