11 May, 2018
RBI notifies the Cross Border Merger Regulations
The Reserve Bank of India (‘RBI’) has notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (‘Cross Border Merger Regulations’), by way of a notification dated March 20, 2018. Some of the key provisions of the Cross Border Merger Regulations are set out below:
i. Inbound Mergers: In case of an inbound merger (i.e. a cross border merger wherein an Indian company is the resultant company), the resultant Indian company may issue shares to persons resident outside India, subject to compliance with the requirements prescribed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘FEMA 2017’).
(a) the foreign company in an inbound merger is a joint venture (‘JV’) or wholly owned subsidiary (‘WOS’) of the Indian company; or
(b) the inbound merger of a JV or WOS results in the acquisition of a step down subsidiary, then compliance with the provisions of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (‘ODI Regulations’) is required. Some of the key provisions governing inbound mergers are set out below:
- Acquisition/transfer of assets and liabilities by the resultant Indian Company: If the resultant Indian company acquires any asset or comes to hold any liability outside of India as a result of the inbound merger, which acquisition is not permitted under FEMA, then the resultant Indian company would be required to sell such asset / security or extinguish such liability from the sale proceeds of the overseas assets, within two years of the merger scheme being sanctioned by the National Company Law Tribunal (‘NCLT’).
- Offices of the foreign transferor company: The overseas office(s) of the foreign transferor company would be deemed to be the offshore branches/office outside India of the resultant Indian company, which will be required to undertake the activities of a branch/office as permitted under the Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015.
- Borrowings and guarantees of the foreign transferor company: Any borrowings raised or guarantees issued by the foreign transferor company, which come to be held by the resultant Indian company, will have a period of two years to become compliant with the applicable foreign exchange regulations governing external commercial borrowings, borrowing or lending in Rupees or guarantees. No remittance for paying such liability can be made by the resultant Indian company within the two years of the merger scheme being sanctioned by the NCLT. In such cases, end use restrictions will not apply.
With respect to an inbound merger, if the resultant Indian company intends to continue operations outside India post completion of such cross-border merger, then such resultant Indian company will be required to maintain a presence outside India, through an offshore branch or a subsidiary in the manner permitted under foreign exchange regulations.
ii. Outbound Mergers: In case of an outbound merger (i.e. a cross border merger wherein a foreign company is the resultant company), a person resident in India may hold or acquire securities of the resultant foreign company, in accordance
with the provisions of ODI Regulations (including the fair market value of such foreign securities being within the limits prescribed under the Liberalized Remittance Scheme, where the resident Indian is an individual). Some of the key provisions governing outbound mergers are set out below:
- Offices of the Indian transferor company: Indian offices of the Indian transferor company will be deemed to be branch offices of the resultant foreign company. Transactions can be undertaken out of such Indian branch offices in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.
- Borrowings and guarantees of the Indian transferor company: The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant foreign company are required to be paid as per the scheme sanctioned by the NCLT. However, the resultant foreign company will not be permitted to acquire any liability payable towards an Indian lender in Rupees which is not in conformity with the provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’).
- Acquisition/transfer of assets by the resultant foreign Company: If the resultant foreign company acquires any asset or security which it is not otherwise permitted to hold under FEMA, it will be required to sell such asset or security within two years of the merger scheme being sanctioned by the NCLT, and the proceeds of such divestment are required to be repatriated outside India immediately through normal banking channels. However, repayment of Indian liabilities from the proceeds of the sale of such assets or securities within such two year period is permitted.
- Valuation: In accordance with Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016, valuation for an outbound merger has to be conducted by a valuer who is a member of a recognized professional body in the jurisdiction of the transferee company in accordance with internationally accepted principles on accounting and valuation.
With respect to an outbound merger, if the resultant offshore company intends to continue operations in India post completion of such cross-border merger, then such resultant offshore company will be required to maintain a presence outside India through a subsidiary in the manner permitted under foreign exchange regulations.
Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018
The RBI has, by way of a notification dated March 26, 2018, issued the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (‘2018 Regulations’) that replaces the erstwhile Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 (‘2000 Regulations’). Some of the key changes introduced by way of the 2018 Regulations are set out below:
i. The 2018 Regulations has replaced the concepts of ‘a person resident outside India who is a citizen of India’ and ‘a person of Indian origin’ under the 2000 Immovable Property Regulations with ‘Non-Resident Indian’ (‘NRI’) and ‘Overseas Citizen of India (‘OCI’), respectively and treats NRIs and OCIs at par with respect to their capacity to hold and / or transfer immovable property in India.
ii. An NRI or an OCI is generally permitted to acquire any immovable property, other than agricultural land/ farm house / plantation property in India, by way of a sale or gift from a person resident India or another NRI or OCI, who is a ‘relative’ (as defined under Section 2(77)1 of the Companies Act, 2013). While the 2000 Regulations were silent on this aspect, the 2018 Regulations provide that a person resident outside India, not being an NRI or OCI but whose spouse is an NRI or an OCI, may acquire one such immovable property, jointly with the NRI / OCI spouse.
iii. Any person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, or persons of Hong Kong, Macau or Democratic People’s Republic of Korea, and including persons from aforesaid countries having a place of business in India in a manner permissible under FEMA, will not be permitted to acquire or transfer any immovable property in India in their individual capacity, without the prior approval of the RBI, other than on lease not exceeding five years. However, such restriction would not apply where such person is an OCI.
iv. Under the 2018 Regulations, a person resident in India under a long term visa, who
is a citizen of Afghanistan, Bangladesh or Pakistan and belongs to minority communities in those countries (namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians), may purchase only (a) one residential immovable property for self-occupation and (b) one immovable property for carrying out self-employment activities, inter alia subject to such immovable property not being in / around any restricted / protected areas and cantonment areas. This dispensation was not provided for under the 2000 Regulations.
v. The 2018 Regulations do not have retrospective application on any existing holding of immovable property by a person resident outside India, which was acquired under the 2000 Regulations.
Amendments to FEMA 2017
The RBI has, by its notification dated March 26, 2018 introduced the following amendments to the sector specific policy for foreign investment, under FEMA 2017:
i. Foreign investment in investing companies:
(a) Foreign investments in investing companies not registered as non-banking financial companies (‘NBFCs’) with the RBI and in core investment companies, both engaged in the activity of investing in the capital of other Indian entities, will require prior Government approval; and
(b) foreign investment in investing companies registered as NBFCs with the RBI, will not require any prior approval and will be permissible under 100% automatic route.
ii. Single brand product retail trading: In case of entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible, a committee under the chairmanship of the Secretary, DIPP, with representatives from Niti Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject will examine the claim on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology, and give recommendations for such relaxation.
iii. Issuance of capital instruments to persons resident outside India: No prior Government approval will now be required for issuance of capital instruments to persons resident outside India against:
(a) import of capital goods / machinery / equipment (excluding second hand machinery); or
(b) pre-operative / pre-incorporation expenses, unless the Indian investee company is engaged in a sector under the Government route.
As set out in our January 2018 edition of the Inter Alia, the Union Cabinet had approved certain amendments to the foreign direct investment regime in India on January 10, 2018, which have now been incorporated in FEMA 2017.
1 Section 2 (77) of the Companies Act, 2013 states: “relative”, with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed.
For further information, please contact:
Zia Mody, Partner, AZB & Partners