MERGERS OF FOREIGN COMPANIES: AN INDIAN PERSPECTIVE

Author: Pawanpreet Kaur

INTRODUCTION

Over the past few years, several business developments have taken place around the globe by Cross-Border Mergers, Acquisitions, Amalgamations under the rules and regularities authorities of the Companies Act, 1956.

The mergers with Foreign companies are growing rapidly with a significant shrinking of the globe. India is a developing country, which is steadily moving towards the development of many goals which makes India, a desired business vacant spot, which in the future creates a financial environment, this is the boom of Cross-Border mergers.

This paper mainly deals with the Mergers of Foreign Companies with Indian Companies, how the Foreign Companies expands their business in India? Laws and Regulations which regulate these companies, how these companies benefit India?

A merger refers to an agreement in which two companies join together to form one company.[i] In other words, a company that is formed with the combinations of two companies of different nations into a single entity for the same perspective to expand their businesses, known as mergers. Due to the increasing wave of Globalization, the mergers of foreign companies have become of significant importance in recent times under the Companies Act, 2013.

Cross border mergers will result in the transfer of control and authority in operating the merged or acquired company. Assets and liabilities of the two companies from two different countries are combined into a new legal single entity in terms of the merger.[ii]

EXAMPLES

1. TIMES Bank by H.D.F.C. Bank.

2. Tire Manufacturer acquires Rubber company.

3. Steel Manufacturer acquires Software Company.

The examples of Foreign Mergers are categories in different types of Foreign Mergers, which is listed below:

TYPES OF FOREIGN MERGERS

Under Section 234 of Companies Act, 2013[iii], foreign mergers or cross-border mergers is divided into five major parts, they are:

1. Horizontal Mergers: A merger between companies that are in direct competition with each other, combining to provide ideal products or services. Its main objective is to capture the market by Monopoly strategy, reduce market competition, and grow in economic scale.

Examples: A famous example of Horizontal Merger is HP (Hewlett-Packard) and Compaq in 2011; others are, TimeBank by H.D.F.C. Bank, Spectramind by Wipro, etc.

1. Vertical Mergers: A merger between companies, with having the same supply chain, means the Mergers of companies along with the production and distribution, it means one company focuses or control on Production Department another will focuses on Distribution, in this type of Merger, companies have an efficient and effective utilization working condition, good quality of control, better flow of information.

Examples: The famous example of Vertical merger is Time Warner and America Online in 2000, in which Time Warner deals with supplying information through CNN whereas, America Online distributed information through the internet; other examples of Vertical Mergers are, car manufacturer acquires steel company, etc.

1. Market Extension Mergers: The mergers between two companies, which have the same motive of providing goods and services to the people in different markets, mainly focus on capturing a large market by distributing the market areas, to access the more client/customer base.

Example: The famous example of this merger is RBC Centura merged with Eagle Bancshares Inc. in 2000, to grow its operations in North America.

1. Product-Extension Mergers: The mergers of two companies deals in same goods and services and also supply in same markets, for growth of the business they merged company for providing services and goods to more clients/ customers, their goods and services are different in nature, but they are interrelated to each other, in terms of the supply chain, a distribution channel.

a. Example: The merger of Mobilink and Broadcom, both deals in the electronic industry, they combine their products like Mobilink 2G and 2.5G technologies with Bluetooth 802.11 and DSP products, to sell their products that complement each other.

5. Conglomerate Mergers: The companies which are unrelated each, providing different goods and services in the market, its main goal is to achieve the market growth, it is mainly of two types:

1. Pure Conglomerate Mergers: The companies which are providing goods and services of different nature, operating in distinct markets.

2. Mixed Conglomerate Mergers: The companies which are looking to expand their business or targeting large consumer structures.

Example: The famous example of this merging is Walt Disney Company and American Broadcasting Company, both are of different industries, Walt Disney is an entertainment company whereas American Broadcasting Company deals in Telecommunication network. Other examples are the recent merger of Hotstar with Walt Disney etc.

