In an interesting development, the Ministry of Corporate Affairs (MCA) has published proposed amendments to Rule 25 of the Amalgamation Rules, which are relevant for “Fast Track Merger” process (Proposed Amendments).
The legal current regime of “Fast Track Merger,”, i.e., merger with the approval of the Regional Director (instead of NCLT) is set out in Section 233 of the Companies Act, 2013 (Companies Act) read with Rule 25 of the Amalgamation Rules, as per which, a fast-track merger is permissible for the following categories of companies:
- A holding company with a wholly owned subsidiary;
- Two small companies;
- Two companies which qualify as “start up”; and
- One or more start-up company with one or more small company.
Further, as per Section 234 of the Companies Act read with Rule 25A (5) of the Amalgamation Rules, a holding company incorporated outside India (being the transferor company) can merge with its wholly owned subsidiary incorporated in India (being the transferee company), provided both companies obtain the prior approval of the Reserve Bank of India.
The Proposed Amendments have increased the pool of companies who can avail the fast-track merger route. As per the Proposed Amendments, the following categories of company can also merge under this route:
- One or more unlisted companies with one or more unlisted companies, each meeting the following criteria:
- The borrowings from banks or financial institutions or any other body corporate is less than INR 50 crore;
- There has been no default in repayment of such borrowings;
- A holding company (listed or unlisted) and its one or more unlisted subsidiary company or companies;
- One or more subsidiary company of a holding company with one or more other subsidiary company or the same holding company where the transferor company(ies) are not listed;
Further, the merger of a transferor company incorporated outside India being a holding company with the transferee Indian company being its wholly owned subsidiary, which is allowed under Rule 25A (5) has been now proposed to be specifically incorporated in Rule 25.
Impact of the Proposed Amendments:
- While the fast-track merger process was supposed to provide ease of merger of companies forming a part of the same group, due to its applicability to only limited set of companies, it has not been as effective as it was envisaged to be. Companies which do not qualify as small company(ies) or start-up company(ies) due to their size of operations/ revenue can now also access the fast track merger route as long as they meet the criteria as set out in the Proposed Amendments. The Proposed Amendments are in the right direction and if brought into effect in the same form, will facilitate merger of group companies in a time and cost-efficient manner.
- The Proposed Amendments however does not provide flexibility for a foreign holding company to merge with its Indian subsidiary (which does not qualify as its wholly owned subsidiary) to use the fast-track merger process. There has been a demand in the start-up ecosystem, specifically for companies looking to reverse flip to India for amendment to the current legal regime to provide for merger of such holding and subsidiary companies as it is not un-common for the Indian subsidiary company to have shareholders other than its holding company located outside India. Start-ups looking to reverse flip to India and having a diversified shareholding at the India level will have to continue to use the traditional merger route under Section 234 of the Companies Act read with Rule 25 A of the Amalgamation Rules.
This update is for information purposes only. For further insights please reach out to Romit Dey, Partner at contact@appartners.in