Monday, April 24, 2017

The MCA on 13 April 2016 notified Section 234 of the Companies Act, 2013 (the Act) and the Companies (Compromises, Arrangements, and Amalgamation) Amendment Rules, 2017 (Amendment Rules) which allows the merger of a foreign company with an Indian company and vice versa.

Previously, the Companies Act, 1956 (the old Act) under Section 394, provided that in any arrangement or reconstruction, an amalgamated company (transferee company) must be a company within the meaning of the old Act i.e., it has to be an Indian company. This meant that a foreign company could not be a transferee company, which meant the Indian company could not merge with the foreign company. Thus, it was possible for a foreign company to get merged with an Indian company, but vice versa was not possible.

Key highlights of the notification:

The notified Section 234 provides enabling provision for mergers and amalgamations between companies registered under the Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central government. It also provides for enabling provisions to make rules in consultation with the Reserve Bank of India (RBI) in this behalf. The key highlights of this notification are:

  1. Prior approval of the RBI is required for any scheme of merger and amalgamation between an Indian company and a foreign company. 
  2. The section also lays down the criteria for the discharge of consideration on a merger i.e. payment of consideration to the shareholders of the merging companies may be discharged in cash, or in depository receipts, or partly in cash and partly in depository receipts. ​
  3. An Indian company can merge with a foreign company only if the foreign company falls under the jurisdiction as specified. ​
  4. It has been stipulated that the provisions of the Act shall apply to cross-border merger or amalgamation schemes with the necessary changes and compliance with Section 230-232 of the Act and rules thereunder is mandatory. ​
  5. The transferee company has to ensure that the valuation is conducted by a member of a recognized professional body in the jurisdiction of the transferee company and the valuation is in accordance with internationally accepted standards.

SKP's Comments

  1. In the past, there were several precedents, wherein foreign companies were merged with Indian companies and have derived certain benefits. ​
  2. Although the Act, now specifically allows both inbound and outbound mergers and amalgamations, but it is silent on the issue of cross-border demergers, compromises, and arrangements. ​
  3. Prior approval of the RBI has been made mandatory for mergers and amalgamations. It will be interesting to see how the RBI disposes such application given the fact that it may have certain implications that will need to be viewed from the perspective of foreign exchange control, such as the acquisition of immovable property. ​
  4. The Income Tax Act exempts a transaction of amalgamation, where the amalgamated (i.e. transferee) company shall be an Indian company. Thus, where an Indian company merges into a foreign company, under the present law, it shall be a taxable transaction. One would expect income tax provisions also to be modified in line with the changed Company Law provision. Given the intricacies involved, the Indian Tax Law needs to be realigned to exempt shareholders from any taxes that may arise on a cross-border merger. ​
  5. The implications of the notified section will also have to be viewed from the perspective of stamp duty and various other laws. ​
  6. Section 234 of the Act is a welcome step as it will now allow merging of Indian companies with the foreign companies which were not allowed previously. However, it does not provide detailed provisions for merger or amalgamation from an implementation perspective.
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