CROSS-BORDER TRANSACTIONS

India has witnessed an increasing interest in cross-border transactions over the last few years due to growing confidence in the economy and the various government initiatives designed to build a conducive ecosystem for doing business in India

The key rationale behind cross-border transactions includes technological collaborations/research and development, contract manufacturing for domestic operations as well as exports, distribution, market acquisition and penetration, etc.

Some of the major regulations to be considered while undertaking an M&A transaction in India are as follows:

Companies Act, 2013

• The Companies Act, 2013 governs mergers and schemes of arrangement, including the procedures for obtaining approval from the National Company Law Tribunal (NCLT) and various stakeholders, such as shareholders and creditors
• It also permits an Indian company to merge with a foreign company, subject to certain regulatory conditions and compliance with the relevant rules. Cross-border mergers involving foreign companies from notified jurisdictions are explicitly allowed under the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.
• Acquisitions must adhere to the procedures outlined in the company's Articles of Association for the transfer of shares and must also comply with provisions relating to shareholders' approval.
• The sale of an undertaking or a significant part thereof requires the approval of at least 75% of the shareholders of the company.
• For foreign investments, the Companies Act also interfaces with the Foreign Exchange Management Act (FEMA), particularly in matters concerning capital account transactions, Foreign Overseas Investment (ODI) and Foreign Direct Investment (FDI).

Securities Law (governed by SEBI)

• Takeover Code: Regulates the acquisition of shares and control in listed companies to ensure transparency and fairness in the process.
• Listing regulations: Prescribes certain mandatory conditions and procedures that listed companies must follow to remain compliant with the regulatory framework.
• Issue of capital and disclosure requirements: Governs the provisions of preferential allotment and the issuance of new shares, ensuring adequate disclosure to protect investor interests.
• Insider trading regulations: Controls the dissemination and use of Unpublished Price-Sensitive Information (UPSI) to prevent unfair trading practices.

Taxes and duties applicable on the basis of the mode of the transaction (acquisition, slump sale, and asset sale)

• Direct tax provisions: To consider taxes on account of transfer of capital assets and business undertakings, utilization of carried forward losses, and unabsorbed depreciation of the amalgamating company.
• Stamp duty: Payable on certain instruments/documents, such as National Company Law Tribunal (NCLT) orders for mergers and demergers, share transfer forms, shareholders' agreement/joint venture agreement, share purchase agreements, and conveyance deeds for the transfer of assets.
• FEMA: The Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (FEMA Regulations) address various issues that may arise concerning cross-border mergers from an exchange control perspective.
• Goods and Services Tax provisions: For transactions under the asset sale mode, supply or acquisition of assets will be liable for taxation under GST, while the transfer of business on a going concern basis will not be taxable. In certain cases, however, the business undertaking may be considered an asset, and therefore, GST may be applicable to such transactions.

Competition Act¹

• The Competition Act, 2002 regulates combinations (including acquisitions, acquiring of control, mergers, and amalgamations) that cause or are likely to cause an appreciable adverse effect on competition within India. The Act prescribes certain financial thresholds based on the turnover and assets of the combined entity to determine the applicability of competition law provisions. If these thresholds are met, it becomes necessary to obtain prior approval from the Competition Commission of India (CCI) before proceeding with the merger or acquisition, unless expressly exempted under the 'de minimis' exemption.
• As of the latest update, the threshold limit for this 'de minimis' exemption has been revised to INR 4.5 billion in assets and INR 12.5 billion in turnover, as per the notification dated March 7, 2024. These limits will be valid for next two years.
• Recent amendments to the Competition Act have introduced several key changes, such as the introduction of deal value thresholds for transactions that might not meet the traditional financial thresholds but still have the potential to affect competition. Additionally, the time limit for CCI approval has been reduced, and enhanced penalties have been introduced to ensure stricter compliance. These changes aim to strengthen and simplify the provisions of the Competition Act, making the regulatory process more efficient.
• With the increase in M&A activities, a robust regulatory framework is essential to facilitate transactions while maintaining a competitive market. The recent enactment of the Insolvency and Bankruptcy Code (IBC)², the Goods and Services Tax (GST), and updates to FEMA regulations further bolster India's regulatory environment. The IBC, particularly after the 2019 amendment, now allows for the inclusion of mergers, amalgamations, and demergers in the resolution plans for the restructuring of corporate debtors, thereby promoting quicker resolutions and attracting more investment. The GST is expected to boost GDP growth by increasing transparency and efficiency across various sectors of the economy.
• In addition, the liberalization of FDI thresholds and relaxed sectoral reforms, coupled with these regulatory advancements, are likely to stimulate an increase in both M&A activity and private equity investments in the coming years.

• 1. The Competition Act, 2002, Competition Commission of India, https://bit.ly/4a95DVp
• 2.What's New, Insolvency and Bankruptcy Board of India, https://ibbi.gov.in//uploads/legalframwork/630af836c9fbbed047c42dbdfd2aca13.pdf