Cross-border mergers – Creating new frontiers and challenges
Hiten Kotak (M&A Tax Leader, PwC India)
Lakshmisha S (Director - M&A, PwC India)
The concept of cross border mergers is not unfamiliar in the backdrop of the emerging global economy. The recent liberalisation measures, especially in relation to cross border mergers along with legislative reforms for ease of doing business in India have renewed the investment climate in the country. Many multinational enterprises are looking to capitalise on overseas mergers to penetrate the rapidly growing Indian economy. Similarly, Indian business houses are now considering this a dynamic opportunity for global expansion and strengthening their presence in other countries.
Cross-border mergers transcend investment barriers between emerging economies, facilitate global expansion for local groups, provide access to capital markets, and open commercial and tax synergies to achieve strategic objectives. The recent liberalisation measures will facilitate all the above and more. Achieving global ownership/ international holding structure and providing exit routes to current investors in overseas jurisdictions will also become feasible.
Recent developments in Indian laws
The Ministry of Corporate Affairs (MCA) has, with effect from 13 April, 2017, notified the provisions of the Companies Act, 2013 (Cos Act) in relation to cross border mergers, permitting both inbound and outbound mergers. However, outbound mergers can be executed only in jurisdictions that satisfy conditions specified in the Cos Act. Countries such as Singapore, Mauritius, USA, Netherlands, UAE, UK, etc., would likely fall under the specified jurisdictions. The erstwhile provisions permitted only inbound mergers, without any restriction on jurisdiction.
The MCA has also notified draft rules in consultation with the Reserve Bank of India (RBI), which mandate the prior approval of the RBI for undertaking a cross border merger by an Indian company. Further, valuation norms have also been prescribed. Overall, compliance with existing foreign exchange regulations along with existing Cos Act requirements is envisaged. For instance, transfer of a loan payable to a resulting Indian company, pursuant to an inbound merger, would need to comply with External Commercial Borrowings regulations. Any asset/ liability not permitted to be held should be disposed-off within 180 days of the merger (inbound/ outbound), as provided for in the draft rules.
Key challenges and way forward
While liberalisation measures in relation to cross border mergers is a welcome move in the investment and business world, these measures require extensive parallel amendments to several other laws and regulations in India to establish a comprehensive framework.
A clarification that demergers are included within the definition of “compromise/ arrangement” has been issued. However, the section permitting outbound mergers from India, specifically discusses mergers and does not use the term “compromise/ arrangement” leading to an element of doubt whether outbound demergers will be permitted.
In addition, the current tax laws only provide for income-tax exemption in the hands of the transferor company and its shareholders, subject to the resultant company being an Indian company, in addition to other prescribed conditions. However, in the absence of a similar exemption for outbound mergers, would it mean that all outbound mergers would be taxable in the hands of the Indian transferor company and its shareholders?
There are no clear guidelines on carry forward and utilisation of losses of the amalgamating company. However, the shifting of tax losses from one jurisdiction to another does not sound very obvious and feasible. These aspects would need to be specifically addressed in any cross border scheme proposition.
One of the other major challenges of outbound mergers could be the risk of establishing a “Permanent Establishment” of the foreign company in India. Similarly, cross border mergers would have to be appraised as per the rules of the Place of Effective Management under the Indian regime. Classification of surviving entities/ units based on operations and location of decision-making teams would need to be appropriately weighed in while contemplating a cross border merger. Further, such transactions could potentially lead to shifting of tax base from one jurisdiction to another – one needs to be wary of Base Erosion & Profit Sharing (BEPS) regulations and General Anti-avoidance Rules (GAAR) in this respect.
While few issues persist, as discussed above, in the context of cross border mergers involving an Indian company, the analysis of the laws in overseas jurisdictions and permissibility would also be a crucial consideration for cross border mergers.
With positivity flowing from new legal sanctity to outbound mergers, legislative reforms, liberalisations, brand image of the Indian economy and its mammoth potential, we are still far from seamless cross border mergers and demergers. The Indian government should quickly consider the impact of cross-border mergers and amend various laws to provide clarity and ensure quick and easy implementation.
Views expressed are personal to author. Article includes inputs from Ritika Tulsyan, Manager - M&A Tax, PwC India and Bhavana Rao, Assistant Manager - M&A Tax, PwC India.