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18 July, 2017
Notification of Cross-border Mergers
On April 13, 2017, the Ministry of Corporate Affairs (‘MCA’) notified Section 234 (merger or amalgamation of a company with a foreign company) of the Companies Act, 2013 (‘Companies Act’), paving the way for cross-border mergers and amalgamations. Simultaneously, the MCA notified an amendment to the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2016 (‘Merger Rules’) by inserting a new Rule 25A, which prescribes the rules governing (i) inbound mergers by foreign companies with Indian companies, and (ii) outbound mergers by Indian companies with foreign companies incorporated in certain ‘notified jurisdictions’.
Section 234 of the Companies Act inter alia provides that, with the prior approval of the Reserve Bank of India (‘RBI’), a foreign company may merge into an Indian company and vice versa and that the terms and conditions of the scheme of merger may provide, among other things, for payment of consideration to the shareholders of the merging company in cash, or in depository receipts, or partly in cash and partly in depository receipts. The amendment to the Merger Rules further prescribes that such cross-border mergers and amalgamations must adhere to the requirements under the Companies Act and that the valuation (in case of an outbound merger) be conducted by valuers who are members of a recognised professional body in the country of the transferee company and as per internationally accepted accounting standards and valuation.
While the MCA has now permitted cross-border mergers, there are certain aspects that would require evaluation for successful implementation of cross-border mergers, including feasibility of tax neutrality in all the relevant countries and evaluation of impact under other tax provisions such as general anti-avoidance rules etc.
Draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017
Following the notification of Section 234 of the Companies Act, the RBI , on April 26, 2017, released the draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 (‘Draft Cross Border Merger Regulations ’) to provide a regulatory framework for cross border mergers. Some of the key provisions of the Draft Cross Border Merger Regulations have been
summarized below.
i. Issue/ transfer/ acquisition of security : Any issue or transfer of security by the resulting company is required to comply with the Foreign Exchange Management Act, 1999 (‘FEMA ’) and the regulations issued thereunder.
ii. Borrowings :
a. In inbound mergers, any borrowing from overseas sources entering the books of resultant company arising must conform to the External Commercial Borrowing (‘ECB ’) norms or trade credit norms or other foreign borrowing norms.
b. In outbound mergers, the resultant company must be liable to repay outstanding borrowings or impending borrowings as per the scheme sanctioned by the National Company Law Tribunal (‘NCLT ’).
iii. Repatriation on Contravention : If the assets/ securities held by the resultant company is in contravention of the Companies Act or FEMA provisions, the resultant company would be required to sell those off within 180 days of the sanction of the scheme and the proceeds are to be repatriated to or outside India, as the case may require.
iv. Valuation : The valuation of both Indian and foreign company must be conducted as per internationally accepted pricing methodology, shares on arm’s length basis and duly certified by an authorised chartered accountant/public accountant/ merchant
banker in the relevant jurisdiction.
v. Reporting : Any transaction that arises in relation to the scheme must be reported in the same manner in which it is otherwise required to be reported under FEMA .
The Indian company and the foreign company involved in an overseas merger will be required to furnish reports as prescribed by the RBI .
While Section 234 of the Companies Act only allows cross border mergers and amalgamations, the draft regulations include demergers and arrangements as well. Thus, this issue requires clarity and may need some amendments to the law. Further, effective implementation of the cross-border merger provisions will require amendments to FEMA , securities and tax laws, etc. While it is unclear how the proposed cross-border merger provisions will be specified under various laws, it may become a useful tool for companies to undertake expansion and restructuring activities.
Additional Exemptions for Private Companies
By way of notification dated June 13, 2017, the MCA has declared some additional exemptions to a specified class of private companies from certain provisions of the Companies Act, which have been summarized below:
i. The definition of ‘Financial Statements’ under Section 2(40) has been amended to provide that a private company which is a start-up1 may not include cash flow statement as part of its financial statements.
ii. Section 73(2) of the Companies Act provides that companies may accept deposits from members subject to prescribed conditions, such as creation of a deposit repayment reserve account, maintenance of deposit insurance, etc. Following private
companies are now exempted from complying with these requirements:
a. A private company that accepts deposits from its members not exceeding the aggregate of 100% of the paid up share capital, free reserves and securities premium account; or
b. For a period of five years from the date of incorporation for a start-up; or
c. A private company (i) which is not an associate or subsidiary company of any other company; (ii) its borrowings from banks and financial institutions is less than twice its paid up share capital or . 50 crores (approx. US$ 7.7 million), whichever is lower; and (iii) which has not defaulted in the repayment of borrowings from banks and financial institutions subsisting at the time of
accepting deposits.
