The act where one company acquires a company based in a different country is called Cross Border Acquisition. So, cross border mergers and acquisitions essentially helps the companies to expand their operations around the world without having to start from rock bottom. This results in the transfer of control and authority in operating the merged or acquired company where the assets and liabilities of both companies are combined as per the terms of the merger company. Though in terms of the acquired company, they include a transformation process of assets and liabilities of a local company to a foreign company making the local company affiliated to it.
They benefit the countries by increasing the economies as they restructure the whole industrial process and production structure throughout the world. They ensure that there be the transfer of technology, capital, goods, and services throughout the world and ensure that the scope of networking is improved between nations. India saw a change in its trade and investment policies in the early 1990s which increased the growth of the Indian economy due to these financial and legal reforms. They eased on restrictions on foreign investment and acquisition and deregulation along with privatization of many such industries which essentially were a barrier for cross-border merger and acquisition growth.
In Indian laws the present provisions of mergers and acquisitions are found in Companies Act, 2013; Competition Act, 2002; SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; Insolvency and Bankruptcy Code, 2016; Income-tax Act, 1961; Transfer of Property Act, 1882; Indian Stamp Act, 1899; Foreign Exchange Management Act, 1999 (FEMA) and other such laws.
The Companies Act, 2013 deals with the concept of Mergers and Acquisitions in Chapter XV (sections 230-240).
The Act does not give any specific definition of the term merger but can be understood as the process where two or more entities are involved in the transfer of assets and liabilities from each other. The Act talks about the merger of an Indian company with a foreign company stating that subject the changes that are made the provisions of merger and amalgamation shall apply to companies that are registered under the Companies Act and are incorporated within the jurisdiction of the countries. This needs to be notified after seeking consultation from the RBI by the central government.
This widens the scope of a foreign company by including the company or body corporate that has been incorporated outside India checking whether they have a place for business in India or not. In the case where foreign companies have a business in India, they can conduct such activities themselves, or through agents by using physically or electronic mode of payment. The shareholders of the merging companies can be paid either in cash or in form of a depository receipt.
The Competition Act, 2002 having sections 5-6, and 29-32 where uses the word combinations to cover the acquisition of control, shares, voting rights and assets, and mergers and amalgamations.
In the SEBI Regulations, 2011 the term ‘Takeover’ anticipates the concept of an acquirer taking over the control or management of the firm targeted by acquiring shares or voting rights. Indian culture as a whole has grown from this concept as they can explore new markets and essentially with a good vested interest can expand their scope of business with the same. People are getting acquainted with the practices that are followed in other countries as well and are following some of them if they seem beneficial to them. They are also confident in the newly involved market as they are to follow the rules that are present for a safe and proper business agreement between the countries to be followed and bring about foreign revenue. The domestic market has exponentially improved as more people feel confident with their products as they are motivated to sell more due to the increase in competition.
The Indian economy has shown its potential with the growth in foreign investment-related transactions with the support of government policies that are protecting the interests of the businesses. This gives entrepreneurs the confidence to explore new business ventures and maintain domestic economic growth by keeping the interest of foreign investors and having a regular flow of funds from overseas. Since the regulations for the cross border are relatively new, a lot of issues are to be identified practically and must be dealt with in due course of time.
Written By: Ms. Tanvi Garg, Law Intern at S.Bhambri & Associates (Advocates), Delhi.