Introduction
The global deal-making process often relies on the ability to carry out corporate restructuring and mergers & acquisitions (M&A) using either private or statutory arrangements. Although private arrangements have their merits, statutory arrangements offer distinct advantages in certain cases. However, before choosing between the two, several factors related to business, legal, and tax aspects must be taken into account. The efficiency and simplicity of the chosen arrangement also play a pivotal role in the decision-making process.
In India, M&A activities are more commonly conducted through private arrangements due to their popularity. This preference is due to the fact that statutory arrangements require regulatory authorization, leading to potential delays. Initially, statutory arrangements in India were exclusively allowed through approval from the National Company Law Tribunal (NCLT), which was perceived as burdensome, particularly in transactions involving parent and subsidiary companies or small businesses.
Fast track Merger under Section 233 of the Companies Act, 2013
In India, a novel approach called Fast Track Merger (FTM) has been implemented to enhance the ease of conducting business. This innovative concept streamlines the merger process by eliminating the need for court intervention, thereby reducing both time and cost significantly. The Companies Act of 2013, along with Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules of 2016, outlines the framework for this simplified merger concept.
Section 233 of the Indian Companies Act, 2013 (“Act”), along with Rule 25 of the Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016 (“Amalgamation Rules”), govern the regulatory framework for mergers involving specific categories of companies. The companies falling under the purview of these regulations include:
a)Two or more start-up companies,
b)Two or more small companies,
c)One or more start-ups with one or more small companies, and,
d)Holding companies with their wholly owned subsidiaries.
2023 Amendment: Expedited Timelines
According to the Amendment Rules, there is a specific timeframe for the submission of objections by the Registrar of Companies (ROC) and Official Liquidator (OL) to the Central Government, which is set at 30 days starting from the receipt of the scheme. If neither the ROC nor the OL raises any objections within this 30-day period, the Central Government can proceed to confirm the scheme by issuing an order within 15 days after the 30-day objection period expires.
In cases where objections or suggestions are received but are deemed unsustainable, and the Central Government is satisfied that the scheme is in the public and creditors’ interest, it can confirm the scheme within 30 days following the expiration of the 30-day objection period. However, if the Central Government believes that the scheme is not in the public or creditors’ interest and should instead be considered under Section 232 (the standard merger route for large companies), it has the option to file an application before the National Company Law Tribunal (NCLT) stating its objections. This must be done within 60 days of receiving the scheme.
The 2023 Amendment has effectively tackled a significant concern, particularly relevant in certain regions of India where there is a higher number of filed Schemes, leading to prolonged approval times for Fast Track Mergers (FTMs). This amendment has introduced well-defined and enforceable timelines for Regional Directors (RDs), ensuring a smoother and more predictable process for companies opting for FTMs.
With reduced timelines and improved efficiencies, foreign investors will also gain confidence in conducting transactions in India through the FTM route (where applicable). By fostering a business-friendly environment with the FTM process, the government is offering businesses greater certainty regarding timelines while evaluating eligible statutory arrangements for M&A activities.
Speed breakers in the (fast) tack and the way forward
The MCA (Ministry of Corporate Affairs) is continuously striving to enhance the ease of doing business and create an investor-friendly environment for companies in India. However, to further streamline the Fast Track Merger (FTM) process from a business perspective, certain key aspects should be considered:
(a) Creditors’ Approval:
Obtaining approval from a significant majority of creditors (by value) is crucial for the FTM process. However, organizing a meeting of creditors or obtaining written approvals can be challenging. The Act requires 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 proceed. If the required creditors fail to attend the meeting, the process becomes ineffective. Even obtaining written consent from numerous creditors within the prescribed timelines can be logistically cumbersome and lead to increased costs and potential delays. Some flexibility may be considered, especially when FTMs involve companies within the same group, taking cues from practices in Singapore and Delaware.
(b) Shareholders’ Approval:
The current requirement for prior approval from shareholders holding at least 90% of the company’s total share capital can be onerous, particularly for public and listed companies with many shareholders. A proposal to introduce twin tests in Section 233 of the Act was made in the Company Law Committee Report dated March 21, 2022, but it has not been implemented yet. Comparatively, other jurisdictions like Singapore and Delaware have less stringent shareholder approval requirements, especially in cases of mergers between a subsidiary and its holding company.
(c) Multiple Pitstops:
In the FTM process in India, Eligible Entities must seek approvals from creditors and shareholders, and address objections and suggestions from various authorities like the ROC and OL, followed by the RD’s opinion. This results in multiple consent requirements from different entities, leading to inefficiencies. Considering the practices in Singapore and Delaware, the MCA could consider reducing these multiple pitstops for FTMs and implementing a simpler intimation requirement for getting the merger registered with the relevant statutory authority.
Conclusion
Therefore, by addressing these aspects, the MCA can further increase the efficiency and effectiveness of the FTM process, providing a more favorable environment for businesses pursuing M&A activities in India.
