This article is written by Nishish Mishra Rajnish pursuing Diploma in M&A, Institutional Finance and Investment Laws from LawSikho.
Introduction to Fast Track Mergers
Fast Track Merger (“FTM”) is a new concept that has been introduced in India to facilitate the ease of doing business. Through this, the time and cost required for the merger process have been significantly reduced by the elimination of any court intervention.
Section 233 of the Companies Act, 2013 (“the Act”) read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Rules”) provides the concept of a simplified merger.
In this article, we will critically examine and study the applicability of Fast Track mergers, their process and the different steps involved and will also try to analyse the stamp duty implications in a Fast Track Merger.
Applicability of Fast Track Merger
It is applicable to the following companies:
- Small companies whose paid-up share capital does not exceed Rupees 50 Lakhs and the turnover as per the latest accounting books does not exceed Rupees 2 Crore;
- Holding and Wholly Owned Subsidiary Company, can be a public or private company. Further, if the holding company desires to merge with more than one of its wholly-owned subsidiaries, it has to make more than one application.
- Between two or more small companies (not applicable for listed companies).
- Such other classes of companies may be prescribed from time to time under the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016.
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 are governed by any special Act.
Process of Fast Track Mergers
In the merger process, there are two types of companies i.e. the transferor company and the transferee company.
- Transferor company: A transferor company is the one that is amalgamated into the other company.
- Transferee company: A transferee company, on the other hand, refers to the company into which a transferor company is amalgamated.
Steps involved in a Fast Track Merger
The following steps are involved in a Fast Track Merger process:
- A Board meeting is convened for approving the draft scheme of the merger. Apart from approving the scheme of merger, the board also passes a resolution to schedule a shareholders’ meeting and a creditors’ meeting.
- After the Board of Directors of each of the companies assent to the merger, the transferor and the transferee file the draft scheme proposing the merger, with the Registrar of Companies, the Official Liquidator, and the Persons affected by the scheme (along with a copy of the scheme). The filing must be done in Form CAA-9 by inviting any objections or suggestions from them.
- A declaration of solvency is filed by the company to the respective Registrar of Companies before a meeting of the creditors and shareholders is convened. This is done pursuant to Section 233(c) of the Act read with Rule 25(2) of the rules. This declaration is filed along with a fee, that is to be submitted to the registrar as per the Companies (Registration Offices and Fees) Rules, 2014.
- Further, a meeting of creditors is convened in order to obtain their approval in writing. It is necessary that a 21-day notice is given in advance and a copy of a list of documents (as provided in Rule 6(3)) should be provided to the creditors. Some of the important documents;
- A copy of the draft scheme of merger;
- The declaration of solvency;
- Copy of the latest audited financial statement of each company;
- Copy of valuation report, if any;
- Any other relevant and material information.
- The scheme needs to be approved by the respective members or class of members at a general meeting holding at least 90% of the total number of shares;
- Within seven days of the conclusion of this meeting, a copy of the scheme as has been consented by the creditors along with the report of the result is filed with the Regional Director (Form No, CAA.11).
- If the Regional Director has no objections or recommendations it may issue a confirmation with respect to the merger. However, if there are any objections from the Registrar or the Official Liquidator, and the Regional Director finds that the scheme of the merger is contrary to the public interest, it may file an application before the tribunal within 60 days of the receipt of the scheme.
- On receipt of an application from the Regional Director or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit.
- The confirmation order of the scheme issued by the Regional Directors or Tribunal shall be filed, within 30 days of the receipt of the order of confirmation along with a fee, that is to be submitted to the registrar as per the Companies (Registration Offices and Fees Rules, 2014 with the Registrar of Companies having jurisdiction over the transferee and transferor company.
Stamp duty implications
Mergers attract stamp duties. There are two important points to be considered with regard to the stamp duty implications, these are:
- Stamp duty is a state subject and its applicability is determined on the following two grounds:
- The state where the registered office of the company is situated:
- The status of the properties being transferred under the scheme.
2. As per Schedule to the Indian Stamp Act, 1899, every instrument, whether movable or immovable attracts stamp duty. Thus, two requirements have to be fulfilled, these are:
- There should be an instrument of transfer,
- The immovable or movable property should be transferred inter vivos, between the parties.
Now, there is no specific mention pertaining to the order of the NCLT in relation to mergers/amalgamations in the Indian Stamp Act as an instrument.
Therefore, simply put, stamp duty is levied on a conveyance i.e., a transfer of property. The schedule to the respective State Stamp Acts will provide for the stamp duty on ‘conveyance as affected by the Tribunal order. The stamp duty implications have been explained in detail in the chapter on “How to draft a scheme of mergers/amalgamations.
Fast Track Mergers have been introduced under section 233 of the Companies Act, 2013 in order to simplify the merger process. It is applicable to a merger involving small companies, a merger of a holding company with its subsidiary company, and such other classes of companies as specified in the rules from time to time.
The Fast Track Merger regime is definitely a welcome move. By doing away with the requirement of approaching the Tribunal for a certain group of companies, the legislature has sought to remove administrative barriers faced in Tribunal proceedings, thereby resulting in faster disposal of Schemes, reduction in the burden on Tribunals and reduction in costs and resources of the companies involved.
The process of Fast Track Merger excludes the intervention of the National Companies Law Tribunal. The scheme of such a merger is approved by the Regional Director. It should be ensured that a provision for the merger is provided in the AoA and preliminary due diligence should be conducted in order to ensure a risk-free transaction.
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