LEGAL CONSIDERATIONS IN CROSS-BORDER BANK MERGERS: REGULATORY HARMONIZATION AND CHALLENGES
Category: Corporate News
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Increasing number and value of International M&A deals shows that Cross-border M&A have gained more importance and popularity comparatively market expansion strategy through the setting up of wholly owned subsidiaries in overseas market. Cross- border M&A’s are a quick pathway to enter into new market. The growing popularity of Cross-border M&A are partly driven by the liberalization in the legal and regulatory regime all around the world. In this way a systematic and liberal law is required to boost Cross- border M&A deals in Indian corporate world, so Companies Act 1956 was replaced by the new Companies Act 2013. It is expected that the New Act 2013 would simplify life of corporate India, strengthen corporate governance norms and make India an attractive and safe investment destination. This article seeks to examine certain key changes with regard to Cross-border M&A regulation framework in India by Companies Act, 2013.
Keywords- Merger & Acquisition, Inbound deal, Outbound deal, Synergy, Cross- border merger & acquisition.
INTRODUCTION-
The Corporate sector all over the world used Merger and Acquisition as a major tool of corporate restructuring in order to successfully overcome the challenges posed by the new pattern of globalization. One of the most important features of the present wave of M&A is the presence of large number of Cross-border M&A deals. In developed economies M&A has been prevalent for a long time but in India M&A picked up after introduced the liberalization policies by the government of India in 1991. In this way a more contemporary, simplified and nationalized legislation Companies Act 2013 passed to bring our Company law at par with the best global practices. The new Act of 2013 introduce pragmatic reforms for M&A’s it make the process easier, faster an cleaner for companies, some of the highlights include: setting up of National Company Law Tribunal (NCLT) to hear and decide on M&A proposals, cutting down on the probability and scope of objection to M&A’s and easier as well as wider participation of share-holders through postal ballot approval. These along with other, more creative and hurdle-free approaches towards M&A’s.
MEANING OF CROSS- BORDER MERGER & ACQUISITION-
Cross- border M&A means M&A transaction between two or more companies of different countries it is also called overseas merger and acquisition. In a Cross-border merger, the assets and operations of two (or more) firms belonging to two (or more) different countries are combined to establish a new legal entity. In a Cross-border acquisition, the control of assets and operations is transferred from local to a foreign company, the former becoming an affiliate of the latter. Cross-border M&A supported by technological advancements, low cost financing arrangements and robust market conditions, which have made deal- makers confident and think more creatively about their growth strategies. It will be used as a whole to mean the transactions where operating enterprises merge with or acquire control of the whole or a part of the business of other enterprises, with parties of different national origins or home countries. According to the flow of transactions, Cross-border M&A could be Inbound (Foreign businesses investing in India) or Outbound (Indian business making investment abroad. Some considerations are common to Cross- border M&A such as-
The impact of governmental regulations at all levels such as licensing, employment law, and taxation and subject matter regulation.
The potential difficulty of complying with the laws of both countries at all stage.
The obstacles to integration posed by different cultures and languages.
National security concerns and attendant restrictions.
Barriers to due diligence in differing legal and cultural environments.
Restriction of markets or the conduct of certain types of business in some countries.
Co- ordination of intellectual property rights.
In short Cross-border M&A is more difficult than domestic M&A, lot of think about due diligence process, a qualified, experienced due diligence team can help ensure that you have thoroughly considered all relevant factors, understand the legal requirements associated with your proposed transaction.
REASONS FOR CROSS- BORDER MERGER & ACQUISITION-
Cross- border M&A’s can be seen as a kind of hybrid between a domestic and a foreign corporate. They have become topics of interest mainly because they help a firm to enter new international markets and there by enhance their ability to compete in global markets. Some of the reasons for Cross-border M&A’s are as follows-
Growth-
Expansion and growth through M&A’s is less time consuming and more cost effective. Instead of going through the time consuming process of internal growth or diversification, the firm may achieve the same objective in a short period of time by M&A with an existing firm. In addition, such a strategy is often less costly than alternative of developing the necessary production capability and capacity. Construction of new facilities takes time and it may more profitable to acquire the existing facilities of another company.
Synergy-
Synergy means working together, when two undertakings combine their resources and efforts, they may with combined efforts produce better results than two separate undertakings because of savings in operating costs viz. combined sales offices, staff facilities, plants management, etc., which lower the operating costs. Synergies are different types such as manufacturing synergy, operations synergy, financial synergy, Managerial synergy, Marketing synergy, etc. As an illustration Mahindra & Mahindra Ltd (M&M) acquired Jiangling Motor Company Group (JMCG) that will makes company’s entry into tractor manufacturing synergy.
