- A NEW PATH FOR MERGERS WITH FOREIGN COMPANIES
Amidst the increasing demand for internalization into India from foreign jurisdictions, on September 09, 2024, the Ministry of Corporate Affairs (the “MCA”) introduced an important regulatory change for the amalgamation of foreign holding companies with their wholly owned subsidiary(ies) in India. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the “Merger Rules”) have been amended to add a new provision, Regulation 25A(5), permitting fast-track mergers involving foreign companies (the “Amendment”).
- THE OLD PROCESS: A LENGTHY ROUTE FOR MERGERS INVOLVING
FOREIGN COMPANIE
As a background, Sections 230 to 232 of the Companies Act 2013 (the “Companies Act”) provide for the process for compromises, arrangements, and mergers requiring an approval from the National Company Law Tribunal (the “NCLT”). However, Section 233 offers a simplified, fast-track route for mergers between a holding company and its wholly-owned subsidiary, two small companies, two start-ups, start-up(s) and small company(ies) or other categories of companies (as may be notified by the government) (a “Fast-Track Mergers or FTM”). Section 234 of the Companies Act, on the other hand, provides a general permission for mergers involving an Indian company and a foreign company (both inbound and outbound), subject to rules to be formed by the government. Fast-Track Mergers provide a faster, streamlined route compared to the standard merger process, which typically takes 8 (Eight) to 12 (Twelve) months due to the involvement of the NCLT. This process primarily requires approvals from the board of directors, shareholders (holding at least 90% (Ninety Percent) of the share capital), and 9/10th of creditors (by value), with key objections reviewed by the Registrar of Companies and an official liquidator. After receiving any objections, the scheme is sent to the Regional Director (“RD”), who has 30 (Thirty) days to evaluate the objections and suggestions. If the RD neither raises concerns nor refers the scheme to the NCLT within 60 (Sixty) days, it is deemed to be approved, ensuring a more time-bound process, making FTMs more efficient and predictable.
Section 234 of the Companies Act, read with the erstwhile Rule 25A of the Merger Rules, permitted mergers between Indian companies and companies incorporated in certain jurisdictions outside of India only through this lengthy NCLT driven process. As per the erstwhile Merger Rules, a foreign company incorporated outside India was permitted to merge into a company incorporated in India (“Inbound Merger”) only if such merger was effected through the provisions of sections 230, 231 and 232 of the Companies Act with prior written approval of the Reserve Bank of India (the “RBI”).
Hence, prior to the Amendment, any cross-border merger (including an Inbound Merger), as long as it (a) complied with Sections 230-232 of the Companies Act, (b) qualified as a 'cross-border merger' under the Merger Rules, and (c) was in compliance with the Cross Border Merger Regulations, was deemed to have RBI approval, and a separate application or approval would not be required (a “Deemed Approval”).
Beyond the Deemed Approval, Rule 19 of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“FEMA NDI Rules”) allows the transferee or new company to issue equity instruments to foreign shareholders when a merger, amalgamation, or demerger between Indian companies is approved by the NCLT or another authority (RD in case of FTMs). This is, however, subject to compliance with entry routes, sectoral caps or investment limits, and the attendant conditionalities. If these limits are breached, approval from the Central Government is required. Needless to say, the companies must avoid sectors where foreign investment is prohibited.
- THE AMENDMENT: SPEEDING UP THINGS
The MCA amended the existing Rule 25A of the Merger Rules to include a new sub-rule, allowing for an additional mechanism for undertaking cross-border mergers, which shall be effective from September 17, 2024. Following the Amendment, a foreign holding company can merge into its Indian wholly owned subsidiary through the FTM route under Section 233 of the Companies Act. Similar to rules governing FTMs for other companies, RBI approval will continue to remain mandated under Rule 25A. Given there is no change in Cross Border Merger Rules, the Deemed Approval may be considered to be applicable herein.
- CONCLUSION: A NEW ERA FOR CROSS-BORDER MERGERS IN
INDIA
These relaxations by the government not only enhances efficiency but also signals India's commitment to fostering a business-friendly environment alongside growing investor confidence for direct investments in Indian companies.
Key Takeaways of the Amendment:
- Simplified Process: The new fast-track route for Inbound Mergers bypasses the lengthy NCLT approval, potentially reducing merger timelines from 8 (Eight) to 12 (Twelve) months to just a few months.
- Regulatory Balance: While streamlining the process, the Amendment maintains necessary oversight of RD review, expedites timelines for Inbound Mergers, and potentially also reduces the burden on the NCLT.
- Reverse Flip Catalyst: This change could accelerate the trend of 'reverse flips,' encouraging foreignheld companies to relocate their parent entities to India
As mentioned above, the Amendment seemingly paves the way for RBI's ‘Deemed Approval' to extend to FTMs involving foreign companies. However, this straightforward interpretation faces a potential roadblock. Regulation 4 of the Cross Border Merger Regulations, when read strictly, appears to limit its scope to NCLT-approved mergers under Sections 230-232 of the Companies Act. This creates uncertainty, and one can ponder whether the mergers approved by the RD under Section 233 of the Companies Act are excluded from the ambit of a Deemed Approval, thereby potentially negating the efficiency of the FTM process.
If a separate RBI approval is required for foreign company FTMs covered through the Amendment, it could extend timelines, undermining the speed and efficiency it is trying to achieve. A clarification from the RBI on whether ‘Deemed Approval' covers these new Fast-Track Inbound Mergers could be very helpful in shaping the future of cross-border corporate restructuring in India.
As India continues to refine its regulatory framework with this Amendment, despite some questions that remain, the overall trajectory is clear: India is actively working to position itself as a more attractive destination for global businesses and investments.
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