iii. Section 92(1)(g) provides that the annual returns prepared by a company should, inter-alia , provide details of remuneration to the directors and key managerial personnel. Pursuant to the exemption, private companies, which are small companies, are only required to provide details of the aggregate remuneration drawn by directors.
iv. As per the proviso to Section 92(1), annual return of one person companies and small companies are only required to be signed by the company secretary, or where there is no company secretary by the director of the company. This has now been made applicable to private companies which are start-ups.
v. A private company which: (i) is a one person company or a small company; or (ii) has turnover less than . 50 crores (approx. US$ 7.7 million) as per the latest audited financial statements; or (iii) has aggregate borrowings at any point of time during
the financial year less than . 25 crores (approx. US$ 3.8 million), is exempt from the requirement under Section 143(5)(i) of the Companies Act of including under its auditor’s report a statement on whether the company has adequate internal financial control systems in place and operating effectiveness of such controls.
vi. Start-ups have been exempted from the requirement of holding four board meetings in a year. Such companies are required to hold only one meeting of the Board in each half of the calendar year, provided that the gap between the two meetings is not less than 90 days.
vii. Interested directors can be counted towards quorum for adjourned board meetings of private companies under Section 174(3) of the Companies Act after disclosure of their respective interest pursuant to Section 184 of the Companies Act.
Benefits of the exemptions set out above can only be availed by a private company which has not committed a default in filing its financial statements under Section 137 or annual return under Section 92 of the Companies Act.
Additional Exemptions for Section 8 Companies
By way of notification dated June 13, 2017, the MCA has amended its earlier Notification GSR 466(E) dated June 5, 2015 (‘Section 8 Principal Notification ’), by prescribing additional exemptions for companies with charitable objects registered under Section 8 of the Companies Act (‘Section 8 Companies ’) from compliance with certain provisions of the Companies Act, which
have been summarised below:
i. Under the Section 8 Principal Notification, Section 8 Companies were exempted from complying with the minimum and maximum director requirements under Section 149(1) of the Companies Act. Pursuant to the recent amendment, Section 8 Companies are mandatorily required to have a minimum number of 3 directors (in the case of a public company) and 2 directors (in the case of a private company).
However, there continues to be no limit on the maximum number of directors. ii. As per Section 186(7) of the Companies Act, loans provided by any company to another person must bear interest not lower than at a rate specified under the Companies Act. Section 8 Companies are exempted from complying with this requirements if: (a) not less than 26% of its paid up share capital is held by the Central Government or any State Government(s) or both; and (b) the loan is being granted for funding industrial research and development projects, in furtherance of the objects stated in the memorandum of association of such Section 8 Company.
Benefits of exemptions set out above can only be availed by Section 8 Companies that have not committed a default in filing their financial statements under Section 137 or annual return under Section 92 of the Companies Act.
Amendment to the Companies (Audit and Auditors) Rules, 2014
By way of notification dated June 22, 2017, the MCA has notified an amendment to Rule 5 of the Companies (Audit and Auditors) Rules, 2014 (‘Audit Rules ’). Prior to the amendment, as per Section 139(2) of the Companies Act read with Rule 5, inter alia all private limited companies having a paid up share capital of . 20 crores (approx. US$ 3 million) (or more), were permitted to appoint (i) an individual as the statutory auditor only for a single term of five consecutive years; and (ii) an audit firm as the statutory auditor only for two terms of five consecutive years.
Pursuant to the amendment, the limit of . 20 crores (approx. US$ 3 million) (or more) has been increased to . 50 crores (approx. US$ 7.7 million) (or more).
Amendment to the Transfer of Pending Proceedings Rules, 2016
The MCA has by way of its notification dated June 29, 2017 amended the Companies (Transfer of Proceedings) Rules, 2016 (‘Transfer Rules ’), which specified rules for transfer of pending proceedings under the Companies Act, 1956 (‘CA 1956 ’) in relation to winding up and voluntary winding up of companies from the High Court to the NCLT . Rules 4 and 5 of the Transfer Rules have been amended as follows:
i. All proceedings related to voluntary winding up, where notice of resolution by advertisement has been given under CA 1956 but such company has not been dissolved before April 1, 2017, will continue to be dealt with under CA 1956 and not under the Insolvency and Bankruptcy Code, 2016 (‘IBC ’).
ii. The erstwhile Rule 5 of the Transfer Rules provided for winding up proceedings pending before the High Court to be transferred to the NCLT . If the petition was not served on the respondent then such petitions, and the petitioner would, thereafter, be required to provide information as if such petition were an application under the IBC . The time for providing such information has now been extended up to July 15, 2017, failing which, such petition will stand abated and a fresh application under the IBC will have to be filed.
1 Means a private company recognized as a ‘start-up’ in accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
