CROSS-BORDER MERGERS: RBI REGULATIONS AND COMPLIANCE REQUIREMENTS UNDER SECTION 234 OF THE COMPANIES ACT
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AUTHOR : Pretty Jagdish Bhatia, 3rd year, LLB, Dy Patil University
INTRODUCTION
Section 234 of the Companies Act, 2013, and Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, require prior approval from the Reserve Bank of India (RBI) for cross-border mergers involving Indian and foreign companies.
LEGAL FRAMEWORK
India has a robust legal framework governing mergers, acquisitions, and corporate restructuring, ensuring regulatory oversight for cross-border transactions. The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, play a crucial role in regulating corporate processes, particularly those involving foreign entities. The requirement for prior approval from the RBI applies to certain cross-border transactions.
MEANING OF COMPROMISES, ARRANGEMENTS, & AMALGAMATIONS
The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, provided under Sections 230-240 of the Companies Act, 2013, outline the procedure for compromises, arrangements, and amalgamations. These rules aim to protect the interests of creditors, shareholders, and employees while maintaining corporate stability.
To facilitate the merger and amalgamation of foreign companies with Indian companies, the Ministry of Corporate Affairs (MCA) amended and notified the Companies Act, 2013, and Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules on April 13, 2017. Additionally, the RBI introduced the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, on March 20, 2018, to address foreign exchange concerns.
CASE LAW
PR. COMMISSIONER OF INCOME TAX V. MICROLAND LTD. (2017)
Citation: (2017) 83 taxmann.com 379 (Karnataka)
Summary: This case examined the tax implications of mergers involving foreign and Indian companies, particularly focusing on the exemption under Section 47 of the Income-tax Act, 1961, regarding share transfers during mergers. The case determined whether such mergers would be considered tax-neutral under the IT Act or subject to capital gains tax.
MAIN DESCRIPTION
Under the Companies Merger Rules, a foreign company incorporated outside India must merge into an Indian company after complying with the provisions of Sections 230-240 of the Companies Act, 2013. Further, it must seek approval from the National Company Law Tribunal (NCLT) and obtain Reserve Bank of India (RBI) approval for any cross-border mergers.
To address concerns related to exchange control in cross-border mergers, the RBI introduced the Foreign Exchange Management (Cross Border Merger) Regulations, 2018. According to these regulations, any transaction related to a cross-border merger that complies with the regulations is considered approved by the RBI under Rule 25A of the Companies Merger Rules.
Key compliance requirements include:
Fair share valuation
Shareholder approval
Compliance with MCA guidelines under the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016
This regulatory structure ensures transparency, protection of stakeholders' interests, and financial system integrity in India.
The need for prior RBI approval is a critical aspect of cross-border mergers to ensure compliance with foreign exchange laws and safeguard India's financial stability. The FEMA Merger Regulations (2018) outline conditions under which cross-border mergers are permitted, focusing on foreign exchange outflows, adherence to FEMA, and protection of India's economic interests.
To facilitate the merger of foreign holding companies with their wholly owned Indian subsidiaries, the Ministry of Corporate Affairs (MCA) amended Rule 25A of the Companies Merger Rules. The notification was issued on September 9, 2024, and will take effect on September 17, 2024.
AMENDMENT TO RULE 25A OF THE COMPANIES MERGER RULES
The MCA’s amendment to Rule 25A allows a foreign holding company to merge into its wholly owned Indian subsidiary through the fast-track merger route under Section 233 of the Companies Act. This amendment streamlines the merger process and reduces regulatory hurdles.
RBI APPROVAL PROCEDURE
Cross-border mergers involving share or securities transfers between Indian and foreign entities require RBI approval. The process includes:
Application for Approval
The applicant company must submit a detailed application to the RBI, including:
Merger structure
Share valuation
Transaction impact on the Indian company's operations
Assessment of Foreign Exchange Considerations
The RBI evaluates the foreign exchange impact of the merger, including:
Foreign exchange outflows
Economic implications for India
Due Diligence
The RBI conducts legal, financial, and regulatory assessments of the proposed merger.
Approval or Rejection
The RBI may approve or reject the merger after reviewing the application.
If approved, the RBI may impose compliance conditions.
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TAX IMPLICATIONS
Tax Neutrality: If the transferee company is an Indian company, exemptions under the Income-tax Act, 1961 apply.
Outbound Mergers: If an Indian company merges into a foreign entity, tax exemptions do not apply.
Section 72A of the IT Act: Allows the carryover and setoff of tax business losses and depreciation, but only for mergers meeting specific conditions. Outbound mergers do not qualify for this benefit.
CONCLUSION
The scope of cross-border mergers in India has expanded under the current legislative framework. However, practical challenges remain due to:
FEMA Merger Regulations requiring deemed RBI approval (if not met, prior RBI approval is mandatory).
Lack of clarity on demergers (Section 234 of the Companies Act addresses only mergers and amalgamations, not compromises or arrangements under Sections 230-232).
Absence of tax benefits for outbound mergers.
The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, provide a comprehensive legal framework for corporate restructuring in India. The RBI plays a crucial role in ensuring compliance with both Indian and international regulations.
To ensure legally sound cross-border mergers, companies must carefully navigate:
Foreign exchange restrictions
Valuation standards
Shareholder approval processes
A key step in the process is obtaining prior RBI approval under Section 234 of the Companies Act, 2013.
REFERENCES & CITATIONS
Income-tax Act, 1961: Income-tax Act, No. 43 of 1961, § 47, India.
Companies Act, 2013: Companies Act, 2013, No. 18 of 2013, § 234, India.
Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016: Rule 25A, India.
Foreign Exchange Management (Cross Border Merger) Regulations, 2018: G.S.R. 143(E), March 20, 2018.
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