Corporate Law Newsletter: Amendments relating to Cross Border Merger – June 2022

Amendments relating to Cross Border Merger

The term ‘Cross Border Merger’, as defined under the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross Border Merger Regulations”), means a merger, amalgamation or arrangement between an Indian company and foreign company in accordance with the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013. All cross-border mergers undertaken in accordance with the Cross Border Merger Regulations shall be deemed to have prior approval of the Reserve Bank of India (“RBI”), which is a pre-requisite under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016 (“Compromise and Arrangement Rules”). The Ministry of Corporate Affairs, vide notification dated May 30, 2022, has introduced amendments to Rule 25A of Compromise and Arrangement Rules, whereby all applications pertaining to a compromise, arrangement, merger or demerger between an Indian company and a company incorporated in a country sharing land borders with India must be accompanied by an additional declaration in form CAA-16, which shall be submitted to NCLT along with the application. The format of form CAA-16 has been provided in the aforesaid notification. The form requires a duly authorized representative of the company/body corporate to make a declaration regarding the applicability of the requirement to obtain prior approval under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). In case prior approval as per NDI Rules is required, such approval must be enclosed with form CAA-16. The notification is one of the series of amendments that have been introduced to align the laws pertaining to foreign investment with the changes made to the foreign direct investment policy relating to countries sharing land border with India.

MCA Notification on Appointment and Qualification of Directors Rules

The Ministry of Corporate Affairs, vide notification dated June 01, 2022, has notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (“Amendment Rules”). These rules have come into effect from June 1, 2022. The amendments introduced by the aforesaid notification are as follows:

(a) Consent to act as director:

Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (“Director Appointment Rules”) requires every person to be appointed as a director to provide a written consent to act as a director in form DIR-2. The proviso to Rule 8 requires the company to file such consent with the registrar in form DIR-12 within a period of 30 (thirty) days of the appointment of the director. By virtue of the Amendment Rules, a person who is a national of a country sharing land border with India, seeking appointment as a director, shall furnish necessary security clearance from the Ministry of Home Affairs, Government of India which shall be attached to form DIR-2.

(b) Director Identification Number:

Rule 10 pertains to the allotment of a director identification number. It provides that once form DIR-3 has been submitted on the portal along with the payment of requisite fees through online mode, the system will automatically generate an application number. The Amendment Rules now require all applicants who are nationals of a country sharing land border with India to furnish necessary security clearance from the Ministry of Home Affairs, Government of India; failing which, the application number for director identification number will not be generated.

(c) Declaration in Form DIR-12 and Form DIR-3:

The persons seeking appointment as a director are also required to make a declaration in form DIR-12 and form DIR-3 to confirm, whether or not they are required to obtain necessary security clearance from the Ministry of Home Affairs, Government of India. The persons who are required to obtain such security clearance must attach the same to the said forms.

Processing of ASBA Applications in Public Issue of Equity Shares and Convertibles

Application Supported by Blocked Amount (“ASBA”) is an application process introduced by the Securities and Exchange Board of India (“SEBI”), whereby applicants can authorize Self Certified Syndicate Banks to block funds available in their bank account for subscribing to a public issue. In applications made via ASBA, application money is debited only if the application is selected for allotment. Until April 2010, SEBI had prescribed the ASBA facility for all investors except Qualified Institutional Buyers (“QIBs”). Thereafter, vide circular dated April 6, 2010, the Securities and Exchange Board of India (“SEBI”) extended the ASBA facility to QIBs in public issues opening on or after May 1, 2010.

SEBI is believed to have observed that some QIBs and non-institutional investors (“NIIs”) were submitting bids only to inflate the subscription numbers without an intention of getting allotments. In view of the foregoing, SEBI has reviewed and, vide circular dated May 30, 2022, streamlined the framework of bidding in an initial public offering (“IPO”) to ensure that only genuine applicants submit bids in an IPO.

Accordingly, the following directions have been issued by SEBI under the aforesaid circular:

(a) ASBA applications in public issues will be processed only after application monies are blocked in investors’ bank accounts. All intermediaries and market infrastructure institutions have been advised to ensure that appropriate systemic and procedural arrangements are made within 3 (three) months from the date of issuance of the circular;

(b) Stock exchanges shall accept ASBA applications in their electronic book building platform only with a mandatory confirmation regarding blocking of application monies;

(c) The circular shall be applicable to all modes of processing applications and all categories of investors viz. retail investors, QIBs, NIIs and other reserved categories;

(d) All stakeholders have been advised to take necessary steps to ensure compliance with the circular and merchant bankers shall coordinate with all stakeholders in this regard; and

(e) The circular will be effective for public issues opening on or after September 1, 2022.