The Ministry of Corporate Affairs vide notification dated May 15, 2023 (“Amendment”) has made certain amendments to Rule 25 of the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 (“Rules”) in relation to Section 233 of the Companies Act, 2013 (“Act”) governing fast track mergers.
A positive move, aimed to simplify and expediate the process of mergers in India, the Amendment has notified to reduce the timeline within which the Central Government may confirm the scheme of merger. More often than not, due to lack of a specific timeline, the Registrar of Companies (“RoC”) or the Official Liquidator (“OL”) fail to provide confirmation or raise objections resulting in unprecedented delays.
Another significant change notified by the Amendment is the concept of deemed approval. Failure of the RoC or the OL in providing objections to the scheme of merger within the specified timelines shall be deemed approved by the Central Government.
True to its word, ‘fast track’, the Amendment will hopefully facilitate a robust mechanism for mergers in India.
Previous Fast Track Merger Model
Under the fast track model, certain companies including (i) two or more small companies; (ii) holding company and its wholly owned subsidiary; (iii) two or more startup companies; and (iv) one start up and one small company, can opt for an alternate route for mergers and, or amalgamations under Section 233 of the Act. The company is also required to obtain approval of shareholders holding at least 90% of total share capital and at least 9/10th of creditors or classes of creditors of each of the companies (in terms of value). Prior to the Amendment, a company seeking merger was to wait for a response of the RoC and, or OL.
The process aimed at streamlining the merger process and enforcing ease of doing business, had, due to lack of a fixed timeline lead to substantial delays due to increase in the case load, thereby nullifying the benefits of the process of fast-track mergers.
Implementation of Strict Timeline
Under the Amendment, upon receiving the scheme of merger from a company, the RoC and, or the OL shall have a period of 30 days to record their objections, if any (“Objection Period”). If the scheme is found to be in public interest and there are no objections raised by the RoC or the OL, the Central Government shall issue a confirmation order within 15 days of the expiry of the Objection Period. In the event any objection is recorded but the Central Government is of the opinion that the scheme is in public interest, it shall issue a confirmation order within 30 days of the expiry of the Objection Period. However, if the scheme is opposed to public interest, the Central Government shall file an application with the National Company Law Tribunal within 60 days of the receipt of the scheme. In the event of failure of the Central Government to act within the timelines stipulated above, the scheme of merger of the company shall be ‘deemed approved’.
The requirement for obtaining approval from at least 9/10th of total creditors from each entity presents a logistical challenge. If the creditors fail to attend the meeting, the process becomes futile, thereby increasing costs. Considering that liabilities would be transferred to the other entity and not extinguished, some flexibility is warranted. Further, the requirement for approval from 90% of shareholders of a company is difficult to achieve, especially in case of public and listed companies which usually have many shareholders. The Company Law Committee Report dated March 21, 2022, proposed amendment to Section 233 of Act to include twin tests, requiring:
- Approval from at least 75% of shareholders present and voting at such meeting; and
- Approval from more than 50% of total shareholders of a company.
While no such amendments have been introduced yet, the Ministry of Corporate Affairs can consider revising the threshold of obtaining the approval of shareholders and the creditors, the process of which is cumbersome and time-consuming.
While there is no denying that the Amendment shall not only help expediate the process of mergers in India, it may also accelerate restructuring of companies (as many a times fast track merger is a step in a restructuring exercise). Another aspect of the Amendment that may require clarity would be its applicability to the ongoing fast track mergers, which are yet to get the RoC, OL or the Central Government approvals. Nonetheless, the Amendment is a step in the right direction, in line with international standards; now we need to see how “fast” our National Company Law Tribunals (“NCLTs”) will let fast track mergers be implemented as most NCLTs are flooded and busy with insolvency and bankruptcy matters!