Fast Track Mergers in India
Corporate restructuring and mergers and acquisitions (M&A) are important tools for companies to adapt and thrive in a dynamic business landscape. While statutory arrangements offer advantages over private deals, their complexity can be a deterrent. Recognizing this, the Indian government has actively sought to streamline the process.
Traditionally, statutory mergers in India required approval from the National Company Law Tribunal (NCLT), a time-consuming hurdle, especially for straightforward transactions like parent-subsidiary or small company mergers. To address this issue, the Ministry of Corporate Affairs (MCA) introduced the “fast-track merger” process under the Companies Act, 2013.
This initiative aligns with the government’s broader objective of promoting ease of doing business in India. Section 233 of the Act, introduced in 2016, established a simplified merger option for few company categories. The aim was to expedite and reduce the cost of mergers involving wholly-owned subsidiaries or small companies.
However, initial implementation revealed delays in processing applications and issuing approvals, hindering the effectiveness of the fast-track merger provision. To rectify this, the MCA introduced amendments to the Companies (Compromise, Arrangements, and Amalgamations) Rules, 2016, on May 15, 2023. These amendments aim to significantly accelerate the disposal of applications under Section 233.
Eligibility for Fast-Track Mergers
The streamlined Fast-Track Mergers is a process is designed for specific company categories:
1. Small Companies : Defined under the Companies Act, 2013 (the Act) as companies with a paid-up share capital not exceeding ₹50 lakhs or a higher prescribed limit and a turnover not exceeding ₹2 crore or a higher prescribed limit.
2. Holding Companies and Wholly-Owned Subsidiaries : Mergers between these entities can leverage the fast-track merger approach.
3. Start-up Companies: As defined by the Department for Promotion of Industry and Internal Trade (DPIIT), start-ups can participate in fast-track mergers.
4. Start-up and Small Company Mergers : Mergers involving one start-up and one small company qualify for fast-track mergers.
FTM Procedure: A Streamlined Approach
1. Board Approval and Scheme Drafting : The board of directors of each company drafts a merger scheme and approves it through a board meeting resolution.
2. Notice of Proposed Scheme : Form CAA-9 is used to file the proposed merger scheme with the Registrar of Companies (ROC), Official Liquidator (OL), and individuals potentially affected by the scheme. This includes a 30-day window for objections or suggestions.
3. Shareholder and Creditor Meetings : Separate meetings are held for shareholders and creditors. These meetings require approval from:
i. Shareholders : At least 90% of total issued shares represented at the general meeting.
ii. Creditors : Representing 9/10th of the total value of creditors or classes of creditors (after a 21-day notice with the scheme details).
4. Declaration of Solvency : Each company files a declaration of solvency with the relevant ROC before the meetings ,complying with the Act and relevant rules.
5. ROC and OL Review : The scheme and meeting outcomes are submitted to the Regional Director within seven days.
i. If no objections or suggestions arise, the merger can proceed.
ii. Objections from the ROC or OL, or if the Regional Director deems the scheme detrimental to public interest, can trigger an application to the NCLT within 60 days.
6. NCLT Consideration (if applicable): The NCLT may:
i. Order a review under Section 232 of the Act.
ii. Confirm the scheme if deemed appropriate.
7. Confirmation Order Filing and Registration : The confirmed scheme order from Regional Director or NCLT is filed with the ROCs of both transferee and transferor companies, along with the prescribed fees, within 30 days.
8. Dissolution and Capital Adjustments:
The transferor company is deemed dissolved without winding up upon scheme registration.
i. The transferee company files an application with the ROC reflecting the revised authorized capital and pays any relevant fees.
ii. Any fee paid by the transferor company on its pre-merger capital is offset against the transferee company’s revised capital fees.
9. Post-Merger Shareholding : The transferee company cannot hold shares in its own name or through trusts, and all such existing shares are cancelled.
Challenges in Streamlining Fast-Track Mergers in India
While the Fast-Track Merger process offers a faster and simpler alternative to traditional mergers in India, several key challenges hinder its efficiency and attractiveness for companies. Let’s delve deeper into these roadblocks:
1. Creditor Approvals :
Obtaining approval from a significant majority (9/10th by value) of creditors is a mandatory step in fast-track mergers. This requirement presents logistical hurdles in two ways:i. Convening Creditor Meetings : Organizing meetings for all creditors can be challenging, especially for companies with a large number of creditors. Scheduling conflicts, geographical dispersion, and ensuring quorum can lead to delays and complicate the process.
ii. Written Consents – Cumbersome for Many Creditors : While written consent from creditors is an alternative to meetings, obtaining these consents can be cumbersome if there are numerous creditors involved. Distributing written notices via registered post and ensuring timely responses within prescribed timelines adds to the administrative burden for both the company and the creditors.
2. Shareholder Approvals – A High Bar for Public Companies : Fast-track merger s currently require approval from shareholders holding at least 90% of the total share capital. This high threshold presents a significant challenge for public companies with a large and dispersed shareholder base. Achieving such a high level of consensus can be difficult and time-consuming:
i. Large Shareholder Base : Public companies often have a vast number of shareholders with varying interests and investment levels. Reaching out to all shareholders and garnering their approval for the merger proposal can be a lengthy process.
ii. Minority Shareholder Concerns : Minority shareholders might have concerns about the potential impact of the merger on their stake in the company. Addressing these concerns and ensuring their participation in the approval process can be challenging.
3. Multiple Approvals : The current fast-track merger process involves obtaining approvals from various stakeholders, including creditors, shareholders/OL (Registrar of Companies/Official Liquidator), and potentially the NCLT. This multi-layered approach can lead to delays and increase administrative burdens:
i. Multiple Touchpoints : Navigating approvals from different entities can be time-consuming. Each approval stage might involve separate documentation, meetings, and potential revisions based on feedback received.
ii. Delays and Uncertainty : The multi-layered approval process can lead to delays in finalizing the merger. Companies might face uncertainty about the outcome until approvals from all stakeholders are secured.
The 2023 fast-track merger amendment in India represents a positive step forward. It brings much-needed clarity to timelines and reduces the burden on NCLT. However, for fast-track mergers to reach their full potential, further improvements are necessary. The current system is hampered by challenges in obtaining creditor approvals, high shareholder approval thresholds, and multiple approval stages, which can lead to delays and complexities. By addressing these issues through targeted reforms, India can create a more streamlined and efficient fast-track merger process. This will not only make fast-track mergers a more attractive option for companies seeking to restructure but also solidify India’s reputation as a hub for facilitating swift and transparent corporate manoeuvres.