India: India Adopts Fast-Track Merger Process

Last Updated: 28 February 2017
Article by SKP  

The Ministry of Corporate Affairs, vide notification dated 15 December 2016, has notified Section 233 of the Companies Act, 2013 (Act). This section introduces the new concept of 'Fast-Track Merger' (FTM) with a simplified procedure for mergers and amalgamations of certain classes of companies which include small companies as well as holding and its wholly-owned subsidiary companies.

Provisions of the Act which deal with traditional mergers and amalgamations are time-consuming and costly processes (it takes approximately six to seven months for a traditional merger) as it includes clearances from many regulatory bodies and every type of company must go through this route. There was a need to simplify and expedite the procedure for the mergers of small companies, holding-subsidiary companies and companies where the interest of third parties is not involved. Now, with the new provisions notified, the FTM process provides for a simplified, quick and time-bound procedure in comparison to the procedure for a traditional merger. With the introduction of FTM, India is in line with global practices in terms of mergers and amalgamations of holding companies and its wholly-owned subsidiary companies.

Key highlights of FTM

  • The scheme of merger or amalgamation may be entered into:

    • between two or more small companies (companies with paid-up capital less than INR 5 million and turnover less than INR 20 million); or
    • between a holding company and its wholly-owned subsidiary company; or
    • other class or classes of companies as may be prescribed (other classes of companies have not yet been prescribed).
  • The following types of companies are excluded:

    • Public companies (except amalgamations involving holding and wholly-owned subsidiary companies);
    • Section 8 companies; and
    • Companies or body corporates governed by any special Act.
  • FTM requires the approval of the draft scheme by the Board of Directors of both the companies.
  • The scheme must be filed with the jurisdictional Registrar of Companies and the Official Liquidator.
  • It is mandatory to convene a meeting of members and creditors. A creditors meeting is not required if they grant their approval in writing.
  • The minimum approval required is from 90% of shareholders (in number) and 90% of creditors (in value).
  • It is mandatory to a file declaration of solvency by both companies.
  • No auditors certificate is required with respect to compliance of accounting standards;
  • The scheme can be passed without a filing to the National Company Law Tribunal (NCLT). Under the FTM process, the Central government has the power to approve such schemes and there is no need to approach the NCLT.
  • The Central government has delegated the power to approve of the merger to the Regional Director.
  • In case the Regional Director feels that the scheme is not in public interest or in the interest of the creditors, they can file an application to the NCLT stating that the scheme should be considered as per the procedure of a normal merger.
  • The FTM process also applies to all types of compromises and arrangements involving these companies.
  • An approximate time period of 90 to 100 days has been defined for this process.
  • The classes of companies eligible to opt for FTM may instead opt for the traditional merger route as per the normal provisions under the Act.
  • The detailed procedures for fast track mergers are prescribed under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Advantages of FTM over traditional mergers

  • It is a time-bound and cost-effective process.
  • It is a simplified procedure with no judicial process concerning the NCLT.
  • There are only three regulatory authorities involved, namely, Regional Directors, the Registrar of Companies and the Official Liquidator.
  • The registration of this scheme will have the effect of dissolution of transferor companies without undergoing the process of winding up.
SKP's comments
The introduction of these provisions can be considered one of the government's steps towards 'Ease of Doing Business'. However, the limit given for small companies is too small from a practical standpoint. Higher thresholds for small companies will have to be allowed for more companies to benefit from the fast-track provisions. This is a pragmatic reform which could make mergers, acquisitions and restructuring easier and faster for holding-subsidiary companies as well as smaller companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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