Cross Border Mergers & Acquisitions FEMA Challenges PVR Rajendra Prasad, FCA PnP Consulting Hyderabad Singapore Dubai © Copyright

Cross Border Mergers – Law in brief The Companies Act, 2013 – Section 234, notified with effect from 13th April, 2017 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ( as amended) Provides permission for Cross Border Mergers subject to prior approval of Reserve Bank of India. On 26.04.2017, Reserve Bank of India issued draft regulations on Cross Border Mergers for comments from the public. The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA 389/2018) dated 20.03.2018 are notified w.e.f. 20.03.2018. As per the Regulations, Merger transactions in compliance with these Regulations shall be deemed to have been approved by Reserve Bank of India. In other cases involving non compliance require prior approval of Reserve Bank of India. PnP Consulting © Copyright

Cross Border Merger Inbound Merger Outbound Merger Indian Company A Cross Border merger is a merger of two companies located in different countries. A Cross Border Merger could involve an Indian company merging with a foreign company or vice versa. If the Resultant Company formed due to merger: is an is a or Inbound Merger Outbound Merger Indian Company Foreign Company PnP Consulting © Copyright

Cross Border Merger – Key FEMA Issues Compensation Outstanding Borrowings / Guarantees Assets or Securities Offices Valuation PnP Consulting © Copyright

Cross Border Merger – Compensation Inbound Merger: Cash Payment Permitted as per the Scheme sanctioned by NCLT Issue of Shares or Securities May issue or transfer any Security and / or a foreign security as per FEMA 20(R) Challenges: As per FEMA 20(R), Foreign Security is not permitted to be issued by an Indian Company. Only Depository Receipts are permitted – Eg ADR, GDR or Unlisted Depository Receipts. Foreign Listing :Presently, Indian companies are not permitted to list on foreign Stock Exchanges and Vice Versa – However, SEBI is actively considering to permit foreign listing of Indian Companies and vice versa. PnP Consulting © Copyright

Cross Border Merger – Compensation Inbound Merger In case the foreign company is a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) of the Indian company – then Indian company shall comply with conditions specified in FEMA 120 for transfer of shares. In case the merger results into acquisition of Stepdown Subsidiaries of JV/WOS of the Indian Party by the resultant company, then such acquisition shall be in compliance with Regulation 6 and 7 of FEMA 120. Challenges: FEMA 120 – Transfer of Shares are permitted only when the sale proceeds are repatriated into India. In case of JV/WOS getting merged with the Indian parent then repatriation is not possible. FEMA 120 – Regulation 6 and 7 are applicable for all inbound mergers even though they are not JV/WOS of the Indian Party. PnP Consulting © Copyright

Cross Border Merger – Compensation Outbound Mergers A Person Resident in India may acquire or hold securities of the Resultant Foreign Company in accordance with FEMA 120. A Resident Individual may acquire securities of the Resultant Foreign Company provided the Fair Market Value of such securities is within the limits prescribed under Liberalized Remittance Scheme (LRS) (presently, USD 250,000 per financial year). Challenges: Generally, Indian company shareholders will be individuals and this limit of USD 250,000 will be a drag on the outbound mergers. In case of Parent in India getting merged with JV/WOS, will have major issues with respect to linkage with LRS limits. Trust structures are used to overcome this limitation. Is it legal ? Whether an Individual can set up a trust abroad using LRS remittances – (Mr.Raghav Bahl – Bloombergquint – London Property – Letter to Finance minister – Dt. 12th June 2019). PnP Consulting © Copyright

Cross Border Mergers – Outstanding Borrowings / Guarantees Inbound Mergers Outbound Mergers Guarantees, Outstanding borrowings or any borrowing from overseas source entering into the books of the resultant Indian Company shall conform to FEMA 3(R) (ECBs) or FEMA 3(R) (Loans in INR) or FEMA 8 (Guarantees) within 2 years. Guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant foreign company shall be repaid as per the Scheme sanctioned by the NCLT. No remittance towards repayment of such liability is permitted from India within 2 years. The Resultant foreign Company shall not acquire any liability in Indian Rupees not in conformity with FEMA. End use Restrictions shall not apply. No objection certificate from Lenders in India of the Indian company to be obtained. Challenges: In case of inbound merger, it is not clarified whether the period of 2 years from the date of entering the books or the date of sanction of Scheme by NCLT. The period of 2 years will be too short to unwind liabilities and may have impact on valuations. In case of outbound mergers it appears that Indian companies with outstanding borrowings / Guarantees may not fit into the merger process. PnP Consulting © Copyright

Cross Border Mergers – Assets or Securities Inbound Mergers Outbound Mergers The resultant Indian company may acquire, hold and transfer any asset or security outside India, which is permitted by FEMA Regulations. The resultant foreign company may hold and transfer any asset / security in India, which is permitted under the FEMA Regulations. In case of any asset or security not permitted under FEMA regulations, then shall sell such asset or security within 2 years from the date of Sanction of Scheme by NCLT. In case of any asset or security, which is not permitted under FEMA Regulations, then shall sell such asset or security within 2 years from the date of Sanction of Scheme by NCLT. Repayment of ‘not permitted’ Liabilities outside India can be extinguished out of sale proceeds of such ‘not permitted’ assets or securities. Repayment of ‘not permitted’ Indian Liabilities can be made out of the sale proceeds of such ‘not permitted’ assets. Challenges: Prescribed transition time period of 2 years will adversely impact the valuations of the assets. PnP Consulting © Copyright

Cross Border Mergers – Offices Inbound Mergers Outbound Mergers An Office outside India of the foreign company shall be deemed to be the branch / office of the Indian resultant company and shall comply with provisions of FEMA 10 (R). An office in India of the Indian company shall be deemed to be the branch / office of the foreign resultant company and shall comply with provisions of FEMA 22(R) Challenges: In case of outbound mergers, the activities of branch office in India are with limited scope. Except IT/ITES services and trade, no other activity is permitted. This will severely restrict the scope of outbound mergers. PnP Consulting © Copyright

Cross Border Mergers – Other Challenges Demerges – Interestingly, FEMA Regulations permit demergers, however, Companies Act has not given demergers permission for cross border mergers. Fast Track facility not available for Cross border mergers. Capital gains exemption not available for outbound mergers. Several other Indian legislations not in sync with Global Statues will be a drag on the Cross border mergers. PnP Consulting © Copyright

Thank you! PnP Consulting © Copyright