Section 234 and Rule 25A permit a cross-border merger only where the foreign company is incorporated in a jurisdiction notified by the Central Government. The notified jurisdictions include the United States, the United Kingdom, Singapore, Mauritius, and certain other countries. A merger with a company in a non-notified jurisdiction cannot use the Section 234 route, and the parties must consider the alternative structures.
The Restriction
The restriction is based on the policy of the Central Government, and it is designed to ensure that the merger is with a company in a jurisdiction that has a compatible legal and regulatory framework. The list of notified jurisdictions is amended by notification, and the parties must verify the current list before structuring the transaction.
The Alternatives
A transaction with a company in a non-notified jurisdiction can be structured as an asset transfer, a slump sale, or an acquisition of shares, depending on the commercial objective. The asset transfer and the slump sale do not require the Section 234 route, but they are taxable transactions, and they do not have the benefit of the statutory vesting that a scheme provides.
The Practical Considerations
The parties must consider the tax consequences, the FEMA implications, and the regulatory approvals that the alternative structure requires. The alternative may be more expensive and more time-consuming than a scheme, but it may be the only available route where the jurisdiction is not notified.
Call to Action
Anuj Desai & Associates advises companies on cross-border mergers with companies in non-notified jurisdictions—from the Section 234 restriction and the notified jurisdiction list to the alternative structures and the tax and FEMA consequences. If you are considering a transaction with a company in a non-notified jurisdiction, we can help you identify the lawful route.
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