In simple language, a cross-border merger or acquisition as the name suggests is the merger of two or more companies or any other kind of business or commercial entities registered in two or more different countries, whereas acquisition is when a company is acquired by another company registered in different country.
 

All assets, liabilities and stock of one company stands transferred to Transferee Company in consideration of payments in the form of:

• Equity shares in the transferee company
• Debentures in the transferee company
• Cash, or
• A mixed of above two.

However law in India say that merger can happen in more than one way, for example the situation in which the assets and liabilities of the company (the merging company) are vested in another company (the merged company). The merging company loses its identity and its shareholders become the shareholders of the merged company.
 

In India, Cross- Border M&As are mainly regulated under:

• Foreign Exchange Management (Cross-Border Merger) Regulations, 2018
• The Companies Act 2013
• SEBI Regulations 2011
• Competition Act 2002
• Insolvency and Bankruptcy Code 2016
• Income Tax Act 2016
• Transfer of Property Act 1882
• Foreign Exchange and Management Act 1999

Reasons for Mergers

A merger can take place due to any reason which might be beneficial to both the companies merging. However some main reasons for the merger of the companies’ are-

• Economies of Scale- This term refers to the situation when the average per unit cost of production decreases due to increase in production.
• Corporate Synergy- The term means better usage of complimentary resources available at disposal. It generally takes the form of enhancement in revenue and cost savings.
• Taxation- A profitable company can use the target’s tax right off i.e. wherein a sick unit is brought by some giant company.
• Assets- Sometime a sick government unit having lots of assets is merged with a profit- making company so that huge assets of the merged company can be utilised.
• Other diversification- This is designed to smooth the earning results of a company, which over a long period of time smoothens the stock price of the company giving the conservative investors more incentive and confidence to invest in the company.

The term ‘merger’ is not defined under the Companies Act, 1956 and under Income Tax Act, 1961. However the Companies Act, 2013 although has not clearly defined the term but has explained the concept. Commercially, mergers and acquisitions can be of several types depending on the requirements of merging entities.

Although, the corporate law may be indifferent to the different commercial forms of merger/ amalgamation, the Competition Act 2002, does pay special attention to the forms.
 

Types of Mergers

According to the Competition Act 2002, various types of mergers that can happen are-

• Horizontal Mergers- This kind of merger takes place two or different entities engaged in competing business and are at the same stage of the industrial business. This type of merger is also known as horizontal integration. This type of merger has a harmful effect over market because it takes the merging entities a step closer to attaining monopoly over market in the current industry and it also takes them closer in eliminating the competition from market. This type of merger has other advantages such as economies of scale and economies of scope. These forms of mergers are heavily scrutinized by the Competition Commission. Examples of this type of merger are Exxon and Mobil, Ford and Volvo, Tata Motors and Land Rover and Jaguar.
• Vertical Mergers- A merger is said to be a vertical merger when it happens between two entities which are at different stage of production or industrial process. For example a company engaged in the production automobiles merging with a company producing steel or a company producing rubber. Companies in this case gain on account of lower transaction costs and synchronisation of demand and supplies. Though vertical mergers are not of much concern for the Competition Commission but at times they may come under their notice, example if a dominant enterprise acquires an enterprise dealing in the raw material, it might result in that enterprise having a monopoly over the raw material and at times may refuse selling it to other companies.
• Congeneric Mergers- Congeneric Mergers are those mergers between the entities engaged in same business and in somewhat interrelated industry, but having no buyer-supplier relationship. A company uses this type of merger to increase its customer base as now it can reach the customers of both the companies.
• Cash Merger- In a ‘Cash Merger’, also known as ‘cash –out merger’, the shareholders of one entity receives cash instead of shares in the merged entity. This is effectively an exit for the cashed out shareholders.
• Triangular Mergers- Triangular Merger as the name suggests is the tripartite arrangement in which the target merges with the subsidiary of the acquirer. Based on which entity is the survivor after such a merger, a triangle merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when subsidiary merges into the target and target survives). A triangular merger is often resorted to tax and regulatory reasons.

 

Types of Cross- Border Mergers

A cross-border merger is generally of two types, viz. Inbound Merger and Outbound Merger. Whether the merger is an inbound or outbound depends on the perspective of the party from which one is viewing the transaction.

Inbound Merger- Explaining in the plain language, an Inbound Merger is the merger in which a foreign/overseas company mergers with or acquires a domestic company. When the inbound company is based in India and is being acquired by a company based in some foreign country then it is called inbound merger from the perspective of the Indian company. In this case the resultant company is an Indian Company. Acquisition of Flipkart’s 77 % stakes by Walmart Inc. is an example of an Inbound Merger.

