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Laws on Mergers & Acquisitions (M & A) for Foreign Companies: Lawyers Advice

 > Business Laws  > Laws on Mergers & Acquisitions (M & A) for Foreign Companies: Lawyers Advice

Laws on Mergers & Acquisitions (M & A) for Foreign Companies: Lawyers Advice

The term ‘mergers’ simply means merging of two entities to form one single entity. (A + B = AB). Whereas an acquisition is one entity completely acquiring the business/management of the other one (target). After the acquisition, the target’s business goes under the complete control of the acquirer.

Cross-border Merger and Acquisition
Defining cross-border arrangement:
When two businesses registered in two different countries come together to merge or one acquires the other, it is termed as a cross-border merger or acquisition.
Here, the Indian company is a company registered under the Companies Act, 2013 and the foreign company is a company incorporated outside India. Not all foreign corporations are allowed to get into an arrangement with Indian companies. The allowed jurisdictions are notified by the Central Government from time to time.

Indian Laws on Cross-Border Arrangements:
Companies Act, 2013
First, both the companies prepare a scheme regarding the merger mentioning how the assets and liabilities will be transferred and when the appointed date and actual date of arrangement is.
Section 234 of the Companies Act, 2013 allows the merging of a foreign company with an Indian company. As per this section, for a merger, the foreign company has to gain prior approval of the Reserve Bank of India. After receiving the Reserve Bank of India’s approval, the companies have to comply with section 230 to 232 of the Companies Act, 2013. According to these sections:
• The companies have to first make an application to the National Company Law Tribunal regarding the scheme of arrangement for the merger.
• Based on this application, the Tribunal may call for a meeting of creditors and members. Notice of such meeting has to be sent to all the creditors, debenture holders. The same notice also has to be sent to the Securities and Exchange Board of India and the Stock Exchanges in case of a listed company and also to the Income Tax authorities, Competition Commission of India, the Central Government, the Registrar and the Official Liquidator seeking their approval regarding the same. This notice also is mandated to be displayed on the company’s website.
• While voting for this merger, objection to the same can only be raised by shareholders not holding less than ten per cent and debt holders with not less than five per cent of the outstanding debt.
• Once the Tribunal is satisfied that the procedure is complied with and a majority of the members have approved for the merger, it may sanction the merger.

Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
Rule 25A of the above-mentioned rules mandates the transferee company to ensure that recognised professional valuers in its jurisdiction conduct the valuation and the same is according to internationally accepted standards. While applying for the Reserve Bank of India’s approval, the transferee is required to attach a declaration regarding the valuation.

Foreign Exchange Management Regulations:
In case of an inbound merger (a cross-border merger where the resultant company is an Indian company), Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 will apply. For a Person Resident Outside India to invest in an Indian company prior approval of the Reserve Bank of India has to be sought. Under various schedules, procedures for different types of Persons Resident Outside India are provided. (Pakistan-Bangladesh investors, Foreign Portfolio Investors etc.) Under these regulations:
• Once the merger scheme is granted by the National Company Law Tribunal, within two years the resultant Indian company has to sell its assets and clear its liabilities that it acquired overseas due to this inbound merger. This is a requirement when this acquiring of assets and liabilities is not permitted under the Foreign Exchange Management Act, 1999.
• All the overseas offices of the amalgamating company (here foreign company) will be hereinafter considered as the deemed to be offshore offices of the amalgamated company (resultant Indian company).
For the outbound mergers (a cross-border merger where the resultant company is a foreign company), Overseas Direct Investment Regulations come into the picture:
• Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 will apply because in an outbound merger all the Indian offices will be considered as the offshore branches of the resultant foreign company.

Income Tax Act, 1961
Claiming benefits under Double Taxation Avoidance Agreement:
As per Section 90(2) of the Income Tax Act, 1961 for the foreign corporation to claim tax benefit, it has to belong to the country that is part of Double Taxation Avoidance Agreement with India. According to Section 90(4) and (5) of the Income Tax Act, 1961 the foreign company has to provide details of its status, name of the country in which it was incorporated, its tax identification number in its country and also any other important information asked from time to time. All the benefits can be availed at the time of filing income tax returns with the Indian Tax authorities.
If the amount paid to the foreign company is taxable in India then the tax payable is withheld as mentioned under Section 195 of the Income Tax Act, 1961. 20 per cent is the withholding rate on dividends payable to non-resident shareholders.

