Critical aspects to be looked at in Cross Border Merger or acquisition (M & A) scenarios.

Cross border M&A are defined as M&A’s that involve an acquirer firm and a target firm whose headquarters are
located in different home countries. Cross-border mergers and acquisitions (M&A) have emerged as a way to
quickly gain access to new markets and customers and global trends point to increasing deal volume. These are deals
between foreign companies and domestic firms in the target country. The trend of increasing cross border M&A has
accelerated with the globalization of the world economy.

Top strategic deal objectives: Some benefits which companies derive out of cross border M & A are around
following objectives:

1. Portfolio diversification
2. Favorable regulatory environment in the Target
3. Improving Cost synergies
4. Get scale of operations and related efficiencies
5. Acquiring intellectual property and technology
6. Get Access to new talent pool
7. Ability to Add and enhance the distribution network
8. Get new production capacity
9. Get new product technology
10. Overall Geographic Growth

The M & A requires a comprehensive due diligence process and legal and integration risks are primarily on the mind
while deciding valuations or a go – no go for the deal.

Top risk factors for cross-border M&A:

1. Risk on Taxes and Tax laws

2. Regulatory risks
3. Political risks
4. HR related risks on integration including Culture and talent
5. Overall Business risk
6. Due Diligence risk

Importance of Due diligence :

Due diligence is the process of evaluating a business situation diligently from various aspects before arriving at a
decision. In a transaction scenario, due diligence helps the buyer in uncovering potential liabilities and discrepancies
and thus enables the buyer to take an informed decision. There are various forms of due diligence depending upon
the area/scope of coverage like financial due diligence, legal due diligence, commercial due diligence and tax due
diligence. Other diligences may be performed in areas such as IT and human resources.

Some Advantages from due diligence:

Recapture of past losses upon change in shareholding:

Under the Indian tax regime, change in shareholding of a closely held company by more than 49% hampers its
ability to carry forward unabsorbed tax losses (excluding depreciation) which were otherwise eligible to be carried
forward for eight years. While conducting the due diligence, it needs to assess whether there has been any change in
the shareholding of the target in the past which has impaired its ability to carry forward the unabsorbed losses.
.
Claim of tax holiday/incentives (Section 10AA, 80IA, etc.):
Under the Indian tax regime, tax holidays/incentives can be availed of for a specified period subject to the
fulfillment of specified conditions. It is necessary to assess whether or not the conditions prescribed for availing of a
tax holiday have been complied with by the target company, the correctness of such a tax holiday claim and the
unexpired period for which the tax holiday can be claimed by the buyer so that the buyer can factor the same in
valuation.
 Deemed dividend:
Under the Indian tax regime, a loan by a closely held company to its shareholder/allied entities may be re-
characterized as deemed dividend in the hands of the recipient triggering withholding tax liability on the target
company. Thus, the aspect of advancement of loans to shareholder/allied entities needs to be examined during the
due diligence exercise.

Withholding tax and Recoverability of tax refunds/credits:

India also has a very comprehensive withholding tax regime which casts an obligation on the payer company to
withhold taxes on specified payments to non-residents and on payments to residents which are chargeable to tax.
Sample checks of withholding tax compliances help in identifying inconsistencies in withholding tax filings/
compliances of the target company. Tax due diligence helps the buyer in ascertaining the quality and recoverability
of tax refunds/tax credits like MAT credit being claimed as eligible to be carried forward by the target company.

Understand the Indirect tax liability on goods/services

Highlight corporate legal and regulatory considerations: Enterprise-level, country-specific legal and regulatory
issues involve specific expertise and often mandate long lead times. Three types of issues are common: labor issues,
minority investment issues, and anti-trust and tax issues.

Understanding Product registration and industry-specific regulations : Extensive due diligence is essential to
understanding industry-relevant product registration, certification, and labeling requirements in highly regulated
industries including life sciences and health care, chemical and consumer goods, and financial services.

Legal entity (LE) rationalization: Large integrations often result in overly complex LE structures that are
misaligned with corporate strategy and drive up administrative costs. Three common areas of concern are structure
simplification, registration and licensing, and local engagement.