Enhance profitability due to Economic of Scale-
Through M&A volume of production may increase which leads to reduction of production cost without increase fixed cost. Thus fixed costs are distributed over a large volume of production causing the unit cost of production decline. These economies of scale arise because of more intensive utilization of combined production capacities, research and development facilities etc.
Increase in Market power and Market entry-
Acquiring companies with good manufacturing and distribution network gives the advantage of increase in market power and gaining market leadership. To gain access to new markets a foreign company prefer to merge with a local established company which knows behavior of market and has established customer base. Cross-border M&A are a means of becoming or remaining major players in such markets. For example, Vodafone’s acquisition of Hutchison Essar was with a view to gain entry into Indian market, Whirlpool Corporation entered into Indian market by acquiring Kelvinator India, Tata-Corus merger etc. Thus increase in market power is one of the reason for Cross-border M&A.
Access to Inputs and Technology-
M&A help access to raw materials, technology, latest innovations and cheap and productive labour. Technological change and cost of Research and Development have forced many firms to co-ordinate with each other in global markets.
Global Competitiveness-
To acquire global competitive strength, Cross- border M&A are being resorted to. Globalization and liberalization of economic policy forced business entity to restructure themselves by way of M&A. In a free competitive and globalised world, it is necessary for a company to be placed in such a manner that it is in position to compete with the best in the world. To diversify products and markets, to reduce depend on exports, to avoid home country political and economic instability and compete with foreign competitors in their own territory, business entities are motivated for Cross-border M&A. The deal to buy the world’s second largest U.K. based tea brand Tetley Tea (Tetley Group) by Tata Tea (TTL) with a view to achieve global competitive strength.
Other reasons-
In addition to above reasons of M&A few general gains can be highlighted like favourable exchange rate making foreign acquisition cheap, improve own image into the market, to provide home country clients service for their subsidiaries, e.g. banks.
REGULATORY COMPLIANCES-
Prior approval from R.B.I. is mandatory-
Section 234(2) of Companies Act 2013 states that a foreign company may merge with a company registered under this Act or vice-versa. However such a merger requires prior approval of the Reserve Bank of India. The scheme of merger may inter alia provide for payment of consideration in Cash or in Depository Receipt or a combination of the two. For the purpose of this sub-section the expression “Foreign Company” means any company or body corporate incorporated outside India whether having a place of business in India or not.
Central Government forming Rules in consultation with the R.B.I.-
Section 234(1) provides that the Central Government may make Rules, in consultation with R.B.I in connection with mergers and amalgamations provided under this section. The coverage, consistency (both within and with other existing laws) and clarity of such rules will be important criteria.
National Company Law Tribunal (NCLT) approval-
The Companies Act 2013 creates a new regulator, N.C.L.T who upon its constitution will assume the jurisdiction of High Courts for sanctioning mergers. The Tribunal will consider the merger application there after company concerned has obtained an approval from the R.B.I and complied with the provisions of section 230 to 232 of the New Act and the Rules.
Permitted Jurisdiction for out bound Merger-
The Companies Act 2013 has now opened its doors for outbound mergers, such mergers are only permitted with a foreign company incorporated in a
Jurisdiction whose securities regulator is a member of the International Organization of securities Commission’s Multilateral Memorandum of Understanding (MOU) or a signatory to the bilateral MOU with Securities and Exchange Board of India (SEBI)or
Whose Central Bank is a member of the Bank for International Settlements (BIS) and
A jurisdiction which is not identified in the public statement of Financial Action Task Force (FATA) as:
A jurisdiction hearing a strategic Anti-money Laundering.
A jurisdiction Combating the financing of Terrorism deficiencies to which counter measures apply or
A jurisdiction that has not made significant progress in addressing the deficiencies or
A jurisdiction that has not committed to an action plan developed with the FATF to address the deficiencies.
Valuation-
in case of Out bound merger the foreign company should ensure that its valuation.
Conducted by a valuator who must be a member of a recognized professional body in their country and
Such valuation must be in accordance with internationally accepted principles on accounting and valuation.
A declaration to this effect is required to be attached with the application, for obtaining R.B.I approval in out bound merger but the law remain silent on such requirement for Inbound merger.
