Introduction
The Ministry of Corporate Affairs (MCA) on September 9, 2024, amended Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (effective from September 17, 2024), by introducing sub-rule 5. The amendment is intended to promote seamless mergers and amalgamations between a foreign holding company incorporated outside India and an Indian company, being a wholly-owned subsidiary company incorporated in India, i.e., an inbound cross-border reverse merger.
Even prior to the amendment, Rule 25A allowed inbound cross-border reverse mergers, popularly known as the reverse flip. However, the same was contemplated under Sections 230-232 of the Companies Act, 2013 (“Act”). By way of the amendment, the MCA has brought in the fast-track merger route, i.e., under Section 233 of the Act, for companies intending to undertake a reverse flip.
Analysis
The newly introduced Rule 25A(5)(i) indicates that a prior approval from the Reserve Bank of India (“RBI”) will be required for the companies to enter into a merger or amalgamation. However, the requirement to obtain prior RBI approval always existed under Rule 25A(1). Therefore, as far as Rule 25A(5)(i) is concerned, the amendment has not brought about any change. In fact, it appears that the deemed RBI approval, by way of compliance with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross Border Regulations”), will continue to remain in place and, accordingly, no separate RBI approval will be required even if companies are going through the fast-track merger route.
The amendment through Rule 25A(5)(ii) and (iii) has introduced the fast-track process in reverse flip mergers. Rule 25A(5)(ii) states that a transferee Indian company shall comply with the provisions of Section 233 and Rule 25A(5)(iii) provides that “the application shall be made by the transferee Indian company to the Central Government under Section 233 of the Act and provisions of rule 25 shall apply to such application”.
Early trends indicate that sub clause 5(iii) has led to uncertainties in companies contemplating a reverse flip. The reason for this uncertainty is that the language of sub clause 5(iii) appears to make it mandatory for a company seeking to undertake a reverse flip to apply through the fast-track merger process, i.e., under Section 233 of the Act. Sub clause 5(iii) states that the application shall be made to the Central Government under Section 233 of the Act. The use of the word “shall” indicates that companies must now mandatorily apply for the fast track merger route, consequently implying that the existing route, wherein companies had to approach the National Company Law Tribunal (“NCLT”), now stands closed.
While the amendment appears to mandate the fast-track merger route, it contradicts the provisions of Section 233 of the Act, which provides that “A company covered under this section may use the provisions of Section 232 for the approval of any scheme for merger or amalgamation.”
Evidently, a reading of Rule 25A(5)(iii), with Section 233(14) of the Act gives rise to a contradiction. A literal interpretation of Rule 25A(5)(iii) would mean that the transferee Indian company is mandated to undertake the merger/ amalgamation process under Section 233 of the Act, whereas Section 233(14) itself provides an option to make use of the provisions under Section 232 of the Act.
Using the word ‘shall’ raises a presumption that the particular provision is imperative.[1] At the same time, interpretation of the word “may” under Section 233(14) gives Companies the option to either opt for Section 232 or apply for a fast-track merger under Section 233.
The rule of literal interpretation provides that the language employed in a statute is the determinative factor of the legislative intent.[2] The presumption is that the legislature intended to say what it has said, which in this case is “may” and not “shall”. Section 233(14) of the Companies Act has been interpreted in Mega Corporation Ltd. v. Nil,[3] wherein the NCLAT has observed that “if appellant, keeping in view of sub-section (14), preferred to resort to Section 232, the applicants cannot be faulted with. Only thing is that, then they have to go through the procedure as u/s 232 of the Act.”
Conclusion
It is well settled that rules made on matters permitted by the act, to supplement it and not supplant it, cannot be in violation of the act. When a rule is in conflict with a statute, the provisions of the statute prevail[4]. Having said that, it remains to be seen how the NCLT will interpret the new amendment, in light of Section 233(14) of the Act.
The interpretation of “shall” and “may” and the principle laid down in Mega Corporation (supra) means that Companies have the option of resorting to Section 232 by invoking Section 233(14) of the Companies Act, if they choose to do so.
Interestingly, a strict interpretation of Regulation 4 of the Cross Border Regulations, limits its scope to mergers before the NCLT, under Sections 230-232 of the Act. If companies undertaking a reverse flip are mandated to take the fast-track merger route, appropriate amendments may also have to be made to the Cross Border Regulations.
For further information, please contact:
Shikha Tandon, Partner, Cyril Amarchand Mangaldas
shikha.tandon@cyrilshroff.com
[1] Chapter 5, Subsidiary Rules 1 of 2, ‘G.P. Singh: Principles of Statutory Interpretation’, Lexisnexis India, 11th edn 2008; also in State of U.P. v. Manbodhan Lal Srivastava, AIR 1957 SC 912; State of U.P. v. Babu Ram Upadhya, AIR 1961 SC 751; Khub Chand v. State of Rajasthan 1967 AIR 1074
[2] Prakash Nath Khanna v. CIT, (2004) 9 SCC 686
[3] Mega Corporation Ltd. v. Nil, 2018 SCC ONLINE NCLAT 353
[4] J.K. Industries Ltd. v. Union of India, (2007) 13 SCC 673
