Fast Track Mergers In India: Revolutionizing Corporate Restructuring

The Indian corporate landscape is characterized by its dynamism, demanding businesses to adapt swiftly to evolving market conditions. Mergers and Acquisitions (M&A) have emerged as strong and effective tool for strategic growth, consolidation, and restructuring. However, the traditional, court-driven M&A process in India often proved cumbersome, hindering timely execution. Recognizing this, the Companies Act, 2013, introduced the concept of "Fast Track Mergers" (FTMs), aiming to streamline the process for specific entities, thereby fostering a more efficient and investor-friendly environment.

Section 233 of the Companies Act, 2013, complemented by Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, specifics categories of companies to bypass the National Company Law Tribunal (NCLT) and secure merger approvals directly from the Regional Director (RD). These eligible entities include:

• Holding Companies and Wholly Owned Subsidiaries (WOS): This provision facilitates intra-group restructuring, enabling parent companies to consolidate operations and streamline their organizational structure.
• Small Companies: Defined under Section 2(85) of the Act, these companies, characterized by their relatively smaller size and turnover, benefit from a less onerous merger process.
• Startup Companies: Recognizing the burgeoning startup ecosystem, the government extended FTM benefits to these entities, fostering their growth and facilitating strategic partnerships.
• Inbound Cross-Border Mergers (Foreign Holding Company with Indian WOS): The 2024 Amendment to Rule 25A has significantly simplified and expedited the process of internalizing ownership back to India. This change aligns with the increasing trend of reverse flipping, where foreign holding companies merge with their Indian WOS.
• Threshold Limits: Initially, companies with a paid-up share capital of up to ₹50 lakh and a turnover of up to ₹2 crore were eligible. Amendments have since raised these limits to a paid-up share capital of up to ₹4 crore and a turnover of up to ₹40 crore.
• Exclusions: The process excludes public companies, holding companies with their subsidiaries, companies registered under Section 8, and those governed by special acts, ensuring that only the most suitable entities benefit from the streamlined process.

The FTM Process: A Step-by-Step Analysis

The FTM process, while streamlined, necessitates adherence to specific procedural requirements:

1. Board Approval: The boards of directors of the merging entities must approve the proposed scheme of arrangement.
2. Notification to Regulatory Authorities: Notices are served to the Registrar of Companies (ROC) and the Official Liquidator (OL), seeking their objections or suggestions.
3. Shareholder and Creditor Approval: The scheme must be approved by shareholders holding at least 90% of the company's total share capital and creditors representing at least 9/10th of the value of the debt.
4. Submission to the Regional Director (RD): The approved scheme is filed with the jurisdictional RD, along with any objections or suggestions received from the ROC and OL.
5. RD Review and Approval: The RD reviews the scheme and, if satisfied that it is in the public interest and the interest of creditors, registers the scheme and issues a confirmation order. If the RD finds objections from ROC or OL to be valid, they can send the case to the NCLT.
6. Declaration of Solvency: Both the transferor and transferee companies must file a declaration of solvency with the ROC.

Fast Track Merger vs. Regular Merger

The choice between a Fast Track Merger (FTM) and a Regular Merger depends on the size, nature, and objectives of the merging entities. While both processes aim at corporate restructuring, they differ significantly in terms of time, cost, and regulatory scrutiny. Below is a detailed comparison:

Challenges and Areas for Improvement Despite its advantages, the Fast Track Merger (FTM) framework presents certain challenges that can hinder its efficiency and widespread adoption. These challenges primarily stem from regulatory requirements, approval thresholds, and procedural ambiguities. A closer look at these issues is essential to identify areas for further refinement.

1. Stringent Creditor Approval

Threshold The requirement for 9/10th approval (by value) from creditors can be a major hurdle in the FTM process. Unlike standard mergers, where creditors may be given a limited role unless their interests are directly affected, FTMs mandate an overwhelming majority consent.

• Logistical Complexity: Large companies often have numerous creditors, making it difficult to coordinate approvals. Securing a 90% consent rate is especially challenging if creditors are dispersed across jurisdictions.
• Possible Alternative: Reducing the creditor approval threshold or introducing a deemed approval mechanism (where non-responsive creditors are presumed to have consented) could ease procedural burdens.

2. High Shareholder Approval Requirement

FTM mandates that at least 90% of the total share capital must approve the scheme, which presents significant challenges, particularly for public and listed companies:

• Fragmented Shareholding: In listed companies, shares are widely held by institutional and retail investors, making it difficult to secure such a high approval percentage.
• Inactive Shareholders: Many minority shareholders, especially in publicly traded companies, may not actively participate in voting, causing procedural delays.
• Proposed Reform: Introducing an alternative shareholder approval framework—such as lower thresholds for certain categories of mergers— could increase adoption.

3. Overlapping Regulatory Approvals Causing Delays

While the FTM process is designed to bypass the National Company Law Tribunal (NCLT), it still requires multiple regulatory clearances:

• Registrar of Companies (ROC) and Official Liquidator (OL) must provide no objections or suggestions.
• The scheme must be reviewed and approved by the Regional Director (RD).
• In certain cases, the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), and other sectoral regulators may need to be consulted.

4. Regional Director's Discretion to Refer Cases to NCLT:

While FTMs are intended to avoid NCLT intervention, the RD retains discretionary power to refer cases to the Tribunal in case of objections from the ROC, OL, or other stakeholders.

• Lack of Defined Parameters: The criteria for RD's decision-making are not explicitly outlined, making the process subjective and unpredictable.
• Risk of Delay: Even in cases where objections are minor or procedural, referral to NCLT can prolong the merger timeline, defeating the purpose of FTM.
• Proposed Reform: Establishing a "materiality threshold" for objections (i.e., only significant or public-interest concerns should trigger NCLT intervention) could provide clarity and prevent unnecessary delays.

Conclusion

Fast Track Mergers (FTMs) under the Companies Act, 2013, have emerged as a transformative mechanism for corporate restructuring in India, offering a streamlined alternative to traditional merger routes. By significantly reducing regulatory hurdles, eliminating the need for NCLT approval, and expediting timelines, FTMs enhance operational efficiency while lowering costs. The recent amendments, particularly the 2024 changes facilitating inbound cross border mergers, further underscore the government's commitment to fostering a business-friendly environment.

However, despite these advantages, challenges remain, especially in terms of high creditor and shareholder approval thresholds, overlapping regulatory approvals, and ambiguities in RBI clearances for cross-border transactions. As corporate India continues to evolve, the fast track merger mechanism is poised to play a pivotal role in facilitating seamless consolidations, fostering innovation, and driving economic growth. With ongoing regulatory advancements, FTMs can become an even more robust tool for businesses seeking agility in an increasingly dynamic corporate landscape.

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