Tag Archives: M&A

M&A through Share Swap/Stock Swap Arrangements

Introduction

A share swap arrangement signifies issuance of a share in exchange for a share rather than remittance of cash consideration. Share Swap arrangements occur when shareholders’ ownership of the target company’s shares is exchanged for shares of the acquiring company as part of any restructuring.

For instance, two companies, A and B, come together to form company C. If the two companies enter into a Share Swap Arrangement, the shareholders of company A can be given shares of company C for every share of company A that they owned. A similar arrangement can be made for company B as well. Now, if such an arrangement occurs between companies wherein the Indian parties are shareholders of the Indian company and the other company is a foreign company, the arrangement would attract both regulations prescribed under the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (the ODI Regulations) and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (the FDI Regulations).

Share Swap arrangements can be useful mechanisms to raise investment in the case of an externalisation plan. Externalisation plans involve promoters of Indian entities moving their holding entities outside India (in case more information about externalisation is required, refer to our article on externalisation schemes, which can be accessed at https://novojuris.com/2018/06/24/ externalisation-many-Indian-startups-are-choosing-to-have-their-holding-entity-outside-india/).

In such scenarios, both FDI Regulation and ODI Regulations become applicable owing to the fact that there is a transfer of shares of an Indian company to a person resident outside India and there is an acquisition of shares of a Foreign Company by a resident Indian in the manner. Therefore, an adherence with the applicable FDI Regulation and ODI Regulation is required for the share swap arrangements.

Implications under FDI Regulations

The FDI Regulations would be applicable in the case of a share swap arrangement where any one company to the transaction is non-resident and the transaction becomes eligible to be governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and Foreign Direct Investment policy (“FDI Policy”) issued by the Department of Industry Policy and Promotion every year. A key thing that has to be kept in mind is that as per the FDI Regulation, the price of shares offered should not be less than the fair market value of shares valued by SEBI registered Merchant Banker.

Reporting Requirements

The FDI policy provides primarily for two types of reporting mechanisms:

  1. one through the filing of an FC-TRS (Foreign Currency- Transfer of Shares) Form by the Indian company which becomes applicable in the case of transfer of shares, where one party is a non-resident and another one being a resident Indian; and
  2. second being through the filing of an FC-GPR (Foreign Collaboration- General Permission Route) Form by the Indian company which becomes applic`able in the case of allotment of-of shares by an Indian Company to a person resident outside India.

General permission has been granted to non- residents to acquire shares from Indian shareholders under swap arrangement, provided that the price of shares offered is not less than the fair market value of shares valued by SEBI registered Merchant Banker. However, in the case of share swap arrangement between the entities whose sector is under Government approval route, prior approval would be required.

Implications under ODI Regulations

As mentioned above, the ODI Regulations would be applicable in the case of a share swap arrangement where any one company to the transaction is non-resident. In case of share swap arrangement under externalization, the shareholders of Indian company who are resident Indians would acquire shares of the foreign company in exchange for their shares of the Indian company. The share swap arrangement under the ODI Regulations would fall under the automatic route unless otherwise prescribed under FDI Regulation. The arrangement would also be subject to the sectoral caps and entry mechanisms as applicable under the FDI Regulation and approvals from the relevant ministries.

Reporting Requirements

The resident Indian shareholders of an Indian company would be required to file Form ODI with the Authorised Dealer Bank for reporting the share swap arrangement. The Form is required to be submitted to the RBI within 30 (thirty) days of making the share swap.

Conclusion

From a regulatory standpoint, the key question which is not clear is whether the share swap arrangement would fall under general permission category of ODI Regulation & FDI Regulation or under the Government approval. While the respective regulations are clear that prior approval is needed only in case if the sector is under approval route as per FDI Policy and FDI Regulation. However, practically it has been seen that the Reserve Bank of India on case to case basis, has insisted upon such prior approval requirement. There is a need for better clarification or notification from the Reserve Bank of India.

Additionally, it is pertinent to note that the ODI Regulation mandates for prior approval of the Foreign Investment Promotion Board (FIPB) which has been abolished in 2017. Now, in case any such approvals are required, the proposals will be scrutinized and cleared by sector-specific departments concerned.

Authors: Mr Spandan Saxena and Mr Ashwin Bhat

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Cross Border Mergers – Key Regulatory Aspects to Consider

Introduction

Cross-border mergers and acquisitions have rapidly increased reshaping the industrial structure at the international level. A cross-border merger means any merger, amalgamation or arrangement between an Indian company and a Foreign Company[1] in accordance with the Companies Act, 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016.

The Ministry of Corporate Affairs notified Section 234 of the Companies Act, 2013 thereby enabling cross-border mergers with effect from 13 April 2017. Thus, it was a matter of time that the Reserve Bank of India notified the regulations in order to operationalize the cross-border merger.

Regulatory Framework

In India, Cross border is majorly regulated under (i) the Companies Act 2013; (ii) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011; (iii) Competition Act 2002; (iv) Insolvency and Bankruptcy Code 2016; (v) Income Tax Act 1961; (vi) The Department of Industrial Policy and Promotion (DIPP); (vii) Transfer of Property Act 1882; (viii) Indian Stamp Act 1899 (ix) Foreign Exchange Management Act 1999 (FEMA) and other allied laws as may applicable based on the merger structure.