Key regulatory aspects in a M & A deal:

Inbound Merger Prior approval from R.B.I. is mandatory, Section 234(2) of Companies Act 2013 states that a
foreign company may merge with a company registered under this Act or vice-versa. However such a merger
requires prior approval of the Reserve Bank of India. The scheme of merger may inter alia provide for payment of
consideration in Cash or in Depository Receipt or a combination of the two . For the purpose of this sub-section the
expression “Foreign Company” means any company or body corporate incorporated outside India whether having a
place of business in India or not.

Valuations In case of Out bound merger the foreign company should ensure that its valuation is Conducted by a
valuator who must be a member of a recognized professional body in their country and Such valuation must be in
accordance with internationally accepted principles on accounting and valuation .A declaration to this effect is
required to be attached with the application, for obtaining R.B.I approval in out bound merger but the law remain
silent on such requirement for Inbound merger.

Fast Track Merger Section 233 of the Companies Act, 2013 introduces the globally accepted concept of ‘Fast
Track Merger Process’ which introduce a slightly simpler procedure for mergers and amalgamations of certain
including small companies as well as holding and its wholly-owned subsidiary companies. Provisions under
companies Act 1956 which deal with traditional mergers and amalgamations are time consuming and costly
processes as it includes clearances from many regulatory bodies and every type of company must go through this
route. There was a need to simplify and expedite the procedure for the merger of small companies, holding
subsidiary companies and companies where the interest of third parties is not involve. The present Act enables these
companies to undergo merger and amalgamation procedures quickly, simply and within fixed time duration. Cross-
border mergers also regulated by the R.B.I under the Foreign Exchange Management Act 1999 (FEMA) to
harmonize the scope of cross-border merger
Outbound Merger In case of outbound mergers where the resultant company is a foreign company: The
acquisition and holding of securities in the resultant company by an Indian resident shall be in accordance with
Foreign Exchange Management (Transfer or issue of Foreign Security) Regulation, 2000 or the provisions of the
Liberalized Remittance Scheme as applicable. The resultant foreign company shall be liable to repay outstanding or
impending borrowings as per the scheme sanctioned by NCLT as per the terms of the companies (Compromise,
Arrangement or Amalgamation) Rules, 2016. The resultant foreign company can acquire, hold any assets in India or
transfer any such assets as per the permissible limits under the provisions of the FEMA. In case both inbound and
outbound mergers if such assets or securities acquired or hold by the resultant company in contravention of the
provision of FEMA, the resultant company shall sell such assets or security with in a period of 180 days from the
date of sanction of the cross-border merger scheme and the sale proceeds to be repatriated to India or outside India
as the case may be immediately through banking as the case may be immediately through banking channels.

Reporting requirements The Indian entity is required to furnish the prescribed information electronically to tax
authorities within 90 days from the end of the financial year in which transfer of the share/interest takes place.
Where the transaction has the effect of directly or indirectly transferring the rights of management or control in
relation to the Indian concern, the information shall be furnished within 90 days from the date of the transaction.
Further, the Indian concern shall be required to maintain certain documentation in relation to the transaction for a
period of not less than 8 years from the end of the relevant assessment year in which the transaction takes place.

Some examples of M & A

More than $2.5 trillion in mergers were announced during the first half of this year. Four of the 10 biggest deals
were struck to fend off competition from the largest technology companies. The value of acquisitions announced
during the first six months of the year increased 61 percent from the same period in 2017, according to data
compiled by Thomson Reuters. That has put mergers in 2018 on pace to surpass $5 trillion. In the United
States, interest rates remain low, corporate earnings are ballooning thanks in part to tax cuts and stock prices remain
near historic highs. In this environment, companies have turned to mergers and acquisitions for growth, trying to
grab market share and reinvent their business models, especially as Amazon, Netflix and other tech companies
increasingly push into new industries. AT&T’s $85.4 billion acquisition of Time Warner removed some of the
regulatory uncertainty around blockbuster mergers, and could touch off more deals. Comcast waited just a day after
the judge’s ruling before challenging Disney’s existing bid with its own offer. The pharmacy chain CVS
Health announced a $69 billion merger with the health insurer Aetna late last year, and in March another health
insurer, Cigna, announced a $52 billion deal for Express Scripts. Competition with Amazon also drove one of the
biggest overseas acquisitions by an American company so far this year: Walmart’s $16 billion deal for a majority
stake in Flipkart, India’s leading e-commerce platform.