LAWS GOVERNING FOREIGN MERGERS IN INDIA

In India, many laws and regulations authorities govern the mergers of the company. The major laws that regulate the merger of the company are:

1. The Company Act, 2013: Under Sections 232-234, the mergers of foreign companies are defined, in which it talks about arrangements, amalgamations, procedures, and mergers to be followed for the approval of Merging companies. It also includes the issuance of incorporated companies and rules related to the transfer of the security of the company.

2. The Indian Contract Act, 1872: It helps in creating contracts that are governed by the Indian government, and also describes various rights that parties have for entering into a contractual agreement under Indian laws.

3. The Specific Relief Act, 1963: It provides the remedies to the parties for breach of contract.

1. The Indian Income Tax Act, 1961 (ITA): It provides the Taxation-related considerations for the avoidance of double-taxation treaties. Under Section 2(1B), certain provisions related to reconstruction, merger, and demerger.

2. The Competition Act, 2002: Section 5 of the Competition Act, 2002, deals with the merger of the company in which “Combinations” means, the combinations of the company concerning assets and turnover of the companies. It prohibits anti-competitive agreements.

3. The Foreign Exchange Management Act, 1999: It includes laws related to Issuance and allotment of shares to foreign entities, it covers certain rules, directions, laws issued by the Reserve Bank of India.

CONDITIONS FOR MERGER WITH FOREIGN COMPANIES

The amalgamation of foreign companies in India is of majorly two types:

1. Inbound Merger: According to this concept, the company merging will eventually be regarded as an Indian Company. It simply means that the resultant company will take over the liabilities and assets of the other company involved in the merger of the company with a foreign company.

2. Outbound Merger: According to this concept, the company merging will be regarded as a Foreign Company only. The resultant company means that company that takes over the assets and liabilities of the company involved in the cross-border merger.[iv]

Some key provisions and conditions for the cross-border merger are:

1. (RBI) Reserve Bank of India has to grant prior approval for the merger.

2. Certain provisions of “Section 230-232 of Companies Act, 2013”[v] have to be fulfilled for the amalgamation with foreign companies.

3. Prior approval of certain authorities is mandated such as:

3.1 National Company Law Tribunal (NCLT)

3.2 Securities and Exchange Board of India (SEBI)

3.3 Income Tax Authorities

3.4 Shareholders and Creditors.

1. The payment to all the shareholders of the merging company has to be either provided in cash or depository receipts or partly both.

2. The jurisdiction should be permissible for the incorporation of the companies.

3. The authority to which the valuation of the survivors should be submitted is RBI.

4. The valuation of the company should be done with due consideration of the International accepted principles on Accounting. The valuer making the valuation report should be a member of the recognized body in its jurisdiction.

5. While approving the merger of any company with a foreign company, the laws, and provisions related to the merger of the foreign company in which it is incorporated should also be consulted by NCLT.[vi]

PROCEDURE FOR “MERGER OR AMALGAMATION OF COMPANY WITH FOREIGN COMPANY” UNDER SECTION 234 OF COMPANIES ACT, 2013:

1. The provisions of this cross-border merger shall apply “mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act” unless otherwise provided under any different law for the time being in force.

Corporations consolidated within the jurisdictions of such international locations may be notified by way of the Central Government. It may happen provided that the central government makes policies in consultation with the RBI concerning the amalgamations and mergers below this phase.

2. A foreign employer may with the prior approval of the RBI merge right into the agency merged under the Company Act.

The terms and conditions of the merger call for a fee of attention to the shareholders of the merging corporation either in cash or depository receipts or partially in coins and in part depository receipts, or partly both.

3. A foreign company based outside of India may merge with an Indian Company after obtaining prior approval from the Reserve Bank of India. It has to comply with the provisions of the Company’s Act mainly Section 230-232 and their guidelines.

