Want to be a
Soolegal Member
Team SoOLEGAL
13 Apr 2020 11:03pm

Palpable Effects of Protectionism on Cross Border Mergers and Acquisitions

0
0
3
0

According to the latest preliminary data published by the Refinitiv, the value of the mergers and acquisition (M&A) activity globally totalled to about $3.9 trillion for the year 2019 [1]. The United Nations Conference on Trade and Development (UNCTAD), in its World Investment Report of 2019 has discussed the growth of investments in India for the year 2018. The Report highlighted among other things that the development of communication, manufacturing and financial services resulted in the infusion Foreign Direct Investment (FDI) of up to $42 billion in India in the year 2018. Similarly, South Asia received $54 billion worth FDI, affirming that India received nearly 77% of the total FDI of the region. [2] The contribution of FDI to the economy of a country is enormous and cannot be denied, yet concluding a cross border M&A deal is getting problematic for the companies and the law firms involved owing to the ever-expanding meaning of national interest. [3] Countries in a bid to protect jobs and local industries take recourse to protectionist measures and camouflage them as a national defence mechanism. 

Protectionism as a concept manifests in a number of economic and political setups and the present work focusses on the restrictions on foreign investments by legislative mechanisms to hinder or affect the result of the deal. [4] The legislations dealing with cross border M&A, differ across countries and difficulty in integration results in failure of such deals. Most of the time, the delayed approvals make the whole transaction expensive for the investors.  The nature of the protectionist measures differs with country and cross border M&A deals have to further go through a number of sector specific rules which also act as a hurdle if not streamlined with the main law. [5] A newly enforced law dealing with cross border M&A in India is viewed by many as protectionist. Section 234 of Companies Act, 2013 was notified and put into force on April 13, 2017 along with Rule 25 A which was inserted into Companies (Compromises, Arrangements and Amalgamations) Rules 2017 [6].  Subsequently, on March 20, 2018, Reserve Bank of India after extensive deliberations and inviting comments from the public, issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 [7].  With Section 234 and the corresponding Rules and Regulations coming into force, ushered in a new era of cross border merger and acquisitions in India. Earlier only inbound CBM&A were permitted but now even outbound CBM&A were accorded sanction. The new law is highly protectionist in its application by a mere cursory look since inbound and outbound M&A have been dealt with different set of rules. While rules for inbound M&A are relaxed, outbound M&A have been subjected to harsher compliance norms. Applying different set of rules to domestic companies in contrast to their foreign counterpart, even though done with the intention of safeguarding domestic industry violates the principle of reciprocity that is duly accepted principle under international law. [8]

Outbound mergers are a new reality of corporate restructuring in India yet such mergers are only allowed provided the securities market regulator of the foreign company with whom the Indian company intends to merge is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (MoU) or a signatory to the bilateral MoU with the Indian securities market regulator i.e. Securities and Exchange Board of India (SEBI). Another criterion mentioned therein is that the Central Bank of the country concerned should be member of the Bank for International Settlements. [9] Here a number of prominent countries with which India has active economic tie ups have been left out since not all the 198 countries are signatory to the above-mentioned documents. Unfortunately, the law is silent on how this predicament is to be addressed since it may gradually strain India’s relation with the countries that have been left out. Interestingly, no jurisdiction specific restriction is prescribed for inbound mergers. In case of outbound M&A a foreign company needs to ensure valuation is conducted by a professional valuer who is duly recognised in their own country and also fulfils all the internationally accepted standards of accounting and valuation. The requirement of getting the transaction valued by the professional valuer is as of now applicable on outbound M&A deals. [10] The benefit of tax exemption as of now is applicable only for inbound mergers and not for outbound mergers. This means that the capital gains arising to the transferor are exempted from payment of taxes provided the resultant company is Indian. When the resultant company is established in a foreign jurisdiction, the benefit of tax exemption is not extended to such a deal by Indian Regulators. This assumes importance, since the companies are generally keen to enter into cross border M&A deals with companies coming from tax friendly jurisdictions. Apart from this there are a number of other provisions that need a thorough revision. Owing to the express mandate under Rule 25-A, cross border M&A deals do not get the benefit of fast track merger under Section 233 of the Companies Act, 2013. The Regulations define cross border merger to include demerger, yet neither Section 234, nor Rule 25-A have any reference of de-merger creating an ambiguity about how a demerger of the company is to be processed. 

