Introduction
- Inbound mergers (i.e., a merger of a foreign company with an Indian company) require the approval of the National Company Law Tribunal (NCLT).
- With the new rules introduced by the Ministry of Corporate Affairs (MCA) in September 2024, inbound mergers via reverse flips (i.e., where a foreign HoldCo merges with its Indian wholly owned subsidiary (WOS)) will no longer require NCLT approval and can be undertaken through the "fast track" mode, which is expected to shorten timelines significantly.
- The following slides analyze the trends in NCLT-approved inbound mergers from 2019-2024.*
* Based on an analysis of 28 NCLT orders
Types of Inbound Mergers
- Since the introduction of automatic RBI approval for cross border mergers in 2018, there have been only a handful of instances involving reverse flips through the inbound NCLT merger route with the vast majority of cases involving consolidation of overseas WOSs into Indian parents.
- While companies like Phonepe have used the share swap structure for reverse flipping, unlike with inbound mergers, share swaps are subject to capital gains tax in India. Thus far, the timeframe and uncertainty of the NCLT process have proved to be significant deterrents for start-ups headquartered abroad to consider an inbound merger.
Sector-wise Split
Manufacturing sector leads the way in inbound mergers followed by retail and other services, IT and healthcare sectors.02468 10 12 Number of Mergers.
Country-wise split
- Jurisdictions like Mauritius and Delaware require only a filing with the local registry following the final approval in India, whereas certain other jurisdictions require a formal strike off / voluntary liquidation process to be pursued.
- One of the holding companies of Pepperfry, for example, redomiciled from Cyprus to Mauritius before initiating the merger process, presumably to benefit from the lighter regulatory regime in Mauritius.
Approval Timelines
While NCLT Mumbai handles the maximum cases of merger by far, the average timeframe for approval is still lower compared to most of the other NCLTs across the country.
Regular Route vs Fast Track Route
- With the recent introduction of fast-track mechanism for inbound mergers of overseas HoldCo with Indian WOS, this would serve as the default route for companies exploring reverse flips ahead of an Indian listing.
- While Zepto, Meesho and Pine Labs seem to be in the process of completing their reverse flips through the regular route, it remains to be seen which route will be adopted by other companies (e.g., Flipkart and Urban Ladder) which are also reportedly considering reverse flips.
- Set out below is a brief comparison between the merger process under the regular route and the fast-track route.
Overview of Approval Process
Key challenges
While fast-track process is significantly more streamlined and can be completed within 3 to 4 months, a few caveats remain:
- Restructuring necessary if Indian entity is not already wholly owned by overseas HoldCo
- If any shareholder in overseas HoldCo is prevented from directly owning shares in Indian WOS (e.g., due to PN3 issues), fast-track route cannot be pursued
- Uncertainty amongst AD banks regarding availability of automatic RBI approval facility for fast-track mergers
- If any objections from ROC, OL, IT authority etc. are not satisfactorily resolved, merger will get referred to NCLT
- While overseas HoldCo does not need to be in FATF / IOSCO compliant jurisdiction, preferable for HoldCo to be domiciled in a country which is "familiar" to Indian authorities
- Since domestic mergers permitted only for "companies", unlikely for overseas LLPs to be permitted to be merged under fast-track route
- Promoters' ESOPs may need restructuring for legal compliance and tax efficiency, as Indian law limits issuance of ESOP shares to founders in most cases
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