Deal Talk
January 23, 2025
“Driving” Into the Future Together: Unpacking Indian Law Considerations for The Proposed Honda-Nissan Partnership
Introduction
On December 23, 2024, Japan’s second and
third largest carmakers respectively, Honda Motor
Co., Ltd (“Honda”)
and Nissan Motor Co., Ltd (“Nissan”)
sent shockwaves through the automotive industry
when they announced the signing of a memorandum
of understanding (“MOU”)
to consider business integration, through the establishment
of a joint holding company, for “deepening
the framework of” their existing strategic
partnership.1 This follows another MOU
that was previously executed by the parties on August
1, 2024 for achieving carbon-neutrality and zero-traffic-fatality
in the automotive industry.
While strategic alliances in the automative industry
are common, this mega-alliance is poised to alter
the dynamics of the global automotive industry by
creating the third largest automaker in the world.2
Additionally, Nissan and Honda have chosen a non-conventional
model for a partnership in the automotive industry
(as compared to the more conventional models such
as acquisitions, mergers, platform sharing or technology
sharing). This commitment from Honda and Nissan
also comes in the backdrop of increasing competition
from Chinese counterparts, with Honda’s chief
executives indicating that this partnership is part
of a plan to stabilise operations by 2030.3
Interestingly, there are public announcements that
subject to discussions between parties, the merger
may potentially include Mitsubishi Motors Corp.
(of which Nissan is a major shareholder).
In our inaugural Deal Talk for 2025, we break
down all the implications under Indian law for a
deal similar to the Honda-Nissan deal structure,
highlighting critical considerations to be borne
in mind by two industry conglomerates when coming
together overseas whilst having substantial presence
in India.
Proposed Transaction
Honda and Nissan are Japanese listed companies
that have signed the MOU to create a joint holding
company incorporated in Japan, which shall operate
as the parent company of both the companies and
be listed (by way of a “technical listing”)
on the Prime Market of the Tokyo Stock Exchange
(“TSE”) (such company,
the “Joint Holding Company”).
A “technical listing” is governed by
Rule 208 of the Securities Listing Regulations of
the TSE, which provides companies with the flexibility
to list existing shares on public markets instead
of issuing new shares to the public under the traditional
initial public offering route. The ability to undertake
a “technical listing” is available only
when a company meets the criteria set out in Rule
209, which broadly assesses the market capitalisation,
number of shareholders, and overall financial performance
of the listed company. An interesting point to note
is that Indian securities market does not have an
institutionalized concept of a “technical
listing”.
Post incorporation, the Joint Holding Company
shall hold the entire shareholding of Nissan and
Honda which would therefore become wholly owned
subsidiaries of the Joint Holding Company. To this
extent, both Nissan and Honda will respectively
delist from TSE as a part of this process. While
the date of listing of the Joint Holding Company
and delisting of Honda and Nissan will be determined
according to the applicable law, at the time when
the Joint Holding Company acquires the shares of
Nissan and Honda, existing public shareholders of
Nissan and Honda would have the ability to swap
their shares in Nissan and Honda with the shares
of the Joint Holding Company.
However, the share transfer ratio has not been
finalised and is slated to be determined subject
to due diligence and third-party valuations referring
to average closing prices of Honda and Nissan prior
to the public announcement of the MOU.
The broad timelines and step plan for this deal
are as follows –
(the “Proposed Transaction”).
Once the Proposed Transaction is consummated,
on the effective date of the share swap, Honda will
nominate a majority of the internal and external
directors of the Joint Holding Company. Further,
it is envisaged that the president and representative
director or president and representative executive
officer of the Joint Holding Company will be selected
from amongst Honda’s nominated directors.
A diagrammatic representation of the current
group structures of Honda and Nissan, and the structure
pursuant to the Proposed Transaction is as follows –
India-centric deal considerations
for the parties
Presence of Honda and Nissan in India’s
automotive sector
(i)
Honda
As per public sources, Honda majorly operates
through two companies in the Indian automotive market:
(a) Honda Cars India Limited (“HCIL”),
a public limited company operating as a wholly owned
subsidiary of Honda,4 and (b) Honda Motorcycle &
Scooter India Pvt. Ltd. (“HMSI”),
a private limited company also operating as a wholly
owned subsidiary of Honda.5
(ii)
Nissan
Public sources indicate that in a structure similar
to that of Honda, Nissan’s Indian presence
in the automobile industry is majorly through Nissan
Motor India Pvt Ltd (“NMIPL”),
which is a wholly owned subsidiary of Nissan.6
Further, Nissan has an alliance with French carmaker
Renault in India. Renault Nissan Automotive India
Private Limited (“RNAPL”)
is a joint venture between Renault and Nissan which
undertakes manufacturing of import and export vehicles
for each of them.
