Mergers and Acquisitions Industry Alerts

What’s the Buzz?

Recent reports indicate that Mohalla Tech, the parent company of India’s ShareChat, is set to acquire its local rival MX’s short-video platform in a deal worth approximately $700 million. Following the ban on Chinese apps like TikTok in India, several Indian short-video platforms have rapidly gained traction. Recognizing the industry’s high profit potential, Mohalla Tech, which already operates the Moj short-video app, aims to expand its market presence with this strategic acquisition.

How is M&A Regulated in India?

Mergers and acquisitions (M&A) in India are governed by several key legislations:

• Foreign Exchange Management Act (FEMA), 1999: Specifically, the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, along with associated rules, circulars, and directions issued by the Reserve Bank of India (RBI).
• Competition Act, 2002: Regulates anti-competitive agreements and ensures fair market practices.
• Companies Act, 2013: Governs the functioning of companies, including the issuance of shares and other regulatory aspects.
• Indian Contract Act, 1872: Governs contractual obligations between the parties involved in an M&A deal.
• Securities and Exchange Board of India (SEBI) Act, 1992: Provides regulations for listed companies, along with its associated rules, circulars, and guidelines.

Types of M&A Transactions in India

M&A transactions in India are broadly categorized as:

1. Private and Public M&A Transactions
2. Tribunal-Based M&A Transactions

1. Private Transactions

Private M&A transactions are based on contractual agreements between the buyer and seller, subject to necessary approvals. They can take the following forms:

• Share Acquisitions: Either purchasing shares from existing shareholders or subscribing to newly issued shares.
• Asset Transfers: The buyer acquires specific assets of the seller, with individual values assigned.
• Business Sales: The transfer of an entire business unit as a going concern, including employees.

2. Tribunal-Based M&A Transactions

These involve mergers, demergers, acquisitions, or business sales that require approval from the National Company Law Tribunal (NCLT). Additionally, approvals may be required from:

• Shareholders and creditors
• Sectoral regulators
• Stock exchanges
• SEBI (for listed companies)

FEMA Regulations on Cross-Border Mergers

Under FEMA Regulations, any cross-border merger is deemed approved by the RBI, provided it complies with all necessary legal provisions. The managing director, whole-time director, and company secretary of the company involved must furnish a certificate confirming compliance when submitting an application to the NCLT.

A “cross-border merger” is defined as any merger, amalgamation, or arrangement between an Indian company and a foreign company under the Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016, as notified under the Companies Act, 2013.

Inbound Merger (Foreign Company Merging into an Indian Company)

• All properties, assets, liabilities, and employees of the foreign company will be transferred to the Indian company.
• If the Indian company issues or transfers securities to a foreign resident, it must adhere to foreign investment conditions and reporting requirements under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.
• If a joint venture (JV) or wholly owned subsidiary (WOS) of an Indian company merges with its parent company in India, it must comply with the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (ODI Regulations).
• Offshore offices of the foreign company will become branches or offices of the Indian company under the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2015.
• Any borrowing from overseas sources must comply with external commercial borrowing (ECB) norms and other FEMA regulations within two years from the date of the NCLT’s approval.

Outbound Merger (Indian Company Merging into a Foreign Company)

• The Indian company merges into a foreign entity, and all assets, liabilities, and employees are transferred.
• Indian residents holding securities in the Indian company can acquire or hold securities in the foreign entity under the ODI Regulations.
• The Foreign Exchange Management (Establishment in India of a Branch Office, Liaison Office, or Project Office) Regulations, 2016 govern the operations of the foreign company’s Indian branches post-merger.
• The foreign company may open a Special Non-Resident Rupee (SNRR) Account for up to two years to facilitate transactions under FEMA regulations.

Preliminary Steps in an M&A Transaction

Before initiating an M&A transaction, the following key documents are required:

• Term Sheet/Memorandum of Understanding (MOU)
• Confidentiality Agreements
• Corporate Resolutions (in the case of a listed company)

It is important to note that if a party breaches the contract, they may be liable for damages under the Indian Contract Act, 1872.

Financing Methods and Key Professionals Involved

Methods of Financing an Acquisition

• Equity
• Debt

Key Professionals Involved in M&A Transactions

• Tax Advisors: Assist in structuring the deal to minimize tax liabilities.
• Bankers: Play a key role in financing and negotiations.
• Lawyers & Consultants: Provide legal expertise and ensure compliance with regulatory requirements.

Final Thoughts

The M&A landscape in India continues to evolve, with regulatory bodies working to streamline the process while ensuring transparency and compliance. As businesses expand across borders, adherence to FEMA regulations, SEBI guidelines, and sector-specific laws remains crucial for smooth transactions.

This publication is for general informational purposes and does not constitute legal advice. © 2022 Astrea Legal Associates LLP