CROSS BORDER MERGERS AND ACQUISITIONS: AN OVERVIEW

A substantial number of cross border mergers and acquisitions have taken place in India [1] in the recent past [2] and the current circumstances can further lead to cross border mergers and acquisitions as the lowered valuation in short term can be encouraging for the buyers to easily invest in or gain control of important companies [3]. Earlier only such cross-border mergers were allowed by the Indian Law, where the transferee company was an Indian company and the transferor company was a foreign company [4] i.e. the merger of a foreign company with an Indian company. The merger of an Indian company with a foreign company was prohibited. After the notification of section 234 of the Companies Act, 2013 the following mergers are permitted:

• Inbound merger: The merger where the resultant company is an Indian company i.e. foreign company [5] merging into an Indian company. [6]
• Outbound mergers: The mergers where the resultant company is a Foreign company i.e. Indian company merging into a foreign company. [7]

Due to the nature of the investment, the regulations applicable to it are different from the transactions where both the transferor company and the transferee company are domestic companies. In addition to the compliance with the requirements of sections 232,233 and 234 of the Companies Act, 2013, the following conditions have to be complied with:

• Prior approval from RBI has to be obtained: For an inbound merger, regulations 4, 6, 7,8 and 9 of the Foreign Exchange Management (Cross Border Mergers) Regulations, 2018 have to be complied with, while for an inbound merger regulation 5, 6, 7,8 and 9 of the Foreign Exchange Management (Cross Border Mergers) Regulations, 2018 have to be complied with.
• In case of an outbound merger, the foreign company has to be incorporated in a jurisdiction specified in Annexure B to Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. [8]
• The specified jurisdiction under this annexure includes the jurisdictions whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding with SEBI [i] or whose Central Bank is member of Bank for International Settlements [ii] & jurisdiction, which is not identified in the public statement of Financial Action Task Force as a jurisdiction having strategic anti-money laundering or Combating of Financing Terrorism deficiencies to which counter measures apply or a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies [iii]. [9]

Tax implications for Cross border Mergers and Acquisitions

For a successful cross-border merger or acquisition, compliance with the laws two or more countries and international customs and treaties is also required. One of the most complex aspects of cross-border M&A is the taxation of the transaction. Taxation of these transactions has witnessed great changes in this decade and will continue to do so because of various regulatory reforms introduced in light of the initiatives of OECD. In September 2013, the G-20 nations endorsed the 15 point OECD BEPS action plan [10] and the OECD released the final plans to curb Base Erosion and Profit Shifting in 2015. [11] These guidelines have been formulated to curtail the practices aimed simply for the purposes of tax reduction or tax evasion. Mergers and Acquisitions across the nations have been impacted by the implementation of the OECD BEPS. Further, a Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) was signed by 94 countries (it entered into force on 1 July 2018) to implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. [12] India signed the MLI on June 7, 2017 and the MLI entered into force in India on October 1, 2019. [13] The implementation of the Action plans of OECD BEPS and the MLI not only alters the tax landscape across the world but has far reaching impact on all cross-border transactions. In context of the mergers and acquisitions, these measures were targeted to increase transparency and prevent tax evasion by aggressive tax-planning and hybrid tax instruments. But it has also led to an increase in the cost of compliance and the lack of uniform implementation of these guidelines has led to new problems for the regulatory authorities and the corporations. In the following articles, the researcher tries to gauge the impact of the implementation of the BEPS Action Plan and the MLI on cross-border Mergers and Acquisitions in India.

This article is written by – Snehal Kanzarkar

[1] Mergers and Acquisitions deal volume at a 7 year high in 2017 with 1022 transactions: EY, Economic times, (March 22, 2018) available at https://economictimes.indiatimes.com/news/company/corporate-trends/merger-and-acquisition-deal-volume-at-7-yearr-high-in-2017-with-1022-transactions-ey/articleshow/63419084.cms?from=mdr

[2] Beena Saraswathy, Cross Border Mergers and Acquisitions in India: Extent, Nature and Structure, July 2010, Working Paper 434, Core UK, available at https://core.ac.uk/download/pdf/19918872.pdf

[3] Ramagovind Kuruppath, Archit Bhatnagar & Surabhi Saboo, COVID-19 and M&A in India: Navigating Risks and Understanding Opportunities, India Corporate Law: A Cyril Amarchand Mangaldas Blog, (April 16, 2020), available at https://corporate.cyrilamarchandblogs.com/2020/04/covid-19-and-ma-in-india-navigating-risks-and-understanding-opportunities/

[4] Companies Act 1956, section 394 (4)(b)

[5] Companies Act, 2013, Explanation to section 234

[6] Foreign Exchange Management (Cross Bound Merger) Regulations, 2018, section 2(v)

[7] Foreign Exchange Management (Cross Bound Merger) Regulations, 2018, sections 2 (iv), 2(vii)

[8] Companies Act, 2013, Section 234 and Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017, Rule 25A

[9] Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, Annexure B

[10] Explanatory Statement to the Convention to implement Tax Treaty Related Measures to Prevent Profit Shifting and Base Erosion, Page 1, OECD Publishing, available at https://www.oecd.org/tax/treaties/explanatory- statement-multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf

[11] BEPS 2015 Final Reports, OECD Publishing, 2015, available at https://www.oecd.org/ctp/beps-2015-final-reports.htm

[12] Signatories to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Status as of February 28, 2020, OECD: Better Policies for Better lives, last visited on March 26, 2020, available at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm

[13] Id.