The two most relevant regulations under FEMA from a merger & amalgamation perspective are Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (the ODI Regulations). In addition to this, the Reserve Bank of India (the RBI) has notified Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (the Cross-Border Regulation) under the Foreign Exchange Management Act, 1999 to include enabling provisions for mergers, demergers, amalgamations and arrangements between Indian companies and foreign companies covering Inbound and Outbound Investments. This is a significant move as there will be a massive surge in the flow of Foreign Direct Investment with the enactment of new laws and tweaking of existing policies.

Inbound & Outbound Merger

Cross-Border Merger could be either Inbound merger or Out-bound Merger. Inbound Merger means a cross-border merger, where the resultant company is an Indian company. An outbound merger means a cross-border merger where the resultant company is a foreign company. A resultant company means an Indian company or a foreign company which takes over the assets and liabilities of the companies involved in the cross-border merger.

Key provisions of the Cross-Border Regulation in case of Inbound Mergers

Issuance of Securities

As a consideration, the Indian company would issue or transfer of securities to the shareholders of transferor entity which may include both persons resident in India and person resident outside India. In case of a person resident outside India, the issuance of securities shall be in accordance with the pricing guidelines, sectoral caps and other applicable guidelines as prescribed under the Cross-Border Regulation. However, if the foreign company is a JV/WOS then it shall comply with the conditions prescribed as specified in Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. Further, if the inbound merger of the JV/WOS results into an acquisition of the one or more step-down subsidiary of JV/ WOS of the Indian party by the Resultant Indian company, then such acquisition should be in compliance with Regulation 6 and 7 of the ODI Regulations.

Vesting of Assets & Liabilities

  • Any borrowings or guarantees of the transferor company shall become the borrowings or guarantees of the resultant company. A timeline of two years has been provided to conform with the external commercial borrowings compliance. The end use restrictions would not apply in such cases.
  • Any asset acquired by the resultant company can be transferred in any manner as permissible under the Act or regulations. Where such asset is not permitted to be acquired, the resultant company shall sell the same within two years from the date of sanction of order by the National Company Law Tribunal (the NCLT) and the sale proceeds shall be repatriated to India immediately through banking channels. Where any liability outside India is not permitted to be held by the resultant company, the same may be extinguished from the sale proceeds of such overseas assets within the period of two years.
  • The resultant company is permitted to open a bank account in the foreign country’s jurisdiction for overseeing transactions related to the merger for a maximum period of two years from the date of sanction of scheme by the NCLT.

Valuation

The valuation shall be done as per Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016 i.e., by Registered Valuers who are members of recognized professional bodies in the prescribed jurisdictions of the transferee company and such valuation is in accordance with internationally accepted principles on accounting and valuation.

Key provisions of the Cross-Border Regulation in case of Outbound Mergers

Issuance of Securities

(a) As a consideration, the Foreign Company would issue securities to the shareholders of Indian entity which may include both persons resident in India and person resident outside India. In case if shares are being acquired by a person resident in India, then such acquisition shall be subject to the ODI Regulations as prescribed by the RBI.

Vesting of Assets & Liabilities

  • The guarantees or borrowings of the resultant company shall be repaid as per the scheme sanctioned by the NCLT. Further, they should not acquire any liability not in conformity with the Act or regulations as prescribed. A no objection certificate to this effect should be obtained from the lenders in India of the Indian company.
  • Any asset acquired can be transferred in any manner as permissible under the Act or the regulations thereunder. In cases where it cannot be held or acquired by the resultant company, it shall be sold within two years from the date of sanction of the scheme by the NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of two years shall be permissible.

Opening a Bank Account

The resultant company is permitted to open a Special Non-Resident Rupee Account (SNRR Account) for the purpose of for overseeing transactions related to the merger for a maximum period of two years from the date of sanction of a scheme by the NCLT.

Valuation

The valuation shall be done as per Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016 i.e., by registered valuers who are members of recognized professional bodies in the prescribed jurisdictions of the transferee company and such valuation is in accordance with internationally accepted principles on accounting and valuation.

Other Compliances

  • The resultant company and/or the companies involved in the cross-border merger shall be required to furnish reports as may be prescribed by the RBI, in consultation with the Government of India, from time to time.It is pertinent to note that at the time of sanctioning the merger of a foreign transferor body corporate with an Indian transferee company, the NCLT shall consider the validity of the merger as per the laws of the country in which the foreign body corporate has been incorporated, and any transaction on account of a cross-border merger undertaken in accordance with Cross-Border Merger regulations will be deemed to have prior approval of the RBI.

Conclusion

A range of complex issues must be navigated in an effort to successfully complete cross-border mergers. Each cross-border merger is different and implementation of these issues will greatly depend on the facts, dynamics, scale and geographic scope of both companies. The Cross-Border Regulations being fairly new, a lot of practical issues are yet to be identified and shall be addressed as and when encountered in the due course of time.

Authors: Ms. Ifla. A and Ms. Shruthi Shenoy, associates at NovoJuris Legal.

[1]Section 2(42) of the Companies Act 2013 defines Foreign Company as any company or body corporate incorporated outside India which: (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.