This article is written by Saswata Tewari, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

Time is an important subject in any business deal because if the right time passes by then there shall be no need for the deal as the benefit that was previously there had lapsed with the time. Now it is also not possible to have a quick business deal as a lot of paperwork, legal compliance and other clearance is needed for the success of the deal. So to come to a middle-ground, different new schemes and arrangements have been made over time to bypass the time constraint and at the same time have all the important clearance needed for the deal.

Fast track merger is such an arrangement that bypasses the time restrictions and was laid down in December 2016. Before the passing of this scheme, there was only one unified merger procedure for all the companies which required approval of the merger scheme from the Tribunal which led to unnecessary delays.

Now the question that arises is whether Fast track merger is really that fast or is it fast enough to create more complications than before? Before we jump into the heart of our topic, the author wants the readers to have basic knowledge about the whole Fast track merger process in India.

What are fast track mergers

To question the efficacy of any process, one should have necessary ideas about the functioning of the process.

One should know that it usually takes at least 9 to 12 months for the National Company Law Tribunal to approve a scheme of merger or amalgamation prescribed under Sections 230 to 232 of the Companies Act, 2013 read with the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016. The normal merger process is lengthy, time-consuming and administratively troublesome. To expedite the approvals for the scheme of mergers and amalgamations, the procedure of fast track merger was designed.

Fast track merger process came into force on 15th December 2016 and this simplified merger procedure is prescribed under Section 233 of the Companies Act, 2013 read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. This procedure deals with mergers or amalgamations of companies and does not require approvals of the National Company Law Tribunal(“NCLT”) or courts. 

However, this process is subjected to certain requirements and guidelines. The Fast track merger process can only take place between:

• Two or more small companies.
• Between a holding company and its wholly-owned subsidiary company. 
• Other class of prescribed companies.

This process requires the approval of the following persons:

• Shareholders
• Creditors
• The Central Government (powers delegated to Regional Director vide MCA notification dated 19/12/2016)
• Registrar of Companies (“ROC”)
• Official Liquidator
• Regional Director

It is important to keep in mind that if the Central Government (Regional Director) shall register the scheme and give a confirmation to the companies if the ROC and the Official Liquidator concerned have no objections or suggestions to the scheme

Why do people opt for fast track mergers?

The advantages of fast-track mergers are undeniable. People choose the fast track merger because of these advantages. Some of these advantages are listed below:

• The first and foremost benefit is that the fast track merger process has relaxed the approvals of the tribunal and courts. 
• Fast track mergers support corporate restructurings for the small and group companies.
• Does not require issuing of public advertisement.
• It is comparatively less costly than the normal course of mergers.
• This procedure leads to faster disposal of the matters and does not need any separate RBI/IT approvals.
• Besides, if the fast track merger is declared to be against the public interest, the National Company Law Tribunal may order the merger to proceed in the normal course, i.e. through the NCLT.

Doubts and challenges

Now that we know what fast track merger is and what are its benefits, we can go ahead with the challenges and difficulties involved in this simplified merger process.

Even though fast track merger was introduced to simplify the process of mergers and amalgamations, yet it is known to have multiple clearances and is said to be time-consuming and at the same time does not have any scope for demergers.

The meaning and procedures mentioned for fast track mergers have also raised some questions. The following is a list of these questions and concerns:

• There exists a doubt whether the Regional Director can suggest changes to the merger. If the Registrar of Companies and Official Liquidator has no objections to the plan, it appears that the Regional Director must confirm without making any suggestions of his own.
• The question has also arisen that if the fast track merger is between a holding company and its wholly-owned subsidiary company or small companies or a prescribed class of companies, is it possible that the fast track merger can occur between a wholly-owned subsidiary and holding as well as a holding into the wholly-owned subsidiary?
• Section 233(12) of the Companies Act allows a compromise or an arrangement or division or transfer and the types of transactions that can be done under Section 233(12) are diverse which includes, demergers, slump sale, shareholder/creditor arrangements. But contrary to this notion, there exists an opposing view that apart from amalgamations Section 233 does not allow any other type of transactions.
• Section 233 has the words that say “on receipt of an application from the Central Government or from any person”. Is this to say that if the Regional Director does not refer the scheme to the NCLT or offer his or her approval for the scheme, any creditor or shareholder will apply with the NCLT?

