Regulatory System For Mergers & Acquisitions In India Where Foreign Entities Are Involved

Regulatory System for Mergers & Acquisitions in India where Foreign Entities are Involved

Mergers & Acquisitions An Overview

An entrepreneur may grow its business either by internal expansion or by external expansion. In external expansion, a firm acquires a running business and grows overnight through corporate combinations. These combinations are in the form of mergers, acquisitions, amalgamations and takeovers and have now become important features of corporate restructuring. They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of businesses. In the wake of economic reforms, Indian industries have also started restructuring their operations around their core business activities through acquisition and takeovers because of their increasing exposure to competition both domestically and internationally. Mergers and acquisitions are strategic decisions taken for maximization of a company's growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Merger or Amalgamations A merger is a combination of two or more businesses into one business. Laws in India use the term 'amalgamation' for merger. Mergers or amalgamations may take two forms:1. Merger through Absorption 2. Merger through Consolidation Acquisitions and Takeovers An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. M&A are increasingly been recognized as a business tool. M&A are now driven more with business consideration rather than dominated by regulations. Yet the local legislations do play in role in shaping the M&A. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. Currently, the Indian policy on foreign investments allows for both inbound and outbound investments. As a direct consequence, there is a steep rise in the merger and acquisition activities between Indian and overseas companies. Liberalization of the economy has made India a favorite investment destination among major business players across the globe. But this does not take away from the fact that India has a complex set of legislations and there is no single work of law that enables entrepreneurs to fully and comprehensively appreciate the interconnect between the different laws and the foreign investment. Criteria for regulation of M&A for foreign buyers M&A transactions are primarily regulated by the Companies Act, 1956. The Companies Act stipulates inter alia that in the case of the transaction involving merger of companies, the transferee company should be a company incorporated under the Companies Act. In other words, the transferor company could be a company incorporated in India or outside of India, but the transferee company should be a company incorporated in India.
Regulatory System for Mergers & Acquisitions in India where Foreign Entities are Involved

The Act lays down the legal procedure for mergers or acquisitions: y Permission for merger y Information to the stock exchange y Approval of the Board of Directors y Application in the High Court y Shareholders' and creators' meetings y Sanction by the High Court y Filing of the Court order y Transfer of assets and liabilities y Payment by cash or securities Investment by Non-Resident in Indian Companies is referred as Foreign Direct Investment ( FDI ). Investment by Foreign Institutional Investors ( FIIs ), Non-Resident Indians ( NRIs ), American Depository Receipts ( ADRs ), Global Depository Receipts ( GDRs ), Foreign Currency Convertible Bonds ( FCCBs ), Compulsory Convertible Preference Shares and Debentures are treated as FDI. Besides Indian entities promoted by non-residents can also invest in Indian Entities. This may result in Foreign Indirect Investment. y y Foreign buyers must comply with the provisions of the Foreign Exchange Management Act, 1999 ( FEMA ) and the rules/regulations made there under. The Foreign Direct Investment ( FDI ) Policy, formulated by the Government of India, provides for sector specific regulations, in the form of investment caps, conditions for investment, and sectors in which FDI is prohibited. Investments by Foreign Institutional Investors, other entities and individuals, are further regulated by applicable FEMA and SEBI regulations. Investment proposals for acquisition of shares in an Indian company, which satisfy the parameters for investing under the automatic route, can acquire shares or securities. Proposals which do not satisfy such qualifying parameters are required to seek prior approval of the Foreign Investment Promotion Board ( FIPB ) of the Government of India for investing in Indian companies. Transfer of shares by an overseas shareholder company would be governed by the provisions contained in the FEMA, with intimation to the Reserve Bank of India.

y y

Foreign Direct Investment in India Exchange control regulations are which critical to the India specific cross border M&A are defined under the Foreign Direct Investment guidelines. The FDI Policy allows investment by an overseas investor in an Indian company, either under the automatic route or under the approval route . Under the present FDI policy, foreign investments are allowed in an Indian company under the automatic route in almost all sectors except: y Retails Trading (Except single brand product retailing) y Atomic Energy y Gambling and Betting, Lottery Business y Certain Financial Entities y Trading in Transferable Development Rights y Activity/ sector not opened to private sector investment
Regulatory System for Mergers & Acquisitions in India where Foreign Entities are Involved

For other sectors, there are two routes for foreign investment in India: 1. Automatic route the foreign investor does not require any approval from the Reserve Bank of India ( RBI ) or Government of India for foreign investment. 2. Prior government approval route for foreign investment Companies owned and controlled by non-resident entities are required to follow foreign investment norms on entry route, conditions and sectoral caps. The applicable guidelines classify such companies as 1. Operating Companies 2. Operating cum Investing Companies 3. Investing Companies FEMA Foreign Exchange Management Act The Foreign Exchange Management Act (FEMA) was an act passed in the winter session of Parliament in 1999. It has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). It was introduced because the FERA didn t fit in with post-liberalization policies. A significant change that the FEMA brought with it was that it made all offenses regarding foreign exchange civil offenses, as opposed to criminal offenses as dictated by FERA. The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments. It was also formulated to promote the orderly development and maintenance of foreign exchange market in India. FEMA is an investor friendly legislation which aims to facilitate external trade and payments as well as promote an orderly development and maintenance of foreign exchange market. Under the Act, Reserve Bank of India (RBI) has been authorized to frame various rules, regulations and norms pertaining to overseas investments in consultation with the Central Government. Main features of the Act: y Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions. y Restrictions are imposed on people living in India who carry out transactions in foreign exchange, foreign security or who own or hold immovable property abroad. Without general or specific permission of the Reserve Bank of India, FEMA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India the transactions should be made only through an authorized person.

y y

Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest. Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions. People living in India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property
Regulatory System for Mergers & Acquisitions in India where Foreign Entities are Involved

was owned or acquired when he/she was living outside India, or when it was inherited to him/her by someone living outside India. y Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out properly, RBI may ask the exporters to comply to its necessary requirements. M&A Methods; With the FDI policies becoming more liberalized since the past many years, Mergers, Acquisitions, and alliance talks are heating up in India and are growing at an alarming rate. The policies included opening for international trade and investment in to India allowing the investors across the globe to enter the Indian market without restricting them to one particular type of business. In the recent years, India has become a desired destination among the emerging economics for foreign investors. The key factor in making a successful investment through FDI in India lies in understanding the forms in which the business can be set-up and comprehending the regulatory framework and mode of operation. A foreign company planning to set-up its business operations in India has the following options: 1. As an incorporated entity by incorporating a company under the Companies Act, 1956 through  Joint Ventures  Wholly Owned Subsidiaries 2. As an office of a foreign entity through any of the following modes  Liaison Office/ Representative Ofice  Project Office  Branch Office Foreign investors may follow different methodologies to invest in the Indian companies. The interest in an Indian company can be acquired through: 1. Investing in the shares of an unlisted company 2. Investing in the shares of a listed company 3. Establishing a new company and transferring the defined business of the target to a new company.

Regulatory System for Mergers & Acquisitions in India where Foreign Entities are Involved