In the case of In Re: Bid Services Division (Mauritius) Ltd [2020] 114 taxmann.com 434 (AAR – Mumbai), the capital gains tax benefit was rejected to the Mauritius entity. This capital gains tax benefit is provided under article 13(4) of the Indian Mauritius Double Taxation Avoidance Agreement. Here, the Mauritius entity has purchased shares of an Indian Joint Venture Company. The reason given by the Authority for Advance Rulings was that the Mauritius entity was shown as a mere shell entity and not a beneficial owner of the shares which were transferred.
Capital gain tax is levied whenever any asset or securities are transferred in India. There are different rates for listed and unlisted shares. For the former, it is 15 per cent and for the latter, it is 10 per cent. Long term capital gain on transfer of any other asset would attract 20 per cent. This capital gain tax can be exempted if the merger (termed as amalgamation under the Income Tax Act, 1961) is a tax-neutral merger. A tax-neutral merger is when all the liabilities and assets of the amalgamating company (company A) becomes the liabilities and assets of the amalgamated company (company B) (Where A is merging into B). Here the resultant company has to be an Indian company (inbound merger).
Section 47 (vi) of the Income Tax Act, 1961 attracts capital gains tax upon transfers. However certain exemptions are provided for cross-border mergers. For this, the transfer of capital assets and shares have to be done by an amalgamating company (company A) to the amalgamated company (company B) and 75 per cent of shareholders of the amalgamating company (company A) have to become part of the amalgamated company (company B). Inbound mergers have an edge over the outbound mergers concerning capital gains tax.

Another tax case of a foreign acquisition is the Vodafone International Holdings v Union of India [2012 (1) SCALE 530] case. Hutchison Telecommunications International Ltd, a telecommunications giant wholly-owned CGP Investments Ltd. Both the companies were based in the Cayman Islands. This CGP Investments Ltd held indirectly 67 per cent stake in Hutchison Essar Ltd (Joint Venture). Hutchison Telecommunications International Ltd sold CGP Investments Ltd to the Dutch-based Vodafone International Holdings and Vodafone bought it to gain control over Hutchison Essar operations. Now Hutchison Essar turned into Vodafone Essar. In 2007, Indian Tax Authorities filed for recovering taxes against Vodafone International Holdings and Vodafone Essar to the tune of approximately $ 2Billion. Contentions of the Indian Tax Authorities: The acquisition by the Vodafone International Holdings of CGP Investments Ltd led to direct control over Hutchison Essar making it Vodafone Essar. This results in selling off many Indian assets which attract capital gains that have to be taxed in India.
Contentions of the Vodafone Holdings: A transaction that occurred between Hutchison Telecommunications International Ltd and Dutch-based Vodafone International Holdings is a transaction between two foreign entities and that cannot be taxed in India.
Vodafone had approached the Bombay High Court that held: Although CGP Investments Ltd was acquired this entity did not have an existence of its own and neither did it have a bank account of its own. Therefore the intentions of the Vodafone Holdings can be drawn towards the fact that CGP comes with Hutchison Essar. Also, this transaction cannot be complete without selling Indian assets. It was ruled against the Vodafone authorities.
Vodafone had approached the Apex Court which held: The main question that was discussed by the Hon’ble Court was whether there was a deliberate attempt on part of the Vodafone Holdings to avoid taxes. The assessee could prove that there was no ill intention to avoid taxes. It was ruled in favour of them.
That is when the Indian Government had brought in the General Anti-Avoidance Rule where retrospectively they would get the power to reassess all the past transactions even those which date back to 1962. This amendment affected the tax code and forced Vodafone Holdings to go for international arbitration.
Vodafone’s contentions: The two Bilateral Investment Treaties, India-Netherlands Bilateral Investment Treaty and India-UK Bilateral Investment Treaty have mentioned about fair and equitable treatment. The International Court had ruled in favour of Vodafone Holdings stating that the Indian government has breached the terms of the Bilateral Investment Agreements.

Competition Act, 2002:
Section 5 of the Competition Act, 2002 defines a combination to be any direct or indirect acquisition of an asset or amalgamation of an enterprise which exceeds the financial threshold.
The financial thresholds are as follows:
• In India – The acquirer and the target jointly have more than INR 20 Billion worth assets or a turnover crossing INR 60 Billion.
• Globally – The acquirer and the target have more than $ 1Billion worth assets with assets crossing INR 10 Billion in India itself or their turnover is more than $ 3 Billion with more than INR 30 Billion in India itself.
• Acquirer group – The acquirer and the target jointly have more than INR 80 Billion worth assets or a turnover crossing INR 240 Billion.
• Acquirer group – The acquirer and the target have more than $ 4Billion worth assets with assets crossing INR 10 Billion in India itself or their turnover is more than $ 12 Billion with more than INR 30 Billion in India itself.

For certain combinations, there is an exemption meaning, they are exempted from notifying to the Competition Commission of India:
• When the target’s assets in India are worth INR 3.5 Billion or less or
• When the target’s turnover in India is worth INR 10 Billion or less.
As per section 6(2) of the Competition Act, 2002 this combination has to be notified to the Competition Commission of India for its approval to proceed with the transaction. The term Appreciable Adverse Effect on Competition (AAEC) is mentioned in section 3(1) of the Competition Act, 2002. AAEC although not defined under the act simply means restricting the competition in the market. So when the financial thresholds are breached upon notifying to the Competition Commission of India, this commission looks into the merits of the case to see if the combination has any Appreciable Adverse Effect on Competition. In the Titan International acquiring Titan Europe [C-2013/02/109] case, Titan International acquired Titan Europe. Here although Titan International had no revenue accruing from any business in India, still it was mandated by the Competition Commission of India to get the acquisition notified because by acquiring Titan Europe there is an indirect acquisition of Wheels India. Any combination (be it acquisition, merger or an amalgamation) that takes place outside India but might harm competition in the Indian market has to be notified failing which will attract a penalty.

If the Competition Commission of India concludes that the said arrangement will cause Appreciable Adverse Effect on Competition, then the Commission will mandate modifications as was done in the case of Bayer (a German corporation – acquirer) acquiring Monsanto (an agricultural company incorporated in the United States- target) [C-2017/08/523]. Both the acquirer and the target have several subsidiaries in India. This acquisition was a reverse triangular merger which will make Monsanto the wholly-owned subsidiary of Bayer. Upon receiving notification under section 6(2) of the Competition Act, 2002 investigation was conducted under section 29 of the same act. Upon analysing, the commission found that this reverse triangular merger will cause an Appreciable Adverse Effect on Competition in several Indian markets and therefore had asked Bayer to send a show-cause notification. Although Bayer had proposed certain divestments, the commission disagreed to those and had mandated many modifications. Stating that complying with these modifications will only enable Bayer to acquire Monsanto.

Securities and Exchange Board of India:
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 mandates:

• Obligation to make an offer to remaining shareholders: Regulation 3 read with regulation 7 of the Takeover code creates an obligation on the acquirer when he acquires 25 per cent or more in the target company. The obligation is to make an offer to the rest of the shareholders of the target company to further acquire 26 per cent of the voting capital of the company.
• Obligation to make an open offer: If the acquirer holds 25 per cent from the beginning itself which is less than 75 per cent, then again holds another 5 per cent, the acquirer is obligated to make an open offer.

The SEBI (Listing Obligations and Disclosing Requirements) Regulations, 2015 mandates:
Before filing an application for approval of the merger scheme before the National Company Law Tribunal, a listed company has to follow certain listing regulations:
• Every listed company involved in an arrangement has to file its scheme before relevant stock exchanges seeking a no-objection letter.
• Their scheme has to be well within the provisions of the SEBI and the stock exchanges.
• The listed company has to file the pre and post arrangement shareholding pattern with stock exchanges of India and the country where the foreign company is listed in. (in case of a listed foreign company)

With India climbing up the rank in Ease of Doing Business, our country has become a preferred destination for many foreign businesses. If all the related provisions under the company law and foreign exchange management law are duly complied with, half of the complex work is done. Along with it if taxes are paid and the arrangement is free of any market complications (under competition law) the merger will be able to benefit from the increased financial capacity and many other incentives.
Authored By: Adv. Anant Sharma & Sriya Sindhoor

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