Considerations from an Indian legal perspective
While we wait for finalisation of the deal structure
and a copy of the MOU to be disclosed in the public
domain, from an Indian law perspective, the Proposed
Transaction will likely involve an indirect transfer
of the entire shareholding of HCIL, HMSI and NMIPL
from Honda and Nissan to the Joint Holding Company.
However, based on the structure available as of
now, below are some of the critical Indian law considerations
that the parties may need to bear in mind7
while undertaking a structure similar to the Proposed
Transaction –
Potential
approval of the Competition Commission of India
(“CCI”) under the
Competition Act, 2002 (“Act”)
As per recent amendments to the Act effective
since September 10, 2024, any transaction meeting
the following criteria will be subject to the prior
approval of the CCI before consummation: (i) the
value of the transaction is INR 2,000 crores (i.e.
approximately USD 231 million) or more (“Value
Test”); and (ii) the target has “substantial
business operations” in India, (“Business
Test”) each as per the manner set
out in the Competition Commission of India (Combinations)
Regulations, 2024 (collectively, the “Deal
Value Threshold”). The Deal
Value Threshold is applicable even if the target
otherwise meets the de minimis target exemptions
under the Act, which exempts notifiability of transactions
where the target’s assets or turnover are
below specified limits.8 Exemption can
be sought from notification arising on account of
the Deal Value Threshold only if an exemption is
available under the Competition (Criteria for Exemption
of Combinations) Rules, 2024.
While the deal value for the Proposed Transaction
is not available in the public domain, the parties
believe that this integration will lead to sales
revenue exceeding 30 trillion yen (approximately
USD 191.4 billion) and operating profit of more
than 3 trillion yen.9
In light of the above, in the event the Proposed
Transaction passes both the Value Test and the Business
Test, it would be required to be notified to the
CCI.
If prior approval of the CCI is to be sought
owing to the Deal Value Threshold, the Joint Holding
Company (being the acquirer in the Proposed Transaction)
will have to file an application with the CCI upon
execution of transaction documentation (and prior
to the consummation of the Proposed Transaction)
seeking its approval. Depending on the extent of
overlaps in the Indian market between the parties
to the Proposed Transaction, the process of receiving
approval from the CCI could either be through the
green channel route or may take 30-40 days.
While scrutinising the application, the CCI may
potentially also examine the following indicative
factors to assess whether the Proposed Transaction
leads to an “appreciable adverse effect
on competition” in the Indian markets:
Potential market concentration
of Honda and Nissan in India pursuant to the
Proposed Transaction and their joint market
power, in all relevant product markets such
as non-electric automobiles, electric automobiles,
four-wheelers and two-wheelers markets, to assess
dominance; Possibility of vertical
and horizontal integration with dealers, suppliers
and servicing agencies involved in the automotive
sectors; Benefits to end-customers
through this deal.
However, given that the Indian automobile market
is saturated with multiple players, the potential
of the Proposed Transaction causing an “appreciable
adverse effect on competition” would
be relatively lower.
Possibility
of incurring indirect transfer tax under the
Income Tax Act, 1961 (“IT Act”)
An indirect transfer occurs when the effective
control of securities held in a specific jurisdiction
occurs indirectly as a result of a transfer
of ownership / interest of its holding entity (and
not directly as a result
of an actual transfer of securities in that specified
jurisdiction).
Under the IT Act, any income arising from an
indirect transfer of shares is taxable as capital
gains if the foreign entity derives its value “substantially”
from the assets situated in India.10
Value is said to have been derived “substantially”
from Indian assets if the value of such assets:
(i) exceeds INR 10 crores (approx. USD 1.15 million)
(“Limb 1”);
and
(ii) represents at least 50% of the value of all
assets owned by the company or entity (“Limb
2”). It is important to note that
both Limb 1 and Limb 2 will have to be met for indirect
transfer tax to be levied on a transaction.
Therefore, in the event the asset value of HCIL
and HMSI (for Honda) and NMIPL (for Nissan) is above
INR 10 Crores (approx. USD 1.15 million) each and
respectively for Honda and Nissan, they represent
more than 50% of their global value of assets, then
the transfer of shares of Honda and Nissan from
the current shareholders to the Joint Holding Company
could trigger indirect transfer tax in India.
