Neighbouring countries: MCA’s new move to ward off opportunistic takeover of Indian companies

The Centre has widened its oversight on investments flowing from neighbouring countries and now introduced an additional mechanism to strengthen the checks and balances against opportunistic takeover of Indian companies by entities in countries with which India shares its land border.

Framing a new rule around inbound mergers and amalgamations, the Corporate Affairs Ministry (MCA) has now mandated that parties undertaking inbound mergers in India (involving entities incorporated in countries where India shared its land border) should file an additional declaration that all necessary approvals under FEMA, if required, have been obtained for transactions involving compromise, arrangement, merger or demerger. 

The declaration is aimed at ensuring that the prior government approval requirement under Foreign Exchange Management Act (FEMA) are not circumvented in merger transactions. 

The latest government move requiring filing of an additional declaration in merger and amalgamation cases comes on the heels of the MCA tweaking its company incorporation rules so as to align them with recent FEMA changes and ensure that nationals of a country which shares land border with India do not get to incorporate a company in India without requisite security clearance from the Home Ministry. 

The recent MCA moves on this front should be seen as an effort to supplement the restrictions imposed by the government on investments from countries sharing a land border with India, under Press Note 3 of 2020, say legal experts.

It maybe recalled that government had in 2020 placed all foreign direct investment from border countries under the approval route to curb opportunistic takeovers during  the pandemic. It was aimed at preventing Chinese investors from taking control of Indian companies.

COMPLIANCE BURDEN

The latest MCA move requiring to file a declaration with the National Company Law Tribunal (NCLT) at the stage of filing of the application seeking sanction of compromise or an arrangement or merger or demerger has evoked mixed response from legal experts.

Atul Pandey, Partner, Khaitan & Co, said the requirement effectively increases the compliance burden for companies proposed to be engaged in cross border mergers, given that necessary approvals under Press Note 3 of 2020 have to be obtained even prior to the application being filed with the NCLT. This would in effect increase the timelines for such merger substantially, he added.

Rohit Ambast, Partner, IndusLaw, said that parties undertaking inbound mergers in India will now need to submit this additional declaration together with the detailed scheme-related application submitted with the NCLT. “This declaration appears to supplement the governmental approval requirements introduced by Press Note 3 in April 2020 [for investments from countries that share a land border with India]. Interestingly, the requirement has been introduced not under FEMA but the Companies Act, which imposes more stringent criminal liability for any false statements,” Ambast said.

Ashish Gupta, Partner, Chadha &Co, said the latest MCA move is in line with the government’s continuous actions to ensure that all foreign investments from countries sharing land borders with India are reported by the companies concerned in the prescribed form (CAA.16). The said amendment is to further ensure that companies have obtained all necessary approvals under FEMA, if required, for transactions involving compromise, arrangement, merger or demerger. 

“By amending various rules and regulations to enhance compliance, the government is tightening its monitoring to ensure that no foreign investment coming to India from a country with shared land borders goes unscrutinised,” Gupta said.

Simran Nandwani, Resident Counsel - Cornellia Chambers, said this latest MCA amendment has been made to strengthen the checks and balances in the system so as to curb any opportunistic takeover or acquisition of the Indian companies by companies or entities situated in neighbouring countries, as was noticed by the government during the Covid-19 pandemic.