Outbound Merger- In an Outbound merger, an Indian company or any domestic company merges with or acquires an overseas company. In this case the resultant company is a Foreign Company. The acquisition of Jaguar and Land Rover by Tata Motors in 2011 and acquisition of Hamleys by Reliance Group are examples of Outbound M&A.
 

Implications Of Foreign Exchange Management (Cross-Border Merger) Regulations, 2018

Until March 2018, while it was possible for an Indian company to merge with an Indian company, it was not possible for the same to merge with a foreign company under the merger framework sanctioned under the corporate law. In March 2018, RBI finally notified the Foreign Exchange Management (Cross- Border Merger) Regulations, 2018, so now Indian companies desirous of merging with foreign companies can do so just with prior approval of RBI.
 

Key Implications for Inbound Mergers

Merger Regulation states that for an Inbound Merger where foreign company is an Overseas Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) of an Indian company, such foreign company should comply with the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004) also known as Overseas Direct Investment Regulation or ODI Regulations. More all obligations under ODI Regulation applicable to ‘winding up’ must be assessed by that JV or WOS. Where inbound merger results in acquisition of a step down subsidiary of a JV / WOS, such acquisition must comply with conditions relating to total financial commitment, method of funding, etc., as set out in the ODI Regulation.

The Merger Regulation also provides for a period of 2 years starting from the date of sanction of scheme to bring overseas borrowings which are acquired by the resultant Indian Company. Hence, it is now clear that end use restrictions under Foreign Exchange Management Act, 1999 (FEMA) will not apply to such overseas borrowings.

However, no remittance for repayment of such overseas borrowings can be made during the 2 year period. Moreover the timeframe to sell 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 scheme.

The resultant Indian Company, in order to hold immovable property outside India, still has to do so under the provisions the Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015. The sale proceeds from sale of overseas assets is now expressly permitted to be used within the 2 year period, to extinguish any liability outside India which is not permitted to be held by the resultant Indian company.
 

Key Implications for Outbound Mergers

The Merger Regulation has again provided that the timeframe for the sale of assets not permitted to be acquired or held by a foreign company under FEMA has been increased from 180 days to 2 years. The sale proceeds from such assets can be used for the repayment of Indian liabilities within 2 year period. While it is already clear that borrowings of the Indian company would become the liabilities of the resultant foreign company now. The Merger Regulation states that foreign companies shall not acquire liability in rupees payable to Indian lenders which are not FEMA compliant, and a no-objection certificate to this effect must be obtained from the Indian lenders. A resultant foreign company is permitted to open a Special Non-Resident Rupee Account in terms of the FEMA (Deposit) Regulations, 2016, for 2 years to facilitate any transactions pursuant to an outbound merger.
 

Common implications on both Inbound and Outbound Mergers

It is clear that offices of the Indian company in India in case of an Outbound Merger and the office of the foreign company outside India in case of an Inbound Merger shall be deemed to be a branch office of the resultant company.

An Indian branch will be governed by the FEMA (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, and can only carry out permitted activities such as export or import, consultancy services, research, promoting technical or financial collaborations, representing the parent foreign company in India, banking, etc. In case of an inbound merger, the overseas branch/office can undertake transactions permitted under the FEMA (Foreign Currency Account by a person resident in India) Regulations, 2015.

Conclusion
While such steps will definitely boost the Cross Border Mergers in India, but there are some issues which still need to be tackled. The main one is Double Taxation. Though implementation of GST has eased the taxation system in India but the problem of Double Taxation always prevails.

To tackle this India has signed Double Taxation Avoidance Pact with few countries. The major advantage for entities involved in cross-border mergers is to consolidate ownership and control, and diversify their business. Such a transaction would also help a company internally by way of restructuring and consolidation of holdings. Further, this would provide Indian companies quicker access to foreign markets through a ready base for conducting business in the host country of the foreign entity. This would include access to the customer base of the foreign entity and also through sharing of technology and know-how through collaboration and ownership of intellectual property.

The Act is silent on the outcome of any divergence between the merger regulations, including the Act, and the laws of the resultant foreign company in case of outbound mergers, such as compliance with Indian overseas direct investment and liberalized remittance scheme regulations.

Another major hurdle faced by the merger regulations is the implication of income tax. The Income Tax Act, 1961, has yet not been amended to be in line with the amended Companies Act and the merger regulations. As per Section 47 (vi) of the Income Tax Act, in a scheme of amalgamation, any transfer of capital assets by a transferor company shall be exempt where the resultant company is an Indian company.

Despite numerous challenges faced by the merger regulations, it is indeed a breakthrough of the current regime on cross-border mergers. These regulations have given a widespread platform for cross-border market internationally and increased opportunities for Indian players to now merge foreign companies and expand business globally. Further Indian Companies would be provided a quicker access to foreign markets through a ready base for conducting business in the host country of the foreign entity.