Cross border M&A as a corporate restructuring tool that goes beyond Companies Act, 2013 and delves into competition law, intellectual property law, private international law etc. Synchronisation among the Indian laws will be a gradual process but the crucial point is that the Indian laws ought to be in compliance of globally accepted norms for smooth transitioning of cross border M&A. For example, the corporate laws in Japan prohibit a company incorporated in Japan from undergoing a merger with a non-Japanese company. This shows that compliance of legal requirements in India is irrelevant until and unless the legal requirements of other country are also fulfilled. The pressing issues that plague the present state of cross border M&A scenario can be dealt effectively by taking recourse to legislations enacted by other countries to deal with the general legislative issues that crop up in a cross-border M&A deal. UK (Cross Border) Regulations, 2007 can contribute a great value especially because it is considered to be comprehensive, elaborate and beneficial in its application. Some important points that help in making Companies (Cross-Border Merger) Regulations 2007 worth mentioning are elaborate interpretation clause, robust pre-merger requirements, enhanced and time bound court approvals, equitable employee participation etc. Though the foreign legislations can not be directly made applicable in India, yet  they have immense persuasive value in helping us to navigate through the complexity yielded by cross border M&A. [11] Enforcing Section 234 and the corresponding Rules and Regulations is a welcome step, yet they are not enough to achieve the expected results. It is hence important that the law be amended and implemented in a time bound manner for the benefit of all the stakeholders in general and country in particular.


 

[1] Adrian Croft, The Year in M&A: ‘Super Mega’ Deals and a Fourth-Quarter Surge Put Dealmakers on Top in 2019https://fortune.com/2019/12/31/super-mega-mergers-deals-2019/ (Last visited on 20.01.2020).

[2] Kirtika Suneja, India attracted $49 billion FDI in 2019, among top 10 recipients of overseas investment: UNCTAD, https://economictimes.indiatimes.com/news/economy/indicators/india-attracted-49-billion-fdi-in-2019-among-top-10-recipients-of-overseas-investment-unctad/articleshow/73441481.cms (Last visited on 22.01.2020).

[3] Kalman Kalotay, Indirect FDI, 13 J. World Investment & Trade 542 (2012).

[4] Attila Menyhard, Richard Thomas & David Dederick, International Business and Law in Cross-Border Transactions: A European Perspective, 34 Suffolk Transnat'l L. Rev. 347 (2011).

[5] Christopher King & Hubert Segain, Cross Border Negotiated Deals: Why Culture Matters, 4 ECFR 126 (2007).

[6] Sharanya G. Ranga, India: Cross-Border Mergers Permitted in India, http://www.mondaq.com/india/x/624950/Corporate+Commercial+Law/CrossBorder+Mergers+Permitted+in+India (Last visited 15.01.2020)

[7] Atul Pandey, Abhishek Sanyal, India: FEMA Cross Border Merger Regulations Issued by India,www.mondaCorporate+Commercial+Law/FEMA+Cross+Border+Merger+Regulations (Last visited 15.01.2020)

[8] Stephen J. Choi & Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. Cal. L. Rev. 903 (1998).

[9] Shaswat Sharma, Aditya Shukla, Provision Enabling Cross Border Mergers Notified: India Further Integrates into the Stream of Globalisationhttp://www.nishithdesai.com/information/news-storage/news-details/article/provision-enabling-cross-border-mergers-notified-india-further-integrates-into-the-stream-of-global.html (Last visited 15.01.2020)

[10]Lokesh Malik, Taking the Right Route to Cross-Border Mergershttps://premium.thehindubusinessline.com/portfolio/india-economy/taking-the-right-route-to-cross-border-mergers/article21995289.ece1 (Last visited 15.01.2020)

[11] H. Patrick Glenn, Persuasive Authority , 32 McGill L. J. 261 (1987).


Tagged: Merger and Acquisition
Did you find this write-up useful? YES 0 NO 0
Active Members view all

New Members view all