This article is written by Divija Kothari, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here she discusses “An Overview of Fast Track Mergers in India”.
While the practice of mergers and acquisitions has expanded and seen exponential growth, certain advancements in this field have not been explored to the best of their potential. Fast Track Mergers is one such measure. The Fast Track Merger Scheme was laid down in Section 233 of the Companies Act, 2013 (“the Act”) in December 2016, to be read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“the Rules”). This provision is an alternative to the lengthy and time-consuming process of mergers. Having eliminated court-intervention, it is a welcome step towards exponentially increasing the ease of doing business in India. The aim of this article is to expatiate on the procedure of a Fast Track Merger and understand the intricacies involved therein.
Applicability of Fast Track Mergers in India
The scheme of a Fast Track Merger can be availed by the following companies:
Two or more small companies can merge under this scheme.
Section 2(85) of the Companies Act, 2013 lays down the following conditions for a company to qualify as a small company:
- A paid-up share capital of not more than Rupees 50 lakhs or such higher amount as may be prescribed, but not exceeding rupees 10 crores; or having a turnover of not more than Rupees 2 crore or such higher amount as may be prescribed, but not exceeding Rupees 100 crores. This should be according to the latest profit and loss account of the preceding financial year.
- It is not a public company.
Holding Company intending to merge with its Wholly-Owned Subsidiary
These companies can be public or private companies. Moreover, there is no bar on Section 8 companies in this regard. However, it is pertinent to note that Holding companies intending to merge with more than one of its Wholly-Owned Subsidiaries will have to draft more than one application. The proof of being a Holding company and a Wholly-Owned Subsidiary can be given by filing forms MGT-4, MGT-5, and MGT-7.
Such other classes of companies as may be prescribed by the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
Generally, fast track mergers are not applicable to public companies (except when holding companies are amalgamating with their wholly-owned subsidiaries), Section 8 companies, and companies or body corporates governed by a special Act.
Why opt for Fast Track Mergers?
Under the Companies Act, 1956, the procedure laid down for mergers involved lengthy procedures and mandatory court intervention. This led to the process becoming highly time-consuming. The provision of a Fast Track Merger under Section 233 of the Companies Act, 2013 simplifies this process to a large extent. Without any court-intervention, it requires the approval of the shareholders and creditors, the Registrar of Companies (“ROC“), the official liquidator, and the Regional Director (“RD”).
Furthermore, the following advantages, among various others, are availed of:
- It encourages corporate restructuring of small and group companies.
- Results in faster disposal of matters, and higher efficiency.
- Mandatory approval of the National Company Law Tribunal (“NCLT”) is avoided.
- Issuance of a public advertisement is not mandatory.
- Lower cost involved.
- The registration of such a scheme has the effect of dissolution of the Transferor Company without the process of winding up.
- Leads to reduced administrative burden.
Parties Involved in the Process
The merger process involves two parties:
- The Transferor Company: it is the company which is amalgamated into another company.
- The Transferee Company: on the other hand, it is the company into which the transferor company is amalgamated.
For example, in an amalgamation, a Wholly-Owned Subsidiary will be the Transferor Company and a Holding Company will be the Transferee Company.
The Step-By-Step Procedure for a Fast Track Merger
Articles of Association and Memorandum of Association
The Transferor and the Transferee Company must ensure that their Articles of Association (“AoA”) authorize a merger. The AoA defines the rules and regulations of the company. For a merger to take place, it is essential that the AoA of the company has a specific clause allowing or permitting the structural changes that occur due to the merger transaction. If the respective AoAs of both the parties do not allow for a merger, they must be amended. Additionally, the object clause of the Memorandum of Association (“MoA”) must also permit a merger.
Convening a Board Meeting
A board meeting must be conducted for approval of the draft scheme of merger by the respective companies. Apart from this, a resolution may also be passed to authorize a member to perform all acts and necessary obligations to ensure expediency and efficiency in the process. Additionally, a resolution must be passed to schedule a shareholders’ meeting and a creditors’ meeting.
Filing the draft scheme proposing the merger for comments or objections
Once the draft scheme proposing the merger is approved by the Board of Directors, it must be filed by the Transferor and Transferee company with the following:
- The respective Registrar of Companies depending on where the registered offices of the Transferor and Transferee companies are located;
- Official Liquidator;
- Persons affected by the scheme.
This filing should be done in Form CAA-9, inviting suggestions or any objections to the proposed scheme of merger.
Declaration of Solvency to be filed with the ROC
In accordance with Section 233(1)(c) of the Act read with Rule 25(2) of the Companies (Compromises, Arrangements and Amalgamation) Rules, a declaration of solvency must be filed by both the companies in Form CAA-10, with the respective ROC. This should be done prior to holding the shareholders’ and creditors’ meetings to get the approval for the proposed scheme. The companies must pay the respective fee as prescribed under the Companies (Registration Offices and Fees) Rules, 2014 and file the said declaration in Form CAA-10.
Hold a Meeting with the Members of the company
Pursuant to Section 233(1)(b) of the Act read with Rule 25(3) of the Rules, the transferor and transferee company shall both procure the approval of members holding at least 90% or nine-tenths of the total no. of shares for the scheme. The notice of meeting must be issued at least 21 days prior to the scheduled date of the meeting. The suggestions given and objections raised by the ROC and the Official Liquidator shall also be considered by the respective companies in their general meetings.
The Companies Act, 2013 is silent on whether there can be an alternative wherein a meeting can be avoided and written approval of the majority members representing not less than 90% of the total number of shares can be procured. However, for creditors’ approval, this written consent by a majority can be procured without a meeting. This is explained hereinbelow.
Convening a Meeting of the Creditors
It is mandatory for the Transferor and Transferee Company to either convene a meeting of the creditors, specially to obtain their approval for the proposed scheme or get written approval by the majority representing not less than 90% or nine-tenth of the value of the creditors. The notice of meeting should be issued at least 21 days prior to the scheduled date.
The following documents are required to be attached with the notice of meeting issued to the creditors:
- A copy of the proposed scheme of merger.
- The Explanatory statement pursuant to Rule 6(3) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
- A copy of the Declaration of Solvency, as mentioned above.
- The latest audited financial statements of both the companies.
- A copy of the valuation report, if any.
- Any other relevant information, if necessary.
Both, the Transferor and Transferee Company must file the special resolution passed with the ROC, as approved by the members and the creditors, in Form MGT-14.
Copy of the Scheme and the Results of the Meeting to be filed with the Regional Director
According to Rule 25(4) of the said Rules, within seven days of convening the meeting with the members and the creditors, the Transferee Company shall be required to file the following documents in Form CAA-11:
- A copy of the scheme approved by the members and the creditors.
- A report of the results of the meetings held by both companies, respectively.
Additionally, the Transferee Company shall also file a copy of the scheme and the aforementioned Form CAA-11 with:
- The ROC in Form GNL-1 along with the respective fee pursuant to the Companies (Registration Offices and Fees) Rules, 2014.
- The Official Liquidator, either by registered or speed post.
Approval of the Regional Director
This is arguably the most important step in the process. The Report of the meeting in the aforementioned Form CAA-11 is to be filed in E-Form RD-1 to the Regional Director (Central Government). The suggestions or comments of the Registrar and the Official Liquidator shall be given to the Regional Director within 30 days of the receipt of the scheme.
When there are no objections, comments or suggestions in this regard, it shall be presumed that there are no objections to the scