Companies Act 2013 promises to marry corporate law with globalised business needs. Besides several talked-about concepts such as Corporate Social Responsibility, auditors’ rotation and one-person company, it brings about a clearer legal framework for cross-border mergers.
Cross-border mergers typically involve either a foreign company folding into an Indian one, or vice versa. As the new law also ushers in short-form mergers (that is, bypassing Court or Tribunal approval) between small companies or wholly-owned subsidiaries and their parents, flipping or reorganising international holding structures may now become simpler.
Under Companies Act 1956, only foreign companies could merge or amalgamate with Indian companies by following procedures laid out in Sections 391 to 394. The reverse scenario was not covered. Section 394(4)(b) of the 1956 Act defined “transferee company” only as a company formed or registered under it or earlier company laws in India. However, “transferor company” included any corporate, whether it was a company under the Act or not. Therefore, it was inferred until now that a foreign company could only be a transferor and not transferee, effectively blocking outbound mergers of Indian companies with foreign entities. The new company law permits inbound as well as outbound cross-border mergers and amalgamations between Indian companies and companies in foreign jurisdictions. However, the Government is empowered to notify, from time to time, the foreign jurisdictions in which such corporate matches would be allowed. It will also frame rules for cross-border mergers in consultation with the Reserve Bank of India. Also, RBI approval is a must. Interestingly, the new law appears to be silent on cross-border splits or demergers.
It is currently unclear how cross-border outbound mergers would be affected by other prevailing laws such as the Securities and Exchange Board of India (SEBI) Act and regulations, Competition Act, Foreign Exchange Management Act, and Income-tax Act. It may be noted that asset transfers in amalgamations are currently exempted from income tax only where the transferee is Indian.
Accordingly, if a foreign company were to merge its Indian subsidiary into another subsidiary outside India, it will have a tax bill to pay in India. The stamp laws may also have to be relooked for clarity. The corporate laws and related regulations in the notified jurisdictions would continue to apply. It is noteworthy that corporate laws in many jurisdictions still do not envisage cross-border schemes or arrangements.
Although the Companies Act has received Presidential assent, the provisions governing amalgamations have not been notified yet. That is likely to happen only when the Government is ready with the corresponding rules. So, even though the new law is good news for cross-border corporate marriages, the prospective brides and grooms still have a long wait ahead.
The author is a chartered account .
Sandeep Jhunjhunwala chartered accountant contributed to the article.