More Companies Can Soon Opt for the Fast-Track Merger Route

The Ministry of Corporate Affairs has proposed amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, aimed at broadening the scope of fast-track mergers. This proposal was part of the Union Budget presented in February this year. Public comments on the proposed amendments have been invited until May 5.

Existing Mechanism

Introduced in 2016, the fast-track merger mechanism allows mergers and amalgamations without the intervention and approval of the National Company Law Tribunal (NCLT) between the following classes of companies:

• two or more small companies;
• a holding company and its wholly-owned subsidiary company;
• two or more start-up companies; or
• one or more start-up companies with one or more small companies.

The above is as per Section 233 of the Companies Act, 2013, read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. Last year, Rule 25A was amended to facilitate reverse flipping and extend the scope of fast-track mergers to include mergers and amalgamations between a transferor foreign company incorporated outside India being a holding company and a transferee Indian company being a wholly owned subsidiary company incorporated in India. Sub-Rule (5) of Rule 25A prescribes the conditions to enable such inbound cross-border reverse mergers to opt for the fast-track merger route.

Proposed Amendments

The draft Amendment Rules seek to include additional classes of companies under Rule 25. Accordingly, the scope of fast-track mergers has been further widened to cover mergers and amalgamations between the following additional classes of companies:

• Unlisted Companies:

The scope is extended to include mergers between unlisted companies (other than Section 8 companies), provided that every company involved in the merger meets the following criteria as on a day, not more than 30 days before the date of notice referred to in Section 233(1)(a):

• • the company’s borrowings from banks, financial institutions, or any other body corporate are less than Rs. 50 crore; and
  • the company has no default in repayment of such borrowings.

A certificate from the company’s auditor confirming compliance with these conditions must be attached with the application under Section 233(2).

• Holding Company and its Unlisted Subsidiary Companies:

Mergers between a holding company (listed or unlisted) and its one or more unlisted subsidiary companies are now proposed to be covered under Section 233. Currently, the merger of only a wholly owned subsidiary (WOS) with its holding company is covered under said Section.

• Subsidiary Companies of the Same Holding Company:

Mergers between subsidiary companies of the same holding company would also be included, provided that the transferor company or companies are not listed. Presently, such mergers between fellow subsidiary companies belonging to the same group are not covered under Section 233.

• Foreign Holding Company and Indian WOS:

It is proposed that inbound cross-border reverse mergers, as provided in Rule 25A(5), also be included in Rule 25 to make it self-contained.