Fast Track Merger-
Section 233 of the Companies Act, 2013 introduces the globally accepted concept of ‘Fast Track Merger Process’ which introduce a slightly simpler procedure for mergers and amalgamations of certain including small companies as well as holding and its wholly-owned subsidiary companies. Provisions under companies Act 1956 which deal with traditional mergers and amalgamations are time consuming and costly processes as it includes clearances from many regulatory bodies and every type of company must go through this route. There was a need to simplify and expedite the procedure for the merger of small companies, holding subsidiary companies and companies where the interest of third parties is not involve. The present Act enables these companies to undergo merger and amalgamation procedures quickly, simply and within fixed time duration. Cross-border mergers also regulated by the R.B.I under the Foreign Exchange Management Act 1999 (FEMA) to harmonize the scope of cross-border merger. RBI has released (as on April 26, 2017) the Draft Foreign Exchange Management (Cross-border Merger) Regulations 2017 (Draft Regulation) that prescribed certain guidelines to be followed in case of both in bound as well as outbound mergers.
OUTBOUND MERGER-
In case of outbound mergers where the resultant company is a foreign company:
The acquisition and holding of securities in the resultant company by an Indian resident shall be in accordance with Foreign Exchange Management (Transfer or issue of Foreign Security) Regulation, 2000 or the provisions of the Liberalized Remittance Scheme as applicable.
The resultant foreign company shall be liable to repay outstanding or impending borrowings as per the scheme sanctioned by NCLT as per the terms of the companies (Compromise, Arrangement or Amalgamation) Rules, 2016.
The resultant foreign company can acquire, hold any assets in India or transfer any such assets as per the permissible limits under the provisions of the FEMA.
In case both inbound and outbound mergers if such assets or securities acquired or hold by the resultant company in contravention of the provision of FEMA, the resultant company shall sell such assets or security with in a period of 180 days from the date of sanction of the cross-border merger scheme and the sale proceeds to be repatriated to India or outside India as the case may be immediately through banking as the case may be immediately through banking channels.
The Draft Regulations require all transactions arising due to cross-border merger to be reported to RBI by the Indian company and foreign company involved in the cross-border merger as may be prescribed from time to time.
INBOUND MERGER-
In the context of inbound mergers the Draft Regulation provide that the resultant Indian company may issue or transfer securities to a person residing outside India in accordance with the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulation 2000.
All borrowings or impending borrowings of the transferor foreign company which becomes the borrowing of the resultant company must conform with the external commercial borrowing norms or trade credit norms or other foreign borrowing norms as laid down under the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulation 2000 or Foreign Exchange Management (Guarantee) Regulations2000, as may be applicable.
The resultant Indian company may acquire and hold assets outside India as permitted under the provisions of FEMA and rules and /or regulations framed there under. For instance, the resultant company may acquire immovable property outside India for its business and for resident purposes for itself in accordance with Regulation of the Foreign Exchange Management (Acquisition and Transfer of Immovable property outside India) Regulation 2015.
CONCLUSION-
Cross border M&A, now become a useful tool for companies to undertake expansion and restructuring activities. We had several obstacles in the past and our companies were bound by several obligation while entering outer world. The Companies Act 2013 is a step forward towards globalization. It will open avenues and ways for Indian company access global market capital, and making Indian corporate law relatively friendlier and more acceptable in the global arena. As per the 2013 Act, both inbound and outbound mergers have been allowed with those foreign entities permitted by the Central Government in its amended Rules. Section 234 of Companies Act 2013 specifically deals with cross-border mergers concerning merger or amalgamation of an Indian company with a foreign company and vice-versa. Ministry of Corporate Affairs (M.C.A.) amended the Companies (Compromises, Arrangements and Amalgamation) Rules 2016 (Merger Rules) and insert Rule 25-A, dealing with scope of the application of section 234. Prior approval of Reserve Bank of India along with the Compliance of the provisions of section 230-232 of the Companies Act, 2013 and the Rules, is required to be taken for concluding these type of deals. It is expected to ensure regulatory supervision over the proposed merger including safeguarding of interest of the concerned stakeholders.
Thus the introduction of section 234 in the Companies Act 2013 is a welcome step. However the restriction on cross border merger (both ways) of Indian companies with foreign companies of only notified countries in section 234 is not regressive but also protectionist mindset of the government. Furthermore the scope of Rule 25-A does not recognize under section 233 of the Companies Act 2013. So there is a need to have a relook at some of the parts of the newly introduce Act.
OLQ is a Pan-India basis law firm connecting legal expertise nationwide.
WRITTEN BY: ALOK CHHAPARWAL
GUIDED BY: ADVOCATE ANIK
