The ability to undertake corporate restructuring and M&A through private or statutory arrangements has served as a touchstone in deal making globally. Statutory arrangements, at times, offer several advantages over contractual/ private arrangements. There are, however, several commercial, legal and tax considerations that have to be considered before opting between a statutory and private arrangement. The speed and ease with which a business can undertake an arrangement also plays an important part in such decision-making. In India, private arrangement is more popular than statutory arrangement for undertaking M&A as the latter is contingent on receipt of regulatory authorisation. Statutory arrangements in India were initially permitted only by way of National Company Law Tribunal (“NCLT”) approval.
The NCLT process was considered cumbersome especially for transactions between a parent and a subsidiary company or between small companies. In an attempt to reduce the procedural burden and timelines involved in statutory mergers and provide a platform to facilitate such transactions, the Ministry of Corporate Affairs (“MCA”) introduced a fast track merger (“FTM”) process for certain classes of companies in the Companies Act, 2013 (the “Act”) as briefly detailed below.
Section 233 of the Companies Act: Fast Track(ing) Mergers
Chapter X of the J.J. Irani Committee Report[1] in 2005 (the “Report”), highlighted the wide acceptance of M&A in India as instruments of momentous growth and a critical tool of business strategy. The Report focuses on the challenges and numerous barriers surrounding the M&A process in India, with emphasis on the significant delays encountered in mergers via court processes. Recognising the need for streamlining and expediting this process while also benchmarking international models of M&A processes, the committee recommended short form mergers for certain classes of companies.[2] Based on this recommendation and with an objective to promote ease of doing business in India, the MCA enacted Section 233 of the Act[3] along with Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Merger Rules”), permitting FTMs without the intervention and approval of NCLT between (i) a holding company and its wholly-owned subsidiary (“WOS”); (ii) two or more small companies[4]; and (iii) any such companies as may be prescribed. Post the boom in the start-up space, the applicability of such FTM was extended to start-up companies s[5] on February 1, 2021[6] (hereinafter collectively referred to as the “Eligible Entities”).
As per Section 233 of the Act and Merger Rules, Eligible Entities proposing to undertake FTMs, have to, inter-alia, seek approval from their respective board of directors and send notice to the relevant Registrar of Companies (“ROC”) and Official Liquidator (“OL”) for their objections and/ or suggestions on the proposed scheme of arrangement (“Scheme”). Upon revision of the Scheme by the relevant entities undertaking the arrangement, based on the objections/ suggestions of the ROC and OL (if any), the same has to be then approved by (i) shareholders holding at least 90% of the total share capital of the respective companies, and (ii) atleast 9/10th of the creditors or classes of creditors of each of the companies (in terms of value). Thereafter, this approved Scheme must be filed with the jurisdictional ROC and OL by the transferee company for any further objections and/ or suggestions. The ROC and/ or OL are given 30 days from the date of filing of such Scheme by the transferee company (“Objection Period”) to communicate their objections and/ or suggestions (if any) on the Scheme to the concerned Regional Director (“RD”). If the RD/ Central Government is of the opinion that the Scheme is not in the public interest or in the interest of creditors, based on the objections/ suggestions of the ROC and/ or OL, it may file an application with the NCLT for further consideration of the same. However, if (i) no objections/ suggestions are received from the ROC and/ or OL within the 30 days; or (ii) the RD opines that the objections/ suggestions from ROC and/ or OL are not sustainable, then the RD is required to register the Scheme and issue a confirmation order to all the companies involved.
Whilst the main objective of the FTM is to shorten the process by providing relaxations and exemptions, practically, due to the absence of fixed timelines within which the RD must issue a confirmation order upon completion of the Objection Period, caused substantial delays especially in jurisdictions where the case load is significantly higher, counteracting the intended benefits of the FTM. Hence, the MCA has now introduced time bound approval mechanism and a deemed approval concept by amending Rule 25(5) and Rule 25(6) of the Merger Rules, vide notification dated May 15, 2023[7] (“2023 Amendment”).[8]
2023 Amendment: Expedited Timelines
As per the 2023 Amendment, the RD has to follow the timelines set out below for the corresponding events, upon completion of the Objection Period:
In case the RD fails to (a) issue a confirmation order in accordance with Paragraph (i)-(ii) above; or (b) file an application with the NCLT within 60 days of receipt of Scheme in accordance with Paragraph (iii) above, the RD will be deemed to have no objections to the Scheme and a confirmation order will be issued accordingly, thereby increasing the certainty and reducing open-ended timelines in the erstwhile regime.
2023 Amendment: Enhancing Ease of Doing Business
The 2023 Amendment has addressed a crucial issue, especially relevant for certain regional jurisdictions within India (where the number of Schemes filed is considerably higher, resulting in longer approval time for FTMs), by establishing clear and enforceable timelines for RDs to ensure a more efficient and predictable process for companies pursuing FTM.
Foreign investors will also feel confident about undertaking transactions in India through the FTM route (where applicable) due to the reduced timelines and increased efficiencies. By fostering a business-friendly environment via the FTM process, the government is providing businesses with more certainty regarding timelines when evaluating eligible statutory arrangements for undertaking M&A.