The methodology for calculation of the asset
value of the entity in India has been prescribed
in Rule 11UB of the Income Tax Rules, 1962. Limb
1 will involve calculation of the current fair market
value of the shares held by Nissan and Honda in
HCIL, HMSI and NMIPL respectively through the prescribed
valuation methodology to check if its value exceeds
INR 10 crores. On the other hand, assessment of
Limb 2 will involve: (i) identification of the fair
market value of each of Nissan and Honda as per
the prescribed methodology; (ii) identification
of the fair market value of HCIL, HMSI and NMIPL
as per the prescribed methodology; and (iii) subsequent
comparison whether the 50% threshold is met based
on the fair market values calculated in (i) and
(ii).
It is important to note that the instance of
the indirect transfer tax under the IT Act would
be on the hands of the ‘sellers’ of
shares of Honda and Nissan (i.e. the existing shareholders).
However, an important point to note here is that
the Income Tax Rules, 1962 also provides for a ‘Small
Shareholder Exemption’ from indirect transfer
tax which provides that indirect transfer tax shall
not apply if the non-resident, directly or indirectly,
does not
hold (i) the right of management or control (including
a right which would entitle the person to the right
of management or control) or (ii) voting power,
share capital or interest exceeding 5% of the total
voting power, share capital or interest (as the
case may be) of the company or entity which directly
owns the assets situated in India.
Therefore, for any transaction which follows
a similar structure to the Proposed Transaction
shall also undertake the analysis for indirect transfer
tax in India.
Press
Note No. 3 of 2020 (“PN3”)
considerations
Since (i) the ultimate holding company of HCIL
and HMSI will change from Honda to the Joint Holding
Company; and (ii) the ultimate holding company of
NMIPL will change from Nissan to the Joint Holding
Company, it will amount to an indirect investment
of the Joint Holding Company into the existing Indian
entities of Honda and Nissan. As an effect of this
indirect investment, the beneficial owner
of the shares of the Indian companies will change
to the Joint Holding Company.
PN3 bars investments into India from entities
that share land borders with India, or where the
beneficial owner of an investment into India is
situated in or is a citizen of any such country
sharing land borders with India. These countries
include China (along with Hong Kong), Bangladesh,
Afghanistan, Nepal, etc.
Accordingly, as a result of the Proposed Transaction,
the parties will have to ensure that the beneficial
owner of the Joint Holding Company is not situated
in / a citizen of a land bordering country. Since
the Joint Holding Company shall be a listed company,
it may also be important to undertake this assessment
with respect to the existing shareholders of Honda
and Nissan that would have been a shareholder of
Honda or Nissan prior to the PN3 coming into force
(that shall become shareholders of Joint Holding
Company as a result of the Proposed Transaction).
The ‘significance’
of the Significant Beneficial Owner (“SBO”)
under the Companies Act, 2013 and allied rules
(“CA 2013”)
Under the CA 2013, it is mandatory for every
legal holder of shares to declare the holder of
beneficial interest (i.e. SBO) in such shares to
the Indian company, if such beneficial interest
is not held by them.11 Further, Indian
companies are required to subsequently disclose
these beneficial owners to the Registrar of Companies
(“ROC”).12
Considering that HCIL, HMSI and NMIPL are wholly
owned subsidiaries, the currently reported SBOs
for each of these entities are likely to be the
controlling shareholders of Honda and Nissan respectively.
This analysis would be required to be undertaken
again to assess if there has been any change in
the SBO by virtue of the Proposed Transaction. In
case of a change, HCIL, HMSI and NMIPL may have
to file an updated Form BEN-2 (based on the declaration
provided to it by the Joint Holding Company in Form
BEN-1) with the ROC to reflect the new SBO.
Recent orders from the ROC in the LinkedIn and
Samsung cases suggest that foreign managing officials
of the ultimate foreign holding company could be
considered “significant beneficial owners”
of Indian subsidiary companies (regardless of whether
they directly or indirectly, through the entity,
control the affairs and management of the Indian
company), and be penalised for non-declaration.13
Therefore, in light of these developments, the assessment
and resultant categorisation of the SBO must be
conducted with due consideration to the resultant
group structure dynamics.
Overseas
investment considerations applicable to resident
Indians holding securities of Nissan or Honda
(on the Japanese stock exchange)
Another key consideration for the Proposed Transaction
is the potential impact of Indian overseas investment
laws on the Indian resident shareholders of the
foreign parent companies (being the listed Nissan
and Honda entities in Japan). This may also be relevant
for Indian employees of Nissan and Honda, who may
have acquired shares in the Japanese listed entities
through employee stock ownership plans / employee
benefit plans.
