Centre quietly opens door for foreign buy-out of Indian firms

The centre has allowed Indian companies to merge with companies overseas in a major push to foreign direct investments in the country through mergers and acquisitions, although with the prior approval of the Reserve Bank of India (RBI).

The policy shift will completely alter the merger and acquisition (M&A) landscape in the country and allow investors from countries like Mauritius, the Netherlands, Singapore, UK, US, Abu Dhabi, DIFC (Dubai) and UAE, the main channels of investment in India, to acquire and operate Indian companies.

This is a big gift to foreign companies looking for acquisitions as they can now look to acquire Indian companies easily through this route.

However, such outbound mergers will be allowed only with the prior approval of the Reserve Bank of India (RBI), the ministry of corporate affairs said.

The ministry of corporate affairs (MCA) has passed the necessary executive orders under the new Companies Act, 2013 to bring this into effect from 13 April.  Reports quoting official sources said.

The amendments to the Companies Act will now allow Indian companies to merge with companies abroad, while under the earlier provisions of the Companies Act, only Indian companies were allowed to merge foreign companies in India through a scheme of arrangement (inbound mergers).

The erstwhile Companies Act 1956 had no specific provision allowing Indian companies to go for outbound mergers. Only inbound mergers (foreign companies merging into Indian companies) were allowed under this law, which was replaced by the new Companies Act, 2013.

Although the doors have now been opened for Indian companies to go for outbound mergers, the latest Company Law still does not allow cross-border demergers.

This would mean an Indian company's business division cannot be hived off and de-merged through a scheme of arrangement into a foreign company, say company law experts. The entire Indian company has to merge and would have to lose its identity.

The MCA is a significant change from the earlier position when there was a complete ban on Indian companies merging with foreign companies. This has now been lifted, although in a regulated manner.