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17 October 20227 minute read

India: Notes on fast-track mergers

Restructuring is an important mechanism and, often, an optimum solution for business overhaul as it strengthens a company’s market position, increases its profitability, and streamlines its operations. As economies emerge from the worst of the pandemic, companies across the globe are aggressively considering realigning their organizational structures to improve business efficiencies.

The merger process set out in the Act is simple, swift and cost-effective.

Particularly in India, however, companies are apprehensive about opting for any business restructuring, due to the cumbersome and time-consuming procedures and modalities of the tribunals, courts and regulators that are necessary to the process. This concern, coupled with the practical challenges of actual implementation, make business restructuring in India a daunting exercise.

With the objective of promoting the ease of doing business in India, the concept of fast-track merger was introduced under the Companies Act, 2013. Section 233 of the Act and Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 offer certain classes of companies an alternative option of merger, with fewer legal requirements and a quicker approval and registration process. The merger process set out in the Act, unlike that in the former Companies Act, 1956, is simpler and swifter. The fast-track merger mechanism offers a cost-effective solution, with no intervention of the National Company Law Tribunal (NCLT); no requirement of a special audit; and no administrative formalities. Furthermore, the process does not require any newspaper advertisement or public advertisement announcing the merger.

Eligibility criteria

The fast-track merger mechanism facilitates the amalgamation, compromise, or arrangement between the following classes of companies:

(a) Small companies

(b) Holding company and its wholly owned subsidiary

(c) Startup companies

(d) Startup company and small company.

Recently, the Government of India introduced several amendments to the Act to expand the scope of fast-track mergers, such as widening the definition of ”small companies” and including startup companies under its ambit.

Procedure for fast-track mergers

Companies opting for a fast-track merger are required to follow the broad steps set out below:

  1. Draft a scheme of amalgamation and obtain approval of the board of directors.
  2. Issue a notice of the proposed scheme inviting objections or suggestions, if any, to be provided within 30 days from the Registrar of Companies (RoC) and Official Liquidators where registered office of the respective companies or persons affected by the scheme are situated.
  3. Consider the objections and suggestions received in their respective general meetings.
  4. The scheme must be approved by the following classes of persons:

    (i) Shareholders holding 90 percent of the total number of shares at the general meeting and

    (ii) Creditors or class of creditors representing 9/10th in value after a 21- day notice along with the scheme to the creditors.

  5. File a declaration of solvency, as prescribed, with the RoC of the place where the registered office of the company is situated.
  6. On receipt of the scheme, if the RoC or the Official Liquidator has no objections or suggestions, the central government registers it and issues a confirmation thereof to the companies. Any objections or suggestions are communicated in writing to the central government within 30 days. If no such communication is made, it is presumed there is no objection.
  7. If the central government considers that the scheme is not in the public interest or in the interest of the creditors, it may file an application before the NCLT within 60 days of the receipt of the scheme, stating its objections and requesting that the NCLT may consider the scheme under section 232 of the Act. If the central government has no objection or it does not file any application before the NCLT, it is deemed that it has no objection to the scheme.
  8. On receipt of an application from the central government or any person, the NCLT may either (i) direct that the scheme be considered as per the procedure set out in section 232 of the Act; or (ii) confirm the scheme.
  9. A copy of the order confirming the scheme is required to be communicated to the RoC having jurisdiction over the transferee company and the persons concerned.
  10. The RoC registers the scheme and issues a confirmation to the companies communicating it to the RoCs where the transferor company or companies were situated.
  11. The registration of the scheme is deemed to have the effect of dissolution of the transferor company without winding up.
  12. The transferee company files an application with the RoC along with the registered scheme indicating the revised authorized capital and pays the prescribed fees due on revised capital. Any fee paid by the transferor company on its authorized capital prior to its merger/ amalgamation is set off against the fees payable by the transferee company on its authorized capital as increased by the merger or amalgamation.
  13. Following the merger or amalgamation, the transferee company will not hold any shares in its own name or in the name of any trust, either on its behalf or on behalf of any of its subsidiary or associate company, and all such shares are cancelled/extinguished.
  14. The observations shared by the RoC and/or the Official Liquidator must be considered in the meetings of shareholders and/or creditors.

Effects of registration

The registration of the scheme has the following effects:

  1. Property or liabilities are transferred to the transferee company and become properties and liabilities of the transferee company.
  2. The charges (if any) on the property of the transferor company are applicable and enforceable as the charges on the property of the transferee company.
  3. Legal proceedings by or against the transferor company are continued by or against the transferee company.
  4. Where the scheme provides for purchase of shares of the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent unpaid, becomes the liability of the transferee company.

Conclusion

The introduction of fast-track merger and the various amendments to expand its scope have provided much-needed relief to small companies and startups. However, clarity is still required on some provisions of this mechanism. Section 233 of the Act does not specifically prescribe whether a step-down subsidiary can fall under the ambit of fast-track merger. Further, in the absence of any definition of wholly owned subsidiary, the interpretation is driven from other statutes and judicial pronouncements, which causes ambiguity. Further, clarity is needed on the wider applicability of the mechanism to associate companies or indirect holding companies and Section 8 companies.

Welcome to Crossroads – ICR Insights

Crossroads – ICR Insights is our series of short-read articles designed to assist organizations considering an international corporate reorganization (ICR). Each country-specific, solutions-based brief will answer a key consideration during a global transaction such as carveouts, spinoffs, acquisitions and dispositions, pre- and post-acquisition integration, or legal entity rationalization. Visit Crossroads – ICR Insights to view the entire collection or sign up to be notified of new postings. Have an idea of a topic or interested in discussing further? Email ICRCrossroads@dlapiper.com.

*Sidharrth Shankar is a partner at JSA Law. You may reach him via sidharrth@jsalaw.com.

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