Following the notification of Section 234 of the Companies Act, the RBI, on April 26, 2017, released the draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 (‘Draft Cross Border Merger Regulations’) to provide a regulatory framework for cross border mergers. Some of the key provisions of the Draft Cross Border Merger Regulations have been summarized below.

i. Issue/ transfer/ acquisition of security: Any issue or transfer of security by the resulting company is required to comply with the Foreign Exchange Management Act, 1999 (‘FEMA’) and the regulations issued thereunder.

ii. Borrowings:

a. In inbound mergers, any borrowing from overseas sources entering the books of resultant company arising must conform to the External Commercial Borrowing (‘ECB’) norms or trade credit norms or other foreign borrowing norms.

b. In outbound mergers, the resultant company must be liable to repay outstanding borrowings or impending borrowings as per the scheme sanctioned by the National Company Law Tribunal (‘NCLT’).

iii. Repatriation on Contravention: If the assets/ securities held by the resultant company is in contravention of the Companies Act or FEMA provisions, the resultant company would be required to sell those off within 180 days of the sanction of the scheme and the proceeds are to be repatriated to or outside India, as the case may require.

iv. Valuation: The valuation of both Indian and foreign company must be conducted as per internationally accepted pricing methodology, shares on arm’s length basis and duly certified by an authorised chartered accountant/public accountant/ merchant banker in the relevant jurisdiction.

v. Reporting: Any transaction that arises in relation to the scheme must be reported in the same manner in which it is otherwise required to be reported under FEMA. The Indian company and the foreign company involved in an overseas merger will be required to furnish reports as prescribed by the RBI.

While Section 234 of the Companies Act only allows cross border mergers and amalgamations, the draft regulations include demergers and arrangements as well. Thus, this issue requires clarity and may need some amendments to the law. Further, effective implementation of the cross-border merger provisions will require amendments to FEMA, securities and tax laws, etc. While it is unclear how the proposed cross-border merger provisions will be specified under various laws, it may become a useful tool for companies to undertake expansion and restructuring activities.