India – Legal and Regulatory Update (May 2017)

May 1, 2017

The Indian Market

The Indian market continues to attract foreign investment as the Government of India (‘Government‘) accelerates the implementation of second generation market reforms. The Indian Parliament recently enacted the legislative framework to implement a uniform goods and services tax (‘GST‘) throughout the country. Once implemented, GST will substantially improve the trade of goods and services within India.

This update provides a brief overview of certain key legal and regulatory developments in India between January 1, 2017 and April 28, 2017.

Key Legal And Regulatory Developments

Mergers & Acquisitions 

  1. Merger Control Exemptions Expanded: In 2011, the Government had introduced a de minimis target based exemption (i.e., based on the valuation of assets or turnover of the target company) (‘Exemption‘) which excluded certain transactions from the notification and approval requirements applicable to combinations under the [Indian] Competition Act, 2002 (‘Competition Act‘). Transactions that fell below the threshold did not have to be notified to the Competition Commission of India (‘CCI‘). The Exemption was applicable for a period of five years. According to the annual report published by CCI for 2015-2016, 113 notifications of combinations that were not eligible for the Exemption were filed with the CCI. The majority of such notifications were approved within a period of thirty days.[1]

    On March 4, 2016, the Government by a notification (‘2016 Notification‘) extended the period of Exemption for a further period of five years and increased the value of the assets/turnover thresholds (for details please refer to our client alert dated March 15, 2016).

    By a further notification dated March 27, 2017 (‘2017 Notification‘)[2], the Government introduced the following changes to the Exemption-

    (a) Extension of Exemption to All Combinations: Earlier, the CCI had interpreted the Exemption to include only acquisitions. The 2017 Notification extends the Exemption to mergers and amalgamations.

    (b) Acquisition of a Part of a Business: The 2017 Notification stipulates that when a part of a business is being acquired (for example an asset, slump, or business sale), only the value of the assets or turnover of that part of the business that is being acquired will be considered for the purposes of determining the de minimis thresholds. The value of assets or turnover in relation to the entire enterprise is no longer included for the purposes of determining the de minimis threshold exemption.

    The 2017 Notification will be applicable prospectively to transactions that are entered into from March 27, 2017. The 2016 Notification will continue to apply to transactions that were entered into prior to March 27, 2017. 

    Besides obviating the distinction between acquisitions and mergers/amalgamations for the purpose of the Exemption, the 2017 Notification significantly extends the scope of the Exemption. The Exemption, being a definitive test, provides transaction parties with greater certainty.  

  2. Cross-Border Mergers Permitted: Previously, under the [Indian] Companies Act, 1956, only inbound mergers were permitted and any capital gains arising from such transactions was exempt from tax. Now, the Government has notified Section 234 of the [Indian] Companies Act, 2013 (‘Companies Act‘) and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, (bringing them into effect from April 13, 2017), which enable inbound and outbound mergers between an Indian company and a foreign company. Cross-border mergers will require prior permission of the Reserve Bank of India (‘RBI‘) before an application can be made to the National Company Law Tribunal, in accordance with the procedure for court-approved mergers under the Companies Act. Additionally, transactions in certain sectors such as insurance or pension funds may require prior permission from the appropriate industry regulators. Outbound mergers will be permitted only with foreign companies incorporated in certain permitted jurisdictions, which includes most major jurisdictions.[3]

    However, amendments to certain other laws will be required to fully operationalise the outbound cross-border merger framework. These include amendments to current Indian exchange control and taxation laws.[4] The use of this structure, in the absence of alignment with laws of other major jurisdictions for transferring liabilities (including tax liabilities and external commercial borrowings subject to RBI regulations), is likely to be limited.

  3. Foreign Investment Promotion Board (‘FIPB‘) to be Abolished: The Government, in its annual budgetary statement to Parliament, announced its intention to abolish the FIPB. Under Indian exchange control regulations, there are two routes for foreign strategic investors to invest in an Indian company:

    (a) Government Route: Where prior approval of the Government is required for foreign investment in certain specific industry sectors or beyond certain prescribed investment thresholds; and

    (b) Automatic Route: Where foreign investment is freely permitted without the prior approval of the Government.