4. After complying with the provisions of the Company Act (Sec 230-232), and after getting the prior approval of the Reserve Bank of India, a company may merge additionally with an overseas enterprise included in any of the jurisdictions laid out in Annexure B.

5. The transferee enterprise has to make certain that the valuers who perform valuation are associated with any recognized professional frame in the jurisdiction of the transferee corporation. Such valuation has to be according to the International ordinary standards on accounting and valuation.[vii]

JURISDICTIONS OF CROSS BORDER MERGER

The 2013 Act has now opened its doors for Outbound Mergers, but such mergers are only permitted with a foreign company which is incorporated in:

“(A) A Jurisdiction Whose:

1. Securities market regulator is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding (MoU) (Appendix A Signatories) or a signatory to the bilateral MoU with Securities and Exchange Board of India (SEBI); or

2. Central bank is a member of the Bank for International Settlements; and

(B) A Jurisdiction Which Is Not Identified In The Public Statement Of Financial Action Task Force (FATF) As:

1. A jurisdiction having strategic 'Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

2. 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.”[viii]

No specific jurisdiction restrictions have been prescribed for Inbound Mergers in respect to foreign companies.

POST-MERGER PERFORMANCE EVALUATION

Cross-border mergers can be truly evaluated only using comparing the published merger performance of merged entities. For the evaluation of the put-up merger performance, the following parameters can be assessed:

1. Returns: To assess the returns being generated, a comparative analysis of the returns being generated by the entity pre-and post-merger has to be carried out. If the higher returns are gained by the merged entity, then the merger is deemed successful.

2. Operational Efficiency and Cash Flow: If post-merger, the cash flow is increased significantly and this increased amount is put to use for gaining operational efficiency, this too indicates that the newly created entity is performing at an optimum level.

3. The reaction of Stock Market: The reaction of the stock market towards the merger is deemed affirmative, the merger is said to be doing well.[ix]

SUBSTANTIATE CASE STUDY, GAP STUDY, AND COMPARISON

The results above for firms acquiring foreign firms show that the ratios are impacted negatively after the merger. The performance is seen decreasing over the years once we check out performance ratios of pre-and post-1-year mergers and pre and post 2-years of the merger. The debt-to-equity ratio has almost been unchanged which means that firms financed the merger not only through debt but also with the assistance of equity. Profit Margins have shown a mixed trend in the 2-years performance table, however, the change for any of those hasn’t been statistically significant. Return on capital employed showed a decrease (from 24% to 21.6%) but not significantly indicated by the low value of t-stat ( -0.619). Return on net worth also showed a decrease (from 23.41% to 21.52%) but again not significantly. Based on the results of the analysis, Hypothesis B: Merger of the cross-border firm has improved the operating performance of the acquiring firm was rejected since the mergers have affected the performance of most of the ratios negatively but not with statistically significant values. Using the above analysis for both the domestic acquisition and cross-border acquisition, we can say merger features a different effect when a domestic firm is acquired or when a cross-border firm is acquired. Hence, the third hypothesis, C: Merger effect doesn't depend upon whether it's a cross-border acquisition or domestic acquisition is rejected because the effects on the performance ratios have been different.[x]

CROSS-BORDER MERGER-INDIAN OVERVIEW (2005-2010)[xi]

ARE THERE DIFFERENT RULES FOR DIFFERENT TYPES OF COMPANIES FOR MERGING?

Yes, the rules and regulations are different according to the nature of the company, governed by the Indian government, the companies like:

• Public or Private Companies

• Listed or Unlisted Companies

• Registered or Unregistered Companies

• Non-Resident or Resident Companies

• Operating in Specified Sectors.

ARE MERGERS AND CONSOLIDATIONS ARE SAME?

Mergers and consolidations aren't equivalent. Mergers combine two companies into one surviving company. Consolidations combine several companies into a replacement, larger organization.

DIFFERENCE BETWEEN MERGER AND JOINT VENTURE

When companies merge, they liquidate their existing sole entities and become one together in joint ownership (whether through incorporation or another legal structure).

A venture (or merger for diversification) occurs when two separate entities close to make a business that breaks away their existing entities. If the new venture doesn’t affect it, the prevailing entities may stay in business.

COMMON MERGERS WHERE MERGERS FAILS

1. Employee Turnover

2. Overvaluation

3. Cultural Differences

4. Lack of Necessary Resources

5. Lack of proper skills

6. Lack of Owners involvement

7. Inadequate Communication

8. Improper Utilization of Work

9. Spontaneous Working Factors

10. Merger without Shareholder approval

11. Improper functioning of business

12. Not aware of laws and policies of merging

BENEFITS OF CROSS-BORDER MERGER

Mergers and amalgamations are regulated at an international level and thus they come with many advantages.

1. Tax Advantages: Many governments offer tax cuts and advances following a cross-border merger.

2. New Possibilities: Since the market is ever-growing, it becomes difficult to start a new business and thrive in the already established area. A merger lessens the load and saves time and money to start a business from scratch.

3. Access to a skilled labor force: One of the conditions in a merger is to retain the staff or integrate them into a different company. These regulations are legally imposed by international regulations. In a merger, it becomes easy to find a spirited staff already knowing their jobs.

4. Diverse Portfolio: One of the benefits of acquisition or merger is that a wider range of services and products can be explored. With increasing reach and forces, the portfolio of the company could increase more and gain wider popularity.

5. A cheaper option: A merger or amalgamation is usually cheaper than starting from scratch. Facilities such as infrastructure, production centers, storage facilities, and distribution facilities are readily available.

6. Access to a larger market: small countries make great markets for development. A cross-border merger with a foreign company attracts a larger reach because of the authorities involved and according to the stakeholder analysis, clients look for a productive and promising company and they put their faith in new international mergers.

7. Greater financial power: A merger can mean greater financial power and more influence. It represents growth for both countries involved. The revenue generated after the pooling of both the companies, more financial power is deliberated and it means a wider reach in the market. Competition is reduced and influence grows more.[xii]

CHALLENGES FACED DURING A CROSS-BORDER MERGER: SUGGESTIONS AND ISSUES

1. Political Concerns: Any political concern that arises out of such a merger plays a major role in shaping its future, particularly for industries that are politically sensitive such as defense, security, etc. Concerned parties such as governmental agencies, associated employees and suppliers, and all other interested parties should be informed about the merger subsequently beforehand. There should be prior notice given and discussions should be held with the concerned parties and labor unions. It is important to evaluate the present probable political risk.

2. Cultural Differences: Cultural challenges pose a grave threat to the existence of such mergers. There have been many failed mergers due to cultural challenges. When there is a cross-border transaction, issues arise due to the geographical scope of the deal. The biggest objective behind the alliance is intercultural disagreement. The authorities should be well aware of the cultural endangerment and the prospects that come in handy with them. They should prepare their workforce to manage these issues.

3. Legal Consideration: Companies looking forward to merging have to look into the challenges of facing various legal and regulatory issues. Hence, before entering into any agreement it is important to review the employment regulation, antitrust statute, and other contractual requirements.

4. Taxing and Accounting Consideration: When it comes to the structuring of the transaction, tax matters become important. The proportion of debt and equity involved in the transaction would influence the outlay of tax, hence a clear understanding of the same becomes relevant.

5. Due Diligence: Apart from the legal, cultural, political, and regulatory issues we questioned above, there are infrastructure currencies and other local needs which need a thorough appraisal. Due diligence if not taken can affect the terms and

conditions under which the transaction will take place and influence the deal structure including prices.[xiii]

These are some of the issues and challenges faced by companies when a cross-border merger takes place.

CONCLUSION

The corporate sector in India is now taking a big leap towards globalization by spreading its arms into a plethora of fields. There is still a long time to evaluate the actual position of our country in the world, but the efforts are every day rewarding. There are surely a lot of obstacles such as the existence of various laws and provisions governing the same subject, it becomes haphazardly impossible to attain the peak at one go.

A cross-border merger would result in an important aspect and an advantageous instrument for the Indian corporate sector to undertake consolidation and restructuring activities to create value. The standpoint of these mergers is on a debilitated stage as the synchronization of these mergers with the allied laws is still uncertain. This is because: “when it comes to the issuance of securities, the resultant Indian company is to be guided by the Non-debt Instrument regulations in respect of pricing guidelines, entry routes, sectoral caps, attendant conditions and reporting requirements for foreign investment”.[xiv]

A range of convoluted issues must be looked into to get success in the cross-border merger. A cross-border merger being fairly new, a lot of aspects and challenges are yet to be identified and shall be addressed as and when we progress in due course of time.

REFERENCES [i] CFI Education Inc.,Types of Mergers, <https://corporatefinanceinstitute.com/resources/knowledge/deals/types-of-mergers/> [ii] Jyothi Kohli, Company Law Articles, Cross Border Mergers: Meaning, Types, Procedures, Main Rules & Regulations, TaxGuru, <https://taxguru.in/company-law/cross-border-merger-meaning-types-procedure-main-rules-regulation.html> (11July, 2020) [iii] The Companies Act, 2013, Sections 234: Merger or Amalgamation of Company with Foreign Company, Ministry of Corporate Affairs, Notified Date of Section:13/04/2017 <http://ebook.mca.gov.in/Default.aspx?page=applicablity&rg_applicabilityChangePage=5> [iv]Shakshi Sharda, Merger or Amalgamation of Company with Foreign Company: Complete Overview, CorpBiz, (Apr. 3, 2020), <https://corpbiz.io/learning/merger-or-amalgamation-of-company-with-foreign-company/> [v] The Companies Act, 2013, (Sec. 230-232) [vi]Ayush Verma, Cross border regulations : key provisions in case of outbound, IP Leaders Blog,(Dec. 2, 2020) <https://blog.ipleaders.in/cross-border-regulations-key-provisions-case-outbound-mergers/#What_are_the_laws_governing_cross_border_outbound_merger_in_India> [vii] Sakshi Shairwal, Cross Border Merger in India, LEXOLOGY, (Jan. 15, 2021), https://www.lexology.com/library/detail.aspx?g=b86301e2-1b3e-43a0-a5cb-faaaea459d8 [viii] Mehul Shah and Shilpi Jain, India: Companies Act | MCA Notifies Cross Border Merger Provisions, MONDAQ, (Apr. 19, 2017), <https://www.mondaq.com/india/corporate-and-company-law/586972/companies-act-mca-notifies-cross-border-merger-provisions> [ix] See Supra At.2 [x] Saboo, Sidharth, Comparison of Post-Merger performance of Acquiring Firms (India) involved in Domestic and Cross-border acquisitions, Munich Personal RePEc Archive, (10 December 2009) <https://mpra.ub.uni-muenchen.de/19274/> [xi] Kanika, Nancy, Cross Border Mergers and Acquisitions by Indian firms- An Analysis of Pre and Post Merger Performance, ISSN 2278-5612, (July, 2 0 1 3) <fhttp://www.ijmit.com/> [xii] Alex Cuc, Seven big benefits of international mergers & acquisitions, THE DRUM, (Jan. 11, 2019), <https://www.thedrum.com/industryinsights/2019/01/11/seven-big-benefits-international-mergers-acquisitions> [xiii] Cross border Mergers and Acquisitions: Effects and challenges faced, ThatEricAlper, (Dec. 17, 2019), <https://www.thatericalper.com/2019/12/17/cross-border-mergers-and-acquisitions-effects-and-challenges-faced/> [xiv] Abhishek Bothra, The Saga of Cross Border Mergers and Demergers – Part 1, LawStreetIndia, (Oct. 22, 2020), <http://www.lawstreetindia.com/experts/column?sid=481>