Mergers and acquisitions (M&A) are strategic moves where companies combine operations, assets, or ownerships. A merger consolidates two or more companies into one, while an acquisition occurs when one company takes over another, with no new entity created. For example, the merger of Vodafone India and Idea Cellular to form ‘Vi’, and Walmart’s acquisition of Flipkart, are notable instances.
Cross-border M&As, where companies from different countries merge or one acquires the other, have grown in prominence due to globalization. These deals can involve companies entering foreign markets or vice versa. One prominent example is Tata Steel’s acquisition of the UK-based Corus Group, demonstrating the growing global influence of Indian companies.
Regulatory Framework for Cross-Border M&As in India
In India, cross-border mergers are governed by several regulations, including the Companies Act, 2013, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, and the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018. These rules ensure compliance with both Indian and international standards for inbound and outbound mergers.
Inbound mergers occur when a foreign company merges with an Indian company, creating an Indian entity, like Walmart’s acquisition of Flipkart. Outbound mergers involve Indian companies merging with foreign companies, leading to the creation of a foreign entity. For instance, Tata Motors’ acquisition of Jaguar Land Rover in 2011 and Tata Steel’s acquisition of Corus are examples of outbound mergers.
Challenges in Cross-Border M&As
Regulatory Compliance
With the Foreign Exchange Management Act (FEMA) governing capital flows into and out of India. Companies must navigate FEMA’s rules regarding assets, borrowings, and the acquisition of foreign assets. If the merged entity is non-Indian, adjustments to the Indian company’s assets and liabilities are necessary. Additionally, the National Company Law Tribunal (NCLT) approval is required for mergers, and delays or non-compliance with FEMA can delay the process.
Currency and foreign exchange issues
Cross-border deals often involve large sums of money, and these transactions must comply with FEMA’s stringent currency control laws. Indian companies involved in such deals may need to open Special Non-Resident Rupee (SNRR) accounts to manage currency exchange, adding complexity.
Share issuance and securities regulations
Indian regulations, particularly FEMA’s Overseas Investment Rules, governing how shares are issued and how ownership is structured. Compliance is crucial, as violations can lead to legal complications. Additionally, companies must comply with regulations enforced by the Securities and Exchange Board of India (SEBI) and the Companies Act, 2013.
Regulatory scrutiny and approvals
The Competition Commission of India (CCI) is also required to prevent anti-competitive market conditions. Some sectors, such as banking, telecommunications, and defense, have strict foreign investment restrictions, requiring additional approvals, further complicating the process.
Cultural and operational integration
Companies from different countries often have varying corporate cultures, which can affect
decision-making, employee retention, and communication. Integrating operations, technologies, and supply chains can also be logistically and strategically difficult.
Taxation and financial compliance
India’s tax system involves corporate taxes, capital gains taxes, and other obligations, with cross- border M&As potentially triggering capital gains tax on asset or share sales. There is also the risk of double taxation, which can be mitigated through tax treaties. Companies must ensure compliance to avoid unexpected financial burdens.
Legal and contractual challenges
Contractual challenges arise due to differences in legal systems and contract enforcement. Disputes over deal terms may be costly and difficult to resolve, especially when multiple jurisdictions are involved.
Emerging Trends and Regulatory Changes
Despite these challenges, India’s regulatory environment is evolving, presenting new opportunities for cross-border M&As. Recent changes allow Indian companies to swap shares for foreign securities without needing regulatory approval, making it easier to structure deals. This flexibility enables Indian companies to engage in international transactions without cash payouts.
International investors are increasingly willing to accept Indian securities in M&A deals, recognizing the value of the Indian stock market. This trend allows Indian companies to use their high-value securities as currency for global acquisitions, expanding their reach.
In January 2024, the Indian government took a step further by permitting Indian companies to list their securities on international stock exchanges. This move is expected to integrate Indian companies into the global financial system, attracting more international investors.
To sum up, while regulatory and operational challenges remain, recent regulatory changes offer promising opportunities for cross-border M&As involving India. As the regulatory framework continues to evolve and international investors become more receptive to Indian companies, the prospects for cross-border M&As are improving. This shift is likely to boost global deal-making, benefiting both Indian and international markets, and providing significant growth opportunities for Indian companies.
References:
GTDT Practice Guide India M&A 2023- Archer & Angel
INDIA: CROSS-BORDER MERGER FRAMEWORK- DLA PIPER
Cross-border mergers and acquisition in India: - extent, nature and structure- extract by
Beena Saraswathy
Regulation of cross-border M&A in India- Enhelion
Indian cross-border M&A: High-valuation hurdles and the hopeful path ahead
White& Case Driving cross-border transactions and deals in India- KMPG
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