An inbound merger has to be approved by the National Company Law Tribunal (NCLT), which is a time-consuming process, and overall timelines vary depending inter alia on the workload of the NCLT, the regulatory approvals required, whether creditor meetings have been convened and if objections have been raised by stakeholders or governmental agencies. The amalgamating entities have to obtain corporate approvals, and prepare requisite documentation, including the valuation report and financial statements, to file with the NCLT. The scheme has to be approved by the stipulated majority of the shareholders and creditors of the entity in India. The NCLT will usually direct that notice be given to government agencies, such as the income-tax authorities, the Reserve Bank of India and the Competition Commission of India, any of which may make representations and raise objections.

Further, HoldCos that have raised capital from investors in jurisdictions such as China, which share land borders with India, must obtain government approval under Press Note 3 (2020 Series) of 17 April 2020, before issuing shares to those investors, pursuant to the merger becoming effective.

The HoldCo must also comply with the law where it is incorporated in respect of such mergers. While some foreign jurisdictions have straightforward procedures, others do not allow outbound mergers or have significant tax implications, making the process harder.

Founders and promoters of the foreign HoldCo are typically entitled to employee stock options (ESOP) or similar incentives. However, India does not allow promoters of local companies to be given ESOPs. Startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) are exempt from such restrictions, but entities considering inbound mergers may not satisfy DPIIT eligibility. In an inbound merger, promoters’ ESOPs may have to be restructured to be legally compliant and tax efficient.

Debts of the HoldCo become those of the entity in India on merging. Borrowing has to follow Indian law relating to procuring loans from overseas lenders within two years. In addition, the Indian entity cannot send remittances to repay such loans during the two years. If the HoldCo has foreign subsidiaries or investments, they become overseas investments of the Indian transferee company upon merger and have to follow the FEMA regulations on overseas investments.

The government is keen to encourage the trend of “reverse flipping” and has recently set up the expert Padmanabhan committee to provide recommendations on how startups can be encouraged to relocate. If these efforts succeed, it will pave the way for more startups and their investors to re-domicile and list in India.

This article was originally published in India Business Law Journal on 9 June 2023 Co-written by: Puja Sondhi, Partner; Roma A Das, Principal Associate; Harjas Singh, Associate. Click here for original article.

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