Jan 1, 2013

Cos Can Merge With Foreign Firms via IDRs

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The government has allowed Indian companies to merge with firms overseas through the issue of Indian Depositary Receipts (IDRs) and the Reserve Bank of India has been asked to issue detailed guidelines on the process.

The Companies Bill 2012, which was passed in the Lok Sabha last month, has permitted local firms to merge with foreign companies in “select jurisdictions”. The shareholders of the merging company can be paid in cash or in IDRs or partly in cash or partly in IDRs.

The Bill, which was cleared by law makers in the lower house, will now have to be cleared by the upper house. Lawyers and consultants say the move would facilitate cross border mergers, open options to restructure firms and overseas listing through reverse merger. But a final approval will depend on RBI guidelines and rules in foreign countries.

“The move would facilitate cross border listing of entities with Indian assets and exits or liquidity to shareholders and investors,” says Pankaj Jain, a lawyer with BMR Advisors, which specializes in M&A.

The older Companies Act, 1956 allowed only the merger of a foreign company into an Indian firm. In 2003, Moschip Semi Conductors arranged the merger of California-based Verasity with itself under Section 391-394 of the Companies Act in 2003 after the Andhra Pradesh high court ruled in its favour.

“The law did not permit the same freedom to Indian companies. The change, if reflected in the final version of the Bill now expected to be passed in the budget session of parliament in February, will allow Indian companies to merge with foreign firms, who will issue IDRs to shareholders of the domestic firm and which will be listed in the local market,” says Pavan Kumar Vijay, MD of Delhi-based corporate consultancy group Corporate Professionals.

But some experts say such provisions also may not be a game changer. “There may not be a large number of companies waiting for this opportunity, says Avinash Gupta, national leader at Deloitte financial service, a tax and audit firm. “It may take some time before this takes off,” he added. “Further, one needs to see how much headroom is provided by the RBI, which is worried about the flow of foreign money in the country, he added.

Tata Motors India’s largest truck maker and its British marque car maker Jaguar Land Rover and Suzlon with its German Company RE Power are some of the companies which have operations both in India and abroad.

“The capital account convertibility should not be an issue in these cases since Indian law already permits a foreign company to purchase upto the entire shareholding in an Indian company in most sectors,” says RS Loona, former SEBI executive director and now managing partner at law firm Alliance Corporate Lawyers. “It comes into play only when you make the capital freely transferable,” he added.

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