Cross-Border Mergers: Is India Ready? Lessons from the United States and European Union

Abstract:Indian corporate law now permits both inbound and outbound cross-border mergers. Since India broadly follows the incorporation theory, it is now possible that the country could be part of a market for incorporation/reincorporation consisting of countries following similar corporate laws. But India, like most other big countries, does not have the right incentives to develop itself as a serious player in such a market. Overall, with the current set of incentives and laws, India is unlikely to emerge as a reincorporation destination.While permitting cross-border mergers, the Indian law envisages that merger schemes may provide for issuing depository receipts to the merging companies' foreign shareholders to address their concerns. However, attempting to extend Indian securities law to the resultant foreign companies through depository receipts will be onerous, and it would amount to dilution of the incorporation theory that India follows. As a result, it will make a cross-border merger less attractive for the directors. Further, Indian foreign exchange laws put excessive restrictions on the merging companies so that the companies will find cross-border mergers neither desirable nor viable.Both the US and EU experiences would show that a jurisdiction's approach towards takeover defenses influences the promoters' decision on where to incorporate their companies. A jurisdiction that affords more options to defend hostile takeover tends to be the choice of company promoters. Although it does not matter to controlled companies seeking to reincorporate in another jurisdiction, it can be a serious consideration if the promoters do not have a controlling stake. Similarly, the availability of takeover defenses will influence mergers in which the stake of the controllers undergoes dilution. Because India is a country that does not offer any takeover defenses, in a cross-border merger, the dominant tendency of those promoters who do not have a controlling stake would be to avoid India as a destination jurisdiction.