Introduction
The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024[i] (‘Amended Rules’) introduce significant changes to the existing regulations by amending r. 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (‘Rules’). The Amended Rules became effective on 17.09.2024, adding r. 25A(5) following the existing r. 25A(4).
To provide context, ch. XV of the Companies Act, 2013 (‘Act’) addresses compromises, arrangements, and amalgamations, and s. 234 of the Act enables mergers and amalgamations between Indian and foreign companies. The principles and procedures governing domestic mergers under this chapter apply mutatis mutandis to international mergers. The process under s. 233 of the Act is faster than regular mergers, as it does not necessitate the involvement of the National Company Law Tribunal (‘NCLT’) unless objections are raised or the Central Government (‘CG’) refers to the matter. This process requires obtaining necessary approvals from stakeholders, such as shareholders and creditors, instead of the official liquidator, who otherwise retains its role to raise objections or suggestions. If no objections are received from creditors or shareholders and the CG does not express concerns regarding public interest, the merger can proceed. However, if the CG believes the merger contradicts public interest, it can intervene by filing an application under s. 233(5) of the Act before the NCLT differs from s. 232, which governs regular mergers requiring NCLT approval from the outset.
What Do the Amended Rules Say?
The Amended Rules specifically address mergers involving foreign holding companies and their wholly-owned subsidiaries (‘WOS’). They stipulate the necessity for prior approval from the Reserve Bank of India (‘RBI’) and compliance with s. 233 of the Act, the requirement for an application from the transferee Indian company, and a declaration at the application stage.
While the erstwhile r. 25A of the Rules governed the mergers or amalgamations process between foreign and Indian companies. The Amended Rules, by adding sub-rule (5), simplify mergers specifically between foreign holding companies and their Indian WOS by shifting from the traditional merger process under ss. 230 to 232 to the fast-track merger route under s. 233 of the Act.
Regarding prior RBI approval, the Amended Rules specify that both the transferor (foreign company) and the transferee (Indian company) must secure approval before proceeding with a merger or amalgamation. This requirement ensures that cross-border transactions are closely regulated to comply with India’s foreign exchange laws and maintain financial oversight by the RBI.
Next, the Indian transferee company is mandated to comply with s. 233 of the Act governs fast-track mergers for small or holding companies with their WOS in India. Subsequently, the transferee Indian company is mandated to file an application with the CG under s. 233 of the Act to seek approval, whereby the existing r. 25 of the Rules will apply to such applications. Furthermore, the Amended Rules specify that the declaration referred to in r. 25A(4) must be submitted when filing the application under s. 233. This declaration typically involves a statement from both the foreign and Indian companies affirming their compliance with all applicable laws, including foreign exchange regulations.
Our Analysis
Notably, the erstwhile Rules did not address mergers involving foreign holding companies and their Indian subsidiaries in such detail. While cross-border mergers were recognized, the procedural clarity and specific requirements introduced through the Amended Rules create a structured approach for WOS mergers. With the express mandate for RBI approval, the Amended Rules ensure an additional layer of regulatory oversight while creating a focused procedure for foreign companies intending to merge with their Indian WOS.
Following this amendment, several positive outcomes are anticipated. By linking the provisions of the fast-track merger process under s. 233 of the Act to such mergers and streamlining the merger process, the Amended Rules are expected to attract greater foreign investment, stimulate economic growth, and generate new opportunities for Indian businesses.
The requirement for a declaration at the application stage reinforces full disclosure, ensuring that companies provide all relevant information to the authorities upfront, thereby reducing the risk of later objections or compliance issues. Such enhanced clarity and efficiency in the Rules could reduce disputes and delays, fostering a more seamless and predictable merger environment.
End Note
[i] Notification No. G.S.R. 555 (E) [F. NO. 2/31/CAA/2013 - CL.V PART], dated: 09.09.2024.
Authored by Aayan Birla of Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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