Abstract
However, as globalization continues to affect companies, restructuring has increasingly become international and involved mergers and acquisitions as a means of achieving growth. Mergers across international borders give various firms the chance to enter new markets and obtain technological know-how, among other advantages. It is in recognition of the importance of creating a regime that will allow for international corporate restructuring that India has put in place a regime for cross-border mergers through section 234 of the Companies Act, 2013.
Prior to the Companies Act 2013, there was nothing specific in regard to the mergers between Indian and foreign companies in the earlier system of Indian company law. Mergers could only be carried out between Indian companies within the existing regime of firms Act 1956. One important amendment which enables the merger of Indian and foreign companies with prior RBI approval is Section 234 of the Companies Act 2013.
However, even with all these reforms implemented in order to encourage mergers and acquisitions in India, there are many legal and regulatory barriers which need to be crossed by any enterprise intending to merge or acquire another firm. These include complications of overlapping regulations among other obstacles, problems of taxations, valuation issues, and compliance with foreign laws. All these can create serious impediments in the process of a transnational merger. Moreover, given the current global economic scenario and increasing globalization trends, there is a necessity for implementing an efficient regulatory framework.
This research critically evaluates the existing legal framework on cross-border mergers under the provisions of the Companies Act, 2013. This research focuses on analyzing the efficacy of the existing legal framework, regulatory hurdles, and issues arising in the area of cross-border merger operations. Moreover, the study also evaluates international practices and suggests recommendations to make the Indian regulatory framework more effective.
Keywords: Cross-border Mergers, Companies Act, Inbound Mergers, Outbound Merger, Globalization, Regulatory Framework, Foreign Company, Transnational Merger, IBC, Reserve Bank of India, National Company Law Tribunal.
Introduction
The Companies Act, 2013 has a special place in the history of Indian corporate law. It is not merely an update to the earlier Companies Act, 1956. Instead, it completely rewrites the rules for starting, managing, governing, and reorganizing companies in India. One of the biggest changes in the 2013 Act is the creation of a legal framework for cross-border mergers. This is a first in Indian company law. Before this Act, Indian companies could not merge directly with foreign companies, and foreign companies could not dissolve into Indian entities through a court-approved legal process. It was not just complicated; it was impossible under the earlier rules.
For over fifty years, the Companies Act, 1956 has shaped Indian corporate law. At the time of its creation, India operated under a closed economy and its engagement with the global economy was very limited in that it was heavily controlled with respect to foreign investments and also did not provide for statutory mergers of Indian companies with foreign entities. Provisions related to corporate restructuring and mergers contained in the Act, particularly section 391 to 394, were intended to address only domestic transactions. Consequently, courts, including the High Courts of Bombay and Calcutta, interpreted such provisions to apply only to corporations incorporated in India. Thus, courts have ruled that a foreign corporation may not participate in a compromise or arrangement under the Companies Act, 1956. Although such interpretations are consistent with the legal provisions contained in the Act, they create an enormous disconnect between the demands of an increasingly globalized Indian corporate sector and the statutory framework that governs Indian corporate transactions.
The economic liberalisation that occurred in India since 1991 has radically changed the country’s corporate landscape. The dismantling of the licence raj and opening of Indian markets to foreign competition and investment; the abolishment of exchange controls on the current account; and the gradual liberalisation of the capital account under the Foreign Exchange Management Act (FEMA) of 1999, opened the way for Indian companies to think, act and compete internationally. Several of the world’s largest Indian conglomerates have acquired significant foreign companies in the past few years, while many other international multinationals have increased their presence in India through subsidiaries, joint ventures and strategic partnerships. In particular, the information technology sector, the pharmaceutical industry and financial services have become globally competitive, with substantial foreign direct investment and many Indian companies now competing internationally. Due to this changing environment, by mid-2005, the need for an efficient and legally secure mechanism for cross-border corporate combinations, which complied with the international standards, was one of the most commonly cited deficiencies in the structure of Indian corporate law.
The Expert Committee that is responsible for drafting new company regulations indicates that they have recognized that international and foreign businesses will want to merge and operate together in a global marketplace. The Expert Committee recommends that the new company law include a section that permits businesses in India to complete their international activities through mergers, on the same basis and terms as businesses in all other major countries. The recommendations made by the Expert Committee regarding cross-border merging have now become law and are found in Section 234 of the Companies Act, 2013 and in Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These two documents form the backbone of the cross-border merging process in India.
Section 234 and Rule 25A are both important beyond their technical nature. Symbolically, their implementation demonstrates India’s view that the corporate restructuring laws governing India need to match those of countries on the global stage so that they can compete against companies in those countries for international growth and consolidation. Practically, these provisions also provide a clear and legally secure way for one company to merge into another through a court-approved process; specifically, an Indian company can merge into a foreign company or vice versa with all the assets and liabilities of the merging company’s entity transferred automatically to the surviving company of the other entity. These are outcomes that were not possible under the Companies Act of 1956 and would have required indirect contractual arrangements at a significant cost, complexity, and uncertainty.
Section 234 of the Companies Act 2013 and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 have a significance that goes far beyond their immediate technical content. Symbolically, they represent India’s recognition that the statutory regime for corporate restructuring requires reform to permit a level playing field for Indian and foreign companies operating in a globalised economy; that is, Indian companies should be able to access the same structural mechanisms for international expansion and consolidation as their foreign competitors in the USA, UK, Singapore, and the EU. Practically, these provisions allow, for the first time, for a legally certain process through which a foreign company can dissolve itself and merge into an Indian company by way of a court-approved process, or vice versa, and the assets and liabilities of the Indian merging company will automatically vest in the foreign surviving company. The 1956 Act did not enable these types of outcomes, and contracting companies to effectuate these mergers through other means has been both prohibitively expensive and complex, while carrying substantial risk of uncertainty.
The primary purpose of this study is to not only to provide a description of the law, but also to critically assess its merits and identify areas that require clarification or enhancement in order for India’s cross-border merger regime to achieve its phenomenal potential for facilitating global corporate integration.