The Foreign Exchange Management (Overseas Investment)
Rules, 2022 (“OI Rules”)
govern investments by Indian residents into overseas
entities. Under Schedule III read with Rule 13 of
the OI Rules, a resident individual may make or
hold overseas investments via a “swap
of securities”
only
in cases of a merger, demerger, amalgamation, or
liquidation. Thus, the OI Rules do not permit Indian
residents to acquire shares of an overseas entity
through a share swap, unless the swap arises from
one of these specific transactions.
Therefore, the parties must evaluate whether
there are any Indian resident shareholders of Honda
and Nissan as on date and implement suitable tax
and legal structuring to ensure that the Proposed
Transaction complies with Indian laws while providing
the same commercial benefits to such shareholders.
Contractual
obligations with respect to “change in
control” triggers under contracts executed
by HCIL, HMSI, and NMIPL
A critical consideration in the Nissan-Honda
deal is the assessment of whether a “change
in control” obligation will be triggered
under contracts executed by each of HCIL, HMSI and
NMIPL (including but not limited to with lenders,
vendors, customers and suppliers).
Since the Proposed Transaction could result in
an ultimate change in control for the Indian subsidiaries
of both Nissan and Honda, the parties may have to
conduct a thorough analysis to determine whether
an indirect “change in
control” is occurring under these agreements,
in order to ensure that HCIL, HMSI and NMIPL discharge
any follow-on obligations arising from this trigger.
These obligations typically include prior notification
to the counterparty and / or obtaining their prior
consent and / or providing post-transaction intimation.
Change in control clauses are particularly prevalent
in lending arrangements entered into by Indian entities,
as they are designed to safeguard the interests
of the creditors.
As mentioned above, beyond financing agreements,
such requirements may also be embedded in vendor,
supplier, or other operational contracts, reflecting
a broad spectrum of potential implications. Addressing
these contractual provisions will be essential to
ensure compliance, avoid disputes, and facilitate
a smooth transition post-deal. Consequently, the
parties may be required to negotiate proactively
with counterparties, negotiate necessary waivers
or approvals, and implement appropriate measures
to satisfy these obligations as per the process
and timelines set out in the underlying agreements.
Conclusion
When structuring a consolidation between foreign
parent companies with Indian wholly owned subsidiaries,
deal teams must go beyond the primary jurisdiction
of the partnership to conduct a detailed analysis
of the Indian regulatory landscape. Ignoring this
critical dimension may result in regulatory hurdles
or missed opportunities for optimizing the structure
of Indian operations.
In light of the ongoing discussions around the
Nissan and Honda partnership in Japan, it is evident
that such collaborations can have significant implications
for Indian subsidiaries. Deal teams should proactively
evaluate Indian laws, including those related to
corporate governance, taxation, foreign exchange
management, and competition, to craft an arrangement
that aligns with both global and local requirements.
A comprehensive approach that balances the strategic
objectives of the parent companies with the regulatory
and operational considerations of their Indian entities
is essential to ensure the consolidation delivers
its intended value seamlessly across all jurisdictions
involved.
Authors
-
Anurag Shah,
Parina Muchhala and
Nishchal Joshipura
You can direct your queries or comments to the relevant member.
1https://global.honda/en/newsroom/news/2024/c241223beng.html.
2https://www.reuters.com/markets/deals/honda-nissan-set-announce-launch-integration-talks-media-reports-say-2024-12-22/.
3https://www.bbc.com/news/articles/cwy3ljvv93lo.
4https://www.aryahonda.com/.
5https://www.honda2wheelersindia.com/about-us/factory.
6https://india.nissanmotornews.com/en-IN/aboutnissanmotorindia.
7Considering that Mitsubishi and Renault’s
involvement in the transaction structure has not
yet been confirmed, we have not added any references
to their Indian presence and impact of the Proposed
Transaction on such entities held by either of them
in India, if any (either standalone or by way of
an alliance).
8The target asset and turnover thresholds
have been analysed in our article here:
https://www.nishithdesai.com/NewsDetails/14949.
9https://global.honda/en/newsroom/news/2024/c241223beng.html.
10Section 9, Income Tax Act 1961.
11Section 89, CA 2013.
12Section 90, CA 2013.
13Please refer to our detailed analysis
of the LinkedIn and Samsung orders at:
https://www.nishithdesai.com/fileadmin/user_upload/Html/Hotline/Yes_Governance_Matters_June1224-M.html.
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