Bumps and speed brakers in the (fast) tack and way forward
Whilst the MCA is continuously making efforts to ensure ease of doing business and provide an investor friendly environment for businesses in India, it may also consider the following key aspects to further streamline the FTM process from a business perspective:
(a) Creditors’ Approval
In India, under the FTM process, the requirement to obtain approval from a significant majority of creditors (by value) (by organising a meeting of creditors or obtaining written approvals basis notices sent to such creditors, if meeting is not conducted) is crucial to the procedure. However, a notable challenge arises in organising such a meeting of creditors for obtaining their approval. The Act mandates approval from at least 9/10th of the total creditors or classes of creditors (in terms of value) from each Eligible Entity for the merger to go ahead. If the creditors who aggregate to 9/10th in value fail to attend the meeting, the process becomes futile. And whilst an option to obtain written consent from such creditors is available as an alternative to conducting a creditor’s meeting, obtaining such written consents may also be logistically challenging and cumbersome if the number of creditors involved is large, given that written notice is required to be sent to every creditor vide the registered post, and thereafter approval needs to be obtained and recorded from the requisite majority within the prescribed timelines. This poses a significant obstacle, leading to increased costs and potential delays in the FTM process and the concerned entity having to re-start the FTM process or opt for the NCLT approved merger process, thereby defeating the purpose of the FTM.
Considering that the liabilities (with respect to outstanding creditors) of a transferor company do not get extinguished as a result of FTM but gets transferred to the transferee company, some flexibility may be considered, especially when the FTM is between companies in the same group. In Singapore, for instance, companies involved both in short form merger[9] or standard form merger[10] have the limited obligation to intimate their respective secured creditors of such scheme at least 21 days prior to the general meeting[11]. Whereas, in Delaware, US, no such approval/ intimation from/ to the creditors in case of short form merger between a holding company and its WOS[12] is required.
(b) Shareholders’ Approval
In terms of process, FTM requires prior approval from shareholders holding at least 90% of the company’s total share capital. This threshold is onerous and particularly difficult to achieve in case of public and listed companies, which usually have many shareholders. In this regard, a Company Law Committee Report dated March 21, 2022[13] (“CLR 2022”) had proposed an amendment to Section 233 of the Act to include twin tests, requiring (i) approval from at least 75% (in value) of the shareholders present and voting at such meeting, and (ii) approval from more than 50% (in value) of the total shareholders of a company. However, no such corresponding amendment has been introduced in Section 233 of the Act as on date.
To draw a comparison with other mature jurisdictions, in Singapore, seemingly approval by way of special resolution is required from only 75% of the shareholders present and voting for the short form mergers[14], whereas in Delaware, approval from shareholders is not required altogether for a merger between WOS and holding company where holding company is the resultant company. Such exemptions may especially be considered where a WOS is merging with its holding company, given that WOS is owned and controlled by its holding company and seeking dual approvals from shareholders of both the holding company and its WOS may be repetitive. Further, clarification on the number/ nature of shareholders required to approve FTM in case of listed entities will be helpful, considering that 90% threshold (in value) is particularly difficult to achieve in entities with large number of shareholders, thereby making the FTM process redundant for listed entities.
(c) Multiple pitstops
In India, Eligible Entities pursuing FTM have to seek approvals for the FTM from their respective creditors as well as shareholders as set out above. Additionally, they are also required to consider and address the objections and suggestions on the Scheme given by the ROC and/ or OL, followed by the RD’s opinion on whether the same needs to be referred to NCLT for approval, if the same is not in public interest or in the interest of creditors. This leads to multiple consent requirements from various authorities and stakeholders during the FTM process. To increase efficiency, the MCA may consider reducing the multiple pitstops in FTM in line with Singapore and Delaware laws, wherein it appears that there is merely an intimation requirement for short form merger to the relevant statutory authority to get the merger registered.
Regardless of the hurdles in fast-tracking the FTM process, the 2023 Amendment certainly seems to be a step in the right direction and will encourage more companies to consider the FTM route and provide much needed visibility on timelines associated with such process. This will also enable India Inc. to undertake internal restructuring via the FTM route in a more efficient manner. However, to maximise the potential benefits that FTM offers, it is crucial to address some of the challenges set out above that still exist, to streamline the FTM process.
[1] Available at: JJ Irani Report-MCA.doc (primedirectors.com).
[2] Chapter X of the Report, Mergers of Classes of Companies: The amended new Act should provide for less regulation in respect of mergers among associate companies/ 2 private limited companies where no public interest is involved.
[3] Section 233 of the Act was effective from December 15, 2016.
[4] As per Section 2(85) of the Act, a ‘small company’ means a private company whose paid-up share capital does not exceed INR 50,00,000 (Indian Rupees Fifty Lakh) or such higher amount as may be prescribed which shall not be more than INR 10,00,00,000 (Indian Rupees Ten Crore) and turnover for the preceding financial year does not exceed 2,00,00,000 (Indian Rupees Two Crore) or such higher amount as may be prescribed which shall not be more than INR 1,00,00,00,000 (Indian Rupees One Hundred Crore).
[5] As per explanation of Rule 26(1A) of the Merger Rules, a ‘start-up company’ means a private company incorporated under the Act or Companies Act, 1956 and recognized in accordance with notification G.S.R.127(E), dated February 19, 2019 issued by the Department for Promotion of Industry and Internal Trade.
[6] Available at: getdocument (mca.gov.in).
[7] Available at: getdocument (mca.gov.in)
[8] The 2023 Amendment shall be effective from June 15, 2023.
[9] Short form merger means amalgamation between (i) a company and 1 or more of its wholly owned subsidiaries; or (ii) 2 or more wholly-owned subsidiary companies of the same parent company.
[10] Standard form merger means merger or amalgamation between any 2 or more companies and continuation of such companies as 1 company, which may be one of the amalgamating companies or a new company.
[11] Section 215C(5)(a) and Section 215D(3) of the Singapore Companies Act, 1967.
[12] Section 253(a) of the Delaware General Corporation Law, 1899.
[13] Available at: getdocument (mca.gov.in)
[14] Section 215D of the Singapore Companies Act, 1967.
