The past quarter witnessed developments in the company law regime to align rules under the Companies Act, 2013 with restrictions previously imposed under exchange control laws on FDI from neighbouring countries. Validity of the de minimis exemption for merger control clearances was also extended for a further period of five years.

Arnav DayalPartner

Sanjna VijhSenior Associate

Yashita GourAssociate

Mergers and acquisitions (M&A) deal-making activity remained robust in India during the preceding quarter, driven by big ticket transactions in the healthcare, technology and renewable energy sectors. At the same time, concerns of a potential slowdown continued, with increasing inflation pressures and volatility in the public markets across the globe. Signals of some distress also emerged in the start-up space with talk of potential down-rounds and delayed initial public offerings.

Key Developments

  • Foreign exchange laws and compliances

    • Restrictions on foreign direct investment from neighbouring countries

      In April 2020, the Government of India introduced restrictions on foreign direct investment (FDI) by an entity that is situated in a country that shares a land border with India (i.e., China, Bangladesh, Pakistan, Afghanistan, Bhutan, Nepal and Myanmar) or whose beneficial owner is a resident of such country, with any such investment requiring prior government approval.

      The Ministry of Corporate Affairs (MCA) has now issued the following amendments to the rules under the Companies Act, 2013 (Companies Act) to align with the FDI restrictions, with the obligation of compliance falling on the Indian investee companies.

      • Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022

        Indian entities are prohibited from offering securities through private placement to entities incorporated in a country which shares a land border with India, unless government approval is obtained under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules).

      • The Companies (Appointment and Qualification of Directors) Amendment Rules, 2022

        Persons seeking appointment as a director of a company, who are nationals of a country which shares a land border with India, now require security clearance from the Ministry of Home Affairs, Government of India.

      • The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2022

        For a combination between an Indian entity and an entity incorporated in a country which shares a land border with India, entities are mandated to disclose whether they are required to obtain prior approval under the NDI Rules.

      • The Companies (Share Capital and Debentures) Amendment Rules, 2022

        The format of the share transfer form under the rules, i.e., form SH-4, has been revised to include a declaration that the transferee is not required to obtain government approval under the NDI Rules prior to transfer of shares, or where the transferee is required to obtain government approval, the same has been obtained and enclosed with the form.

  • Merger control compliances

    In 2017, the Government of India, through the MCA had exempted enterprises from seeking prior merger control approvals where the value of assets of the target enterprise, including its divisions, units and subsidiaries in India was either less than INR 350 crores or the turnover was less than INR 1,000 crores (De-Minimis Exemption). The De Minimis Exemption was initially available for a period of 5 years until March 2022. In a move widely anticipated by the industry, the MCA through notification extended the De Minimis Exemption benefit for a further period of 5 years, until March 2027.

    The Competition Commission of India (CCI) has also published a revised format of Form-II (Long Form Notification), used for filing information with the CCI by parties when the combined market share of the parties exceeds 15% in cases of horizontal overlap or the combined market share of the parties, who operates in vertically linked markets exceeds 25% in either the upstream or the downstream market. The changes to the Long Form Notification simplify and streamline information requirements, and make its information fields modular and in line with the revised Form-I (short form of merger notification) published in August 2019.

Looking ahead, further developments are expected to streamline the Companies Act, as the Company Law Committee, set up in 2019 by MCA to suggest reforms and amendments to the Companies Act, has published a draft report on 13 April 2022. To ease burden of compliances and address ambiguities, some of the suggestions made by the Committee include (i) providing ongoing flexibility (instead of temporary exemptions) for companies to hold general meetings in virtual, physical or hybrid mode, (ii) creating an electronic platform for maintenance of statutory registers by companies, (iii) recognising issuance and holding of Restricted Stock Units and Stock Appreciation Rights which are employee compensation schemes linked to the shares of a company, that do not involve actually holding shares, (iv) clarification that 'free reserves' should be explicitly included in calculating buy-back of equity shares, and (v) recognition and regulation of special purpose acquisition companies under the Companies Act.

With threats of a recession emerging in the West and continuing volatility from geopolitical events, it will be interesting to see the impact on M&A activity in the coming months. While a degree of turbulence is expected, deployment pressures for private capital and attractive opportunities on account of valuation corrections may continue to drive deal-making.

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