Govt Mandates RBI Approval for Mergers Between Foreign Holding Companies and Indian Subsidiaries
- M.R Mishra
- Sep 16, 2024
- 2 min read
The government has updated the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, requiring that mergers between foreign holding companies and their wholly-owned Indian subsidiaries must now receive prior approval from the Reserve Bank of India (RBI).
These new regulations specifically apply to mergers where a foreign company transfers its assets to an Indian subsidiary. According to the Ministry of Corporate Affairs, both entities involved must secure RBI approval before proceeding. Additionally, the Indian company must adhere to the requirements of Section 233 of the Companies Act, which governs certain types of mergers and amalgamations.
Sandeep Jhunjhunwala of Nangia Andersen LLP noted that this regulatory change comes in the context of a trend toward reverse mergers and the robust performance of India's IPO market, which offers investors potential exit opportunities.
He emphasized that the new rule requires both the foreign holding company and its Indian subsidiary to seek RBI approval for their merger, while the Indian company must also file for clearance with the Central Government under existing provisions.
The decision to mandate Reserve Bank of India (RBI) approval for mergers between foreign holding companies and their Indian subsidiaries can be seen as beneficial from several perspectives:
1. Regulatory Oversight and Financial Stability:
Foreign Exchange Control: RBI approval ensures that cross-border transactions comply with India’s foreign exchange regulations, protecting the economy from any adverse effects of capital flows.
Financial Integrity: This requirement can prevent misuse of the merger process, such as money laundering or tax evasion, by adding an additional layer of scrutiny.
2. Safeguarding National Interests:
The move ensures that mergers with foreign companies don’t lead to unintended consequences, such as a loss of control over key sectors or businesses vital to national interests.
3. Investor Confidence:
The regulation could build confidence among domestic and foreign investors by ensuring that only well-structured and transparent mergers are allowed. This can improve the long-term stability of the business environment.
However, some challenges include:
Increased Bureaucratic Hurdles: Requiring RBI approval might slow down the merger process, adding complexity and potential delays.
Impact on Startups and Smaller Companies: For new-age startups that rely on foreign investment, this regulation might be seen as an additional hurdle, especially in a fast-paced market.
Overall:
The decision balances economic openness with regulatory prudence, ensuring that foreign investments in Indian companies align with national economic policies. While it may slow down some transactions, it strengthens the regulatory framework, potentially leading to a more secure business environment.
Comments