    In the case of Government Route sectors, the FIPB was the governmental authority that granted permission for investments up to INR 50 billion or approximately USD 775 million. However, in many Government Route sectors, additional permission from the industry regulator was also required. With this announcement, it appears that only one set of Government approvals (that of the relevant industry regulator) will be required for investment in Government Route sectors. While this change is aimed at further simplifying the approval process for foreign investment, much will depend on the language of the revised foreign direct investment policy, which will be announced later this year.

Labour & Employment Laws

  1. Maternity Benefit Act Amendment: The Indian Parliament enacted the Maternity Benefit (Amendment) Act, 2017 (‘2017 Amendment‘) that incorporates the following significant changes in the [Indian] Maternity Benefits Act, 1961 (‘Maternity Benefits Act‘):

    (a) Increase in Maternity Leave: Maternity leave under the Maternity Benefits Act has been increased from twelve to twenty-six weeks. However, a woman with two or more surviving children will only be entitled to twelve weeks of maternity leave.

    (b) Adopting and Commissioning Mothers: The 2017 Amendment has introduced twelve weeks of maternity leave for a woman who adopts a child below the age of three months and for women who become mothers through surrogacy. This period of maternity leave is calculated from the date when the child is handed over to the mother.

    (c) Child Care Facilities:  Private employers with fifty or more employees are required to provide access to crèche facilities as prescribed by the Government, each female employee using the facilities has the right to visit it four times in a day.

    (d) Written Information of Benefits: Employers are mandated to inform their female employees, in writing and electronically, of all the benefits available to them under the Maternity Benefits Act.

  1. Consolidation of Statutory Registers: In an attempt to improve compliance with labour and employment laws, the Government has notified the [Indian] Ease of Compliance to Maintain Registers under various Labour Law Rules, 2016. Employers are obliged to maintain various statutory registers for employee matters under nine central (i.e., federal enactments).[5] With the implementation of these Rules the number of statutory registers have reduced from fifty-six to five, which are as follows: (a) Employee Register; (b) Wage Register; (c) Register of Loan and Recoveries; (d) Attendance Register, and (e) Register of Rest/Leave/Leave Wages.

   [1]   Annual Report for 2015–-2016 published by the Competition Commission of India (available at http://www.cci.gov.in/sites/default/files/annual%20reports/annual%20report%202015-16.pdf); Notably, the Competition Act stipulates a statutory limit of two hundred and ten days for the disposal of notifications received for combinations.

   [2]   Notification S.O. 988(E) dated March 27, 2017 (available at http://www.mca.gov.in/Ministry/pdf/Notification_30032017.pdf)

   [3]      Permitted jurisdictions are those: (a) who are signatories to Appendix A of the Multilateral Memorandum of Understanding of the International Organization of Securities Commissions; (b) whose securities market regulator has executed a bilateral Memorandum of Understanding with the Securities and Exchange Board of India; or (c) whose central bank is a member of the Bank of International Settlement.   

   [4]   On April 26, 2017, the RBI released the draft  Foreign Exchange Management (Cross border Merger) Regulations, 2017 that will govern the exchange control aspects of cross-border mergers.(available at: https://rbidocs.rbi.org.in/rdocs/Content/PDFs/CBMD08484A86A9AE4780A2D825C5D85184B3.PDF)

   [5]   Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996, Contract Labour (Regulation and Abolition) Act, 1970; Equal Remuneration Act, 1976; Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979; Mines Act, 1952;, Minimum Wages Act, 1948; Payment of Wages Act, 1936; Sales Promotion Employees (Conditions of Service) Act, 1976; Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office:

India Team:
Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com)
Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com)
Sidhant Kumar (+65 6507 3661, skumar@gibsondunn.com) 

© 2017 Gibson, Dunn & Crutcher LLP

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