Companies Act Section 234

Companies Act, Section 234: Merger or Amalgamation of a Company with a Foreign Company

Section 234 of the Companies Act, 2013 provides a legal framework for the merger or amalgamation between an Indian company and a foreign company. This provision acknowledges the increasing cross-border business activities and aims to facilitate corporate restructuring on a global scale. It outlines the process, conditions, and approvals required for such international transactions while ensuring that the regulatory interests of India are preserved.

This section operates in conjunction with the other provisions under Chapter XV of the Companies Act, 2013, and is also subject to any other applicable laws in force, such as the Foreign Exchange Management Act (FEMA), and the rules framed by the Reserve Bank of India (RBI) and the Central Government.

1. Applicability of Indian Merger Provisions to Cross-Border Mergers

According to Subsection (1), the general provisions of Chapter XV (which deals with compromises, arrangements, and amalgamations) shall apply mutatis mutandis that is, with necessary modifications to schemes involving mergers and amalgamations between:

Companies that are registered under the Companies Act, 2013 (i.e., Indian companies), and
Companies that are incorporated in foreign jurisdictions.
However, this is subject to one important condition:
This provision applies only to mergers involving companies incorporated in such countries as may be notified from time to time by the Central Government.

This means that not all foreign jurisdictions are automatically eligible for such mergers. The government will issue notifications specifying the jurisdictions whose companies may enter into merger arrangements with Indian companies. This is likely to be based on factors such as:

Regulatory compatibility,
Transparency standards,
Reciprocity, and
International relations.
Furthermore, the Central Government, in consultation with the Reserve Bank of India (RBI), has the power to frame specific rules governing such cross-border mergers and amalgamations. These rules would typically cover:

Procedural requirements,
Foreign exchange controls,
Valuation norms,
Tax implications,
Manner of issuing consideration (such as shares or depository receipts), and
Regulatory filings.
2. Conditions and Consideration for Cross-Border Mergers

Subsection (2) lays down the principal condition for executing a merger between an Indian company and a foreign company: prior approval of the Reserve Bank of India (RBI) is mandatory.

This applies in two scenarios:

A foreign company merges into an Indian company, or
An Indian company merges into a foreign company.
Such cross-border mergers are considered highly regulated transactions due to their implications for capital movement, ownership changes, and jurisdictional transfers. The RBI’s role is critical in ensuring:

Compliance with FEMA,
Monitoring of foreign exchange outflows and inflows,
Ensuring that there is no threat to India’s financial system or economy.
Consideration to Shareholders: The terms and conditions of the merger scheme may allow the shareholders of the merging company (whether Indian or foreign) to receive consideration in the form of:

Cash, or
Depository Receipts (DRs), or
A combination of cash and Depository Receipts.
This enables flexibility in structuring the transaction in accordance with international practices and investor preferences. Depository Receipts, such as American Depository Receipts (ADRs) or Global Depository Receipts (GDRs), are financial instruments issued by foreign companies allowing Indian shareholders to receive shares listed overseas (and vice versa).

Explanation Clause: Definition of "Foreign Company"

For the purpose of Subsection (2), the term “foreign company” has been clearly defined to mean:

Any company or body corporate incorporated outside India, whether having a place of business in India or not.

This broad definition includes:

Multinational corporations with no Indian presence,
Foreign startups,
Offshore holding companies, and
Companies incorporated in jurisdictions with which India has notified eligibility under this section.