The Companies Act, 2013, has replaced the half-a-century-old Companies Act,1956, and has introduced some forward-looking provisions. The Act gives the Indian corporate sector a much-needed world-class legislative framework. One of the progressive provisions relates to cross-border mergers wherein an Indian company can merge with a foreign company or vice versa.
While the 1956 Act allowed a foreign company to merge into an Indian company, provided the country of the merging company’s origin permitted cross-border mergers, it is for the first time that India has allowed domestic companies to merge into foreign ones. The provision, needless to say, amply reflects the intent of the legislature to facilitate business and enable Indian companies to truly become multinational ones apart from providing them much flexibility.
In the backdrop of cross-mergers, Section 234 of the new Act becomes relevant. It makes clear that cross-border mergers will be limited to companies under certain foreign jurisdictions notified by the union government. Further, the union government will be framing the rules for such mergers in consultation with RBI.
Cross-border merger provisions allow Indian companies to internationalise their businesses for raising funds through listing or otherwise. Multinationals may use it to consolidate their Indian businesses in favourable jurisdictions. It also allows for closing international operations, rationalising group structures, allowing foreign company branches to merge with parent companies, etc.
Depending on restrictions on such mergers, countries are dived into three broad categories:
(i) Countries which allow cross border mergers only with certain countries, e.g. most EU countries allow cross-border mergers with companies of other EU countries and not outside,
(ii) Countries which have no such country-specific restrictions, viz. Mauritius, Cyprus, Dubai, Luxembourg,
(iii) and Countries which don’t allow any cross-border mergers, viz. Singapore
The tax regimes of countries where Indian companies could have cross-border merger interests need to be conducive. Cross-border merger among EU companies is generally tax-neutral subject to compliance with certain prescribed conditions. In countries like Mauritius which have no restrictions on cross-border mergers, taxes are not levied. There are examples of Mauritian companies merging into Indian companies without any tax implications in Mauritius. Thus, in order to make the Indian cross-border merger provisions fruitful, appropriate amendments/clarifications in relevant Indian laws are necessary. Two laws that come to mind are the Income Tax Act and the Foreign Exchange Management Act.
Income Tax Act, 1961
The Income Tax Act, 1961, at present, contains the provision that mergers of companies where the transferee companies are Indian will not