In a move that would significantly benefit Indian companies seeking to aggressively expand overseas and bulk up inorganically, the government is learnt to be studying the possibility of allowing cross-border mergers. ?Under Indian law, a merger is only allowed if both merging companies are registered in India,? Diljeet Titus, managing partner at corporate law firm Titus & Company, told FE.
A proposal to allow cross-border mergers was believed to have been mooted in February and sent to the Cabinet, but a final decision on the matter was deferred. The two major hitches at the time were the sectoral foreign direct investment caps and competition issues. Now, sources said that with the government?s recent relaxations of FDI norms and the Competition Commission of India (CCI) in place, those problems have been addressed.
As section 390 (a) of the Companies Act, 1956, prohibits direct cross-border mergers, legal sources said Indian companies are often forced to set up overseas entities in order to get around this problem through indirect mergers. ?If the law allows direct cross-border mergers, it would help Indian companies immensely,? said a corporate lawyer with a top legal firm.
Indian companies can, of course, acquire companies overseas, as in the case of Tata Steel?s $13 billion buyout of Anglo-Dutch steel giant Corus in early 2007, or go for complex cash-cum-stock swaps, as is being currently negotiated between the country?s largest telecom operator, Bharti Airtel, and South Africa?s MTN.
Sources told FE that given the high cost of bankrolling acquisitions in the backdrop of the global liquidity crunch, the government is prepared to re-examine the feasibility of allowing cross-border mergers. However, suitable amendments to the Companies Act would require Cabinet and subsequent legislative approval.
Among those likely to benefit from such change in legislation is Bharti Airtel, which is negotiating a $23-billion deal with MTN in a complex deal that would involve Bharti acquiring 49% stake in MTN. In return, MTN and its shareholders would get a 36% stake in Bharti. ?The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it is practicable,? a Bharti statement said.
The first step towards allowing cross-border mergers was taken in 2005 when the ministry of corporate affairs had endorsed the JJ Irani committee?s suggestion that the law should be changed to recognise such mergers. However, overlapping regulatory jurisdiction proved a hurdle. There were also demands from minority shareholders that in such mergers, the government should appoint a valuer.