After going through the doubts, it might occur to you that there are still some differences and loopholes that need to be addressed to prevent potential mergers causing uncertainty. The doubts can still be answered but what about the challenges that arise in the fast track merger process. 

The following issues are said to arise during the fast track merger process:

• It is not practically possible to merge the authorised capital of all companies in the transferee company.
• The Form INC 28 that is used to finally register the scheme of the arrangement, do not provide the following options:
  • A separate drop-down menu for Section 233 of the Companies Act, 2013.
  • Change in the status of the transferor company.
• It is quite difficult to get approval from the majority of each class of creditors and is most difficult in the case of trade creditors.
• No clarification is given on the type of persons who are to be affected by the scheme for giving the notice and there is no clarity as to what effect, if any, objections will have.
• It has been considered by some of the ROCs that to qualify for the fast track merger route, the parent company’s 100 per cent shareholding in its wholly-owned subsidiary should be indicated in the parent company’s annual return filed with the ROC under e-form MGT-7 for the immediate previous financial year. The ROCs are currently not clearing any fast track acquisition applications until the parent company’s 100 per cent shareholding in its wholly-owned subsidiary is shown in eform MGT-7. This means that businesses will have to wait up to a year to enter the fast track merger process in certain cases, so in those cases, a Tribunal-approved merger process under Sections 230-232 of the Companies Act may be quicker!
• According to Section 233 of the Companies Act, consent of the creditors required for the merger may be acquired either by a meeting or by writing, that is, through consent letter objections. Yet, the section does not provide any information on whether the consent of the shareholders’ can be acquired by writing. This states that getting shareholders’ consent by way of writing may not even be allowed under the fast track merger law.
• If according to the Central Government, the scheme of merger or amalgamation is not in the interest of the public or the interest of the creditors, then in that scenario the fast track merger proceedings will be moved to the NCLT and the parties will be obliged to follow the time-consuming merger procedure set out in Section 232 of the Companies Act 2013. As a result of this scenario, fast track mergers can become less appealing.

Conclusion

A fast track merger is undoubtedly a tool that businesses can use to circumvent all of the time-consuming constraints and regulatory hurdles imposed by Tribunal and court proceedings, allowing schemes to be approved more quickly while still saving energy and money. This fast track merger process has certainly been helpful in the current pandemic scenario where everybody wanted things to happen smoothly and in a time-friendly manner.

The current fast track merger process was incorporated because of the recommendations made by the Expert Committee on Company Law, presided by JJ Irani. It was recommended by the committee that a short form of amalgamation should be prescribed for mergers within a corporation including but not confined to the merger of a wholly-owned subsidiary company with its holding company. Furthermore, it was recommended that the definition of a small company should be expanded to allow more companies to qualify for a fast track merger.

The efficiency of the fast track merger can be heightened if appropriate steps are taken and the central government becomes proactive with its approach towards this procedure. It’s important to note that just because a method is successful doesn’t mean it can’t improve.

References

• https://taxguru.in/company-law/fast-track-mergers-aspects-procedure-difficulties.html
• https://law.asia/fast-track-merger/
• https://www.mondaq.com/india/corporate-and-company-law/627302/fast-track-merger-will-it-take-the-fast-track-or-derail
• https://www.icsi.edu/media/portals/71/sirc%20proceedings/CRITICAL%20ISSUES%20IN%20MERGERS,%20AMALGAMATIONS%20AND%20FAST%20TRACK%20MERGERS%20(Shri.%20P%20H%20Arvindh%20Panidan).pdf
• https://www.corporateprofessionals.com/uploaded_files/research/presentation/MA_PPTb4pX.pdf

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