Authors: Siddharth Sengupta* & Aaditi Singh**
Fourth* and Third** year law student at National Law University, Odisha
I. Introduction
On 9th September, 2024, the Ministry of Corporate Affairs (“MCA”) amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Merger Rules”) to incorporate sub-rule 5 in Rule 25A which deals with the provisions in relation to merger or amalgamation of a foreign company with a company and vice versa.
The present amendment effectively brings the fast-track merger route, available under Section 233 of the Companies Act, 2013 (“the Act”), to foreign holding companies looking to amalgamate/merge into their wholly-owned Indian subsidiaries.
This amendment is significant when we consider the recent trend of companies which had moved overseas shifting back their main bases (registered offices or places of incorporation) to India due to the highly lucrative growth projections for the country in the next decade. This phenomenon is called “reverse flipping” and is naturally very positive for India’s economy. It generates significant employment, production and tax collection.
As these particular foreign companies who had earlier flipped out of India, i.e., shifted their headquarters out of India, already have an Indian presence in the form of subsidiaries, the most hassle-free method of reverse flipping is to amalgamate into its subsidiary. Thus, opening the fast-track route under Section 233 for reverse flips is definitely a positive step towards ease of doing business.
However, one glaring issue arises. Although cross-border mergers under Sections 230-232 of the Act received deemed approval of the Reserve Bank of India (“RBI”) according to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“CBM Regulations”), no such provision has been created for the fast track route under Section 233. This creates an ironic situation where the process is shorter in one way and longer in another, questioning as to whether the name “fast-track” is appropriate at all.
This article attempts to delve into a detailed analysis of the amendment to Rule 25A of the Merger Rules introducing sub-rule 5. It explains the procedure under the sub-rule when read with Section 233, compares it with the procedure under Rule 25A of the Merger Rules, prior to the amendment and then moves to the crux of the issue- the requirement of RBI’s approval in the fast track route. The article finally concludes by reiterating some of the most crucial points raised and suggesting a way forward.
II. The Framework Governing Cross-Border Mergers
Rule 25A of the Merger Rules essentially provides for the merger of an Indian company and a foreign company, i.e., a company incorporated outside India. These mergers are known as “Inbound Mergers” when the when the transferee is an Indian company. This rule mandates that the final approval shall be granted after the companies have:
(i) obtained approval of RBI and;
(ii) complied with the provisions of sections 230 to 232 of the Act and;
(iii) complied with the Merger Rules.
Accordingly, they have to receive approval from the National Company Law Tribunal (“NCLT”) as mandated under sections 230 to 232 as well.
As evident, the provisions of these sections results in a cumbersome process. It requires the companies to jump through a number of procedures, such as notifying authorities, holding shareholder meetings, and fulfilling other requirements. These compliances involve a lengthy period of eight to twelve months only to obtain final approval for the merger. In addition to these provisions of the Act, they are also required to comply with the aforementioned rules.
As a result, till now, the merger process for foreign companies returning to India has been complex resulting in significant challenges to secure various approvals from multiple regulatory authorities. These compliances are seen as a hurdle for foreign companies looking to set up operations in India, ultimately discouraging foreign investment. They have also had a detrimental effect on our economy, stifling growth.
III. Key Changes in the Amendment
The newly introduced sub-rule 5 allows amalgamation of a foreign holding company into its wholly owned Indian subsidiary, to take place through the fast-track merger route under Section 233 of the Act. Sub-rule 5 is as follows:
“Where the transferor foreign company incorporated outside India being a holding company and the transferee Indian company being a wholly owned subsidiary company incorporated in India, enter into merger or amalgamation,–
(i) both the companies shall obtain the prior approval of the Reserve Bank of India;
(ii) the transferee Indian company shall comply with the provisions of section 233;
(iii) 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; and
(iv) the declaration referred to in sub-rule (4) shall be made at the stage of making application under section 233 of the Act.”
The amendment is intended to accelerate the growing instances of reverse flipping by permitting the use of fast track merger mechanism under Section 233 thereby circumventing the time-consuming procedures mandated under Sections 230-232. Under this mechanism, the company can bypass the mandated approval of NCLT. Given the protracted timelines associated with obtaining NCLT approval, bypassing the same may expedite the process of reverse flipping. However, with such a significant change usually come some complicated questions, particularly while amending laws affecting cross-border transactions.
An important question arises here. As stated above in the introduction, will sub-rule 5 get the same benefit of ‘deemed RBI approval’ (according to the CBM Regulations) as what is available for mergers and amalgamations taking place under the other provisions of Rule 25A? This question is delved into in great detail in the next section of the article.
IV. Analysis of the Contradictions in Rule 25A
The extant provisions under Rule 25A of the Merger Rules mandate written approval from the RBI. However, under Regulation 9 of the CBM Regulations, if the companies comply with the provisions of the Merger Rules and the CBM Regulations, they will receive deemed approval of the RBI as per Rule 25A. Hence, all that is required under Rule 25A is adherence to Sections 230 to 232 of the Act.
However, in order to obtain a deemed approval of the RBI, Regulation 9 mandates compliance with Rule 25A and CBM Regulations, and Regulation 4, which categorically deals with Inbound Mergers, is confined to NCLT approved schemes under Sections 230-232. Therefore, as adherence to Regulation 4 is technically not possible in a fast-track merger under sub-rule 5 of the Merger Rules due to the absence of NCLT’s involvement in the process, it casts doubt on whether companies can reliably secure deemed approval from the RBI.
Therefore, unless Regulation 4 of the CBM Regulations is amended soon, the process of executing an Inbound Merger will once again become time consuming, taking us right back to square one. As the legislative intent of a fast track merger was to promote streamlined business operations and to reduce the delays caused in obtaining various approvals, this regulatory oversight might defeat the very objective of the amendment.
V. Conclusion
This amendment is a great boost for the economy, encouraging the rising trend of “reverse flipping.” This change will surely benefit Indian start-ups that had relocated overseas for better tax and regulatory conditions but are now looking to return for local opportunities, including stock market listings. Reverse flipping through a merger or amalgamation also has the added benefit of automatic dissolution of the transferor company (the foreign holding company) if the merger is by way of absorption of the transferor into the transferee. The new fast-track route for reverse flips skips the lengthy NCLT approval process, reducing merger timelines from eight to twelve months to less than six months. This amendment ushers in a new era for cross-border mergers, especially for foreign companies seeking to streamline operations in India.
A clarification from the RBI is awaited due to the lack of deemed approval for companies merging under Section 233. It could potentially extend the deemed approval mechanism to mergers under Rule 25A (5), which would be a great step forward. This will call for a revamp of Regulation 4 of CBM Regulations.
Until then, the regulatory landscape for these mergers remains in flux. Companies may need to obtain written approval from the RBI, which could cause further delays in the process. While government support and investor confidence will encourage foreign entities to reverse flip in India, they could find themselves trapped by regulatory compliances once again.
Note: This article has been reviewed by Mr. Vinod Kothari (Managing Partner, Vinod Kothari and Company) at the Tier II Stage.