The 1991 economic policies, led to establishment of Liberalization, Globalization and Privatisation Now, this increasing globalization have made cross border mergers attractive for companies. Cross-border mergers are increasingly being used as a tool for growth by companies to expand their markets basically setting up markets in abroad.
But first we need to understand the concept of Cross-Border merger. As the word “Cross- border” suggests it means when companies established in different countries join to become a single entity which leads to transfer of assets, liabilities and operations across borders. For example- Vodafone-idea merger involved Vodafone group, a UK based telecom merging with Idea Cellular, India’s telecom service provider.
These transactions are divided into two categories:
A. INBOUND MERGERS: A foreign company merges into an Indian company, with resultant company being an Indian company benefitting India’s large market base. Example- acquisition of 77% stake in Flipkart Mart is an inbound merger where resultant company in Indian Company.
- OUTBOUND MERGERS: An Indian Company merges into a foreign company with resultant company being a foreign company. This leads to establishing a global footprint.
ex- Acquisition of Jaguar and Land Rover by Tata Motors in 2011.
LEGAL FRAMEWORK
The provisions governing company mergers can be found in Section 234 of the Companies Act 2013 and Rule 25A of the Companies Rules 2016; these provisions allow companies from India to merge with companies from certain countries. The accepted countries contain the world’s leading economies, including: the United States, United Kingdom, France and Germany.
REGULATORY STEPS
- Petition to the National Company Law Tribunal (NCLT) for approval of the scheme must be formally filed.
- All stakeholders must follow strict valuation procedures.
- All companies are required to give notice to the appropriate regulatory authority and obtain a no objection certificate (NOC).
- The merger structure must contain specific protections for minority stakeholders and creditors.
FEMA REGULATIONS
The Foreign Exchange Management (Cross Border Merger) Regulations, 2018, issued under the FEMA framework works as a mechanism for regulating the financial and currency related disputes.
If you follow the rules and get automatic approvals for your routes, and make sure you’re within the limits set by the sector and the FDI policies, then the RBI will basically give you a stamp of approval without needing to review everything. This is what’s called “deemed approved”.
A clear distinction between inbound and outbound mergers is necessary because the compliance changes significantly depending on which way the deal is going. When companies merge, they have to follow strict rules about reporting the details to the Reserve Bank of India, so everything is out in the open. All these rules are in place to ensure a smooth transition and maintain transparency throughout the process.
SEBI REGULATIONS
When a publicly traded company considers a merger with another firm, it can be a risky venture, especially for ordinary shareholders who have invested in the company. The Securities and Exchange Board of India (SEBI) is designed to ensure that whenever a Board of Directors begins discussing the possibility of merger, the public must be informed about the merger discussion immediately. To safeguard against insider trading, the company must notify the exchange and announce that the Board is having discussions about a merger. This will allow everyone involved to know about the merger possibility, thus protecting anyone that might invest by providing knowledge of the likely risks associated with investing in the stock. By publicly disclosing their plans, they will help develop trust from their investors. In the event of a merger, the company must provide the identity of all shareholders, so that small shareholders are aware that they will no longer have the same control over their company.
COMPETITION LAW
We can think of Competition Act 2002 as the rule book that prevents any single company from becoming a “monopoly”, if merger involves companies that have massive turnover, then the Competition Commission of India (CCI) checks whether the unity of these companies crush the small competitors or make prices skyrocket for regular people. If it does, then they can block the deal.
We LEGALLANDS LLP, a Legal500 ISO certified law firm provide services related to drafting Data Processing Agreements, Share-Purchase Agreements, Service Level Agreements, Company Incorporation, Joint Ventures, Merger and Acquisitions, Intellectual Property Rights (Trademark, Copyright, Patents), Technology Transfer, Contract Conveyancing and Corporate Services, International Disputes (DGFT), Internation Trade (CEPA/FTA), Sports Law, Gaming Law, and Immigration Matters.
Prerna Bhakoria is a skilled Legal Associate at LEGALLANDS LLP, in the field of Corporate Law. She holds a BBA LLB degree with a specialization in Banking and Finance from the University of Petroleum and Energy Studies (Batch 2018-2023).
Her areas of practice in Corporate Law include drafting of legal agreements, corporate compliance, client management.
