Introduction Cross Border Merger
CROSS BORDER MERGER – The trend for merger and acquisition has become a global scenario in the present time due to technological advancement and globalization. It is the most widely used form of cooperating restructuring in the present times Merger and acquisition provides the involved companies greater access to the international market and access to advanced technologies and other instruments.
Merger is the consolidation of two or more corporate entity into a single entity, whereas an acquisition is a process of acquiring a particular targeted entity. Merger and Acquisition can be both domestic and cross-border. When mergers and acquisition take place between the corporate entities registered in the same country it is called domestic merger and acquisition while in Cross border merger and acquisition takes place when an enterprise from one country buys the assets or control of entity in another country.
Businesses today are not limited by the physical borders of the countries. Cross-border merger and acquisition is also considered as the subset of FDI as it ranges from 50% to 100% depending on the source and sector.
Example of Cross Border Merger- The Jet-Etihad deal and the Air Asia deal in the aviation sector in India are good examples of how cross border M&A deals.
Thus, to balance this condition, a company could choose M&As growth by acquiring company which has the resources, such as facilities, well established managements, and other resources available for additional competition purpose in the market[1].
Cross Border Merger & Acquisition under Indian Law
The earlier law only permitted inbound merger which means that only foreign company was allowed to merge with Indian company and not vice versa. The Companies Act 2013 proposed to allow both forms of merger under section 234 of the act but was not notified.
The Act provides for the merger of an Indian company into the foreign company. It states that provisions related to merger and amalgamation shall apply mutatis mutandis to merger and amalgamation between companies registered under the companies act and those incorporated within the jurisdictions of the countries as are notified by the central government in consultation with the RBI[2]. The scope of the term foreign company has been increased by including such company or body corporate incorporated outside India whether they have a place of business in India or not[3].
The section 234 of the Act was notified by the Ministry of Corporate Affairs in consultation with the RBI with the corresponding rules vide notification dated 13th April 2017. The rules are titled as the companies (Compromise, Arrangement and Amalgamation) Amendment Rules, 2017 inserting Rule 25A and Annexure B in the companies (Compromise, Arrangement and Amalgamation) Rules, 2016 in relation with the operation of section 234. it provides that both the categories of merger i.e. inbound and outbound shall be subjected to prior approval of RBI and provisions of Companies Act 2013.
Issues Faced During Cross Border Merger
Challenges arising as a result of having an incomplete picture of the target company – Obtaining information on a foreign target is one of the most common and over-looked challenges in cross-border M&A. Lack of reliable information can pose greater risks in rapidly developing economies and can lull acquirers into making false assumptions about the target’s financial situation, business model, organization, decision making style etc[4].
- Socio-Political Unrest – The socio-political unrest in the countries whose companies are involved in the transaction of M&A causes uncertainty and hinders the transaction. One of the most common reasons for not meeting the expected outcome is the political and social instability[5].
- Government Interventions – It has been observed that the government of many countries use protectionist approach in order to provide favour to their domestic industry. The system of government and its functioning is different in different country which acts as barriers during M&A.
- Difference in intellectual property Regime – As per the TRIPs agreement the member states have to comply with the general principles mentioned in it, but as mentioned part II of the agreement member states are free to incorporated measures which may be higher in standard than as are proposed in the agreement and at the same time are in consistence with the TRIPs agreement. This in turn leads to difference in intellectual property regime[6].
Factors which Encourage Cross Border Merger and Acquisitions
Few factors which generally encourage firms for cross border M&A’s include[7] –
- Globalization of financial markets.
- Market pressures and falling demand due to international competition.
- Seek new market opportunities since the technology is fast evolving.
- Geographical diversification which would result in exploring the assets in other countries.
- Increase companies’ efficiency in producing the goods and services.
- Fulfilments of the objective to grow profitably.
- Increase the scale of production.
- Technology share and innovation which reduces costs.
- Employment creation.
Conclusion
In India notification of provision related to cross-border merger is in consonance with the concept of ease of doing business but there remain few issues which need to be addressed for efficient transaction. Under the new cross border regime, the path to pursue group restructuring exercises and to make Indian companies more globally relevant and competitive is clearer than before.
The need is to minimise the difficulties in cross-border merger and acquisition particularly related to cultural and regulatory differences between various jurisdictions. The government of India has to come out with various amendments and clarifications by taking into consideration the practical aspect of such transactions.
Author of the Article:
ANAS YAWAR