While the 1956 Act allowed a foreign company to merge into an Indian company, provided the country of the merging companys origin permitted cross-border mergers, it is for the first time that India has allowed domestic companies to merge into foreign ones. The provision, needless to say, amply reflects the intent of the legislature to facilitate business and enable Indian companies to truly become multinational ones apart from providing them much flexibility.
In the backdrop of cross-mergers, Section 234 of the new Act becomes relevant. It makes clear that cross-border mergers will be limited to companies under certain foreign jurisdictions notified by the union government. Further, the union government will be framing the rules for such mergers in consultation with RBI.
Cross-border merger provisions allow Indian companies to internationalise their businesses for raising funds through listing or otherwise. Multinationals may use it to consolidate their Indian businesses in favourable jurisdictions. It also allows for closing international operations, rationalising group structures, allowing foreign company branches to merge with parent companies, etc.
Depending on restrictions on such mergers, countries are dived into three broad categories:
(i) Countries which allow cross border mergers only with certain countries, e.g. most EU countries allow cross-border mergers with companies of other EU countries and not outside,
(ii) Countries which have no such country-specific restrictions, viz. Mauritius, Cyprus, Dubai, Luxembourg,
(iii) and Countries which dont allow any cross-border mergers, viz. Singapore
The tax regimes of countries where Indian companies could have cross-border merger interests need to be conducive. Cross-border merger among EU companies is generally tax-neutral subject to compliance with certain prescribed conditions. In countries like Mauritius which have no restrictions on cross-border mergers, taxes are not levied. There are examples of Mauritian companies merging into Indian companies without any tax implications in Mauritius. Thus, in order to make the Indian cross-border merger provisions fruitful, appropriate amendments/clarifications in relevant Indian laws are necessary. Two laws that come to mind are the Income Tax Act and the Foreign Exchange Management Act.
Income Tax Act, 1961
The Income Tax Act, 1961, at present, contains the provision that mergers of companies where the transferee companies are Indian will not be subject to tax if certain conditions, namely, all assets and liabilities of the transferor entity become the assets and liabilities of the transferee company, and at least three-fourth (in value) of the shareholders of the transferor entity become shareholders of the transferee company, are fulfilled.
If the two conditions are fulfilled, then the merger is a qualified one for the purpose of the Act and there will be no tax implications in the hands of the transferor company and its shareholders. Further, for tax purposes, the provisions of the Income Tax Act hold that the transferee company should be an Indian company, in line with the Companies Act, 1956 which only allow foreign companies merger into Indian ones and not vice versa.
Now, the same should also be applicable to cross-border mergers in which an Indian company merges into a foreign one. In view of the new Companies Act, the government should come out with appropriate clarifications to the effect exempting such mergers from taxes.
Foreign Exchange Management Act, 1999
From the FX control perspective, post the merger of an Indian Company with a foreign company, the Indian business may become a branch of the latter. While this might work for industries in the automatic route, viz. service industries, advisory, etc, there will be practical challenges for the manufacturing sector ones which are subject to a multitude of licenses, registrations, etc. The situation may further become complicated for sectors in which FDI is permissible only under the approval route, viz telecom, media, retail trade, etc, or those which are listed on stock exchanges in India.
Some other practical challenges which may arise will be obtaining the consent of lenders for such mergers, enforceability of existing contracts, restrictions on foreign entity/individual owning immovable property in India, etc. Accordingly, to facilitate cross-border mergers, RBI should issue appropriate clarifications/guidelines on how some of the above aspects will be dealt with.
If implemented efficiently, the cross-border merger can become a tool for India Inc to raise funds abroad, thus becoming truly multinational companies. While we have to wait and watch how the rules around cross-border merger finally shape up.
(With inputs from Amit Agarwal, senior managertax & regulatory, PwC India)
The author is the executive directortax & regulatory, PwC India