The Ministry of Corporate Affairs (the “MCA”) recently amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Amalgamation Rules”) by notifying the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (“Amendment Rules”). The Amendment Rules, which came into force on 17 September 2024, now permit a fast-track merger between foreign companies and their wholly owned subsidiaries.

Cross border mergers

Section 234 of the Companies Act, 2013 (“Companies Act”) read along with Rule 25A (Merger or amalgamation of a foreign company with a Company and vice versa) of the Amalgamation Rules allow mergers and amalgamations between Indian companies and companies incorporated in other jurisdictions (“Cross Border Merger”) i.e., a foreign company incorporated outside India can merge with an Indian company (“Inbound Merger”) and vice versa (“Outbound Merger”) after obtaining prior approval of the Reserve Bank of India (“RBI”) and the National Company Law Tribunal (“NCLT”) in accordance with the Companies Act and the Amalgamation Rules.

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross Border Regulations”) prescribe certain additional requirements for undertaking Cross Border Mergers. As per Regulation 9, if a Cross Border Merger is undertaken in accordance with the requirements set out under the Cross Border Regulations, RBI approval for such a Cross Border Merger (as required under Rule 25A of the Amalgamation Rules) will be deemed to have been provided and no separate application is required to be made to the RBI in such cases (“Deemed RBI Approval”).

Fast-track mergers & pre-amendment regime under the Companies Act

Section 233 of the Companies Act allows mergers or amalgamations to be implemented without any involvement of the NCLT through the fast-track route i.e., by seeking an approval of the relevant Regional Director having jurisdiction over the registered offices of the merging companies instead of the NCLT (“Fast Track Process”). The Fast Track Process was available only for domestic mergers between certain categories of companies i.e., small companies, start-up companies and between an Indian company and its wholly owned subsidiary in India.

Key changes under the Amendment Rules

Rule 25A(5) of the amended Amalgamation Rules now permits a specific type of Inbound Merger, viz., a foreign holding company (“Foreign Transferor Company”) can now merge with its wholly-owned Indian subsidiary (“Indian WOS Transferee”), through the Fast Track Process subject to the following conditions:

1. Prior approval of RBI must be obtained by both the Foreign Transferor Company and the Indian WOS Transferee;
2. Indian WOS Transferee needs to comply with the provisions of Section 233 of the Companies Act and file a copy of the scheme with the Regional Director; and
3. a declaration needs to be submitted to the Central Government through the Regional Director confirming if the Foreign Transferor Company is incorporated in a country that shares a land border with India and if so, has prior government approval been obtained in this regard.

Impact & analysis

Promoting ease of doing business in India – Permitting Fast Track Process for Inbound Mergers is yet another addition to, and in line with, the Government of India’s numerous ongoing incentives, reforms and initiatives for promoting and facilitating ease of doing business in India and boosting the growing Indian markets.

Facilitating ‘reverse flip’ structures – This is a timely amendment as an increasing number of companies (especially in the fintech sector) that had originally set up their holding companies overseas are now looking to ‘reverse flip’ and relocate their parent entities back to India. One of the key factors influencing the decision by these companies to reverse flip is India’s growing IPO market, making it attractive for companies to list domestically and simplify their structuring both from a legal and tax perspective.

Applicability of Deemed RBI Approval – The Amendment Rules do not specifically address whether Deemed RBI Approval applies to Cross Border Mergers implemented through the Fast Track Process. However, since Deemed RBI Approval is applicable to the prior approval of the RBI ‘as required under Rule 25A’, it may be reasonable to assume that RBI approval should be deemed granted in cases where a Cross Border Merger follows the Fast Track Route under Rule 25A and is compliant with the Cross Border Regulations. Nonetheless, it remains to be seen if the Regional Director(s) take any differing views in the absence of a formal clarification in this regard.

‘Fast track’ in practice or not? – While the Fast Track Process is designed to expedite mergers as it bypasses the need for NCLT approval, the route isn’t always as fast as intended. If there are objections raised by the statutory authorities (such as sectoral regulators, Official Liquidator, Registrar of Companies), the Regional Director can direct that the scheme be sent to the NCLT for consideration, in which case the merging companies will need to make a fresh application to the relevant bench of the NCLT having jurisdiction over the registered offices of the merging companies. This exposes the merging companies to the risk of having to re-start the entire process, which can potentially add to the timeline and often slow down what is meant to be an expedited process.

Conclusion

The Amendment Rules are a welcome change to facilitate integration of global entities into the Indian market while maintaining a robust compliance framework. However, in order for the Amendment Rules to yield the desired results, it is crucial that the Fast Track Process is streamlined at a practical level so that companies can rely on this route as a quick and efficient corporate restructuring method going forward.

Authors: Neville Golwalla – Partner, Gayatri Chadha – Managing  Associate and Pranav Kandada – Associate

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this alert do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this alert should be considered an advertisement or solicitation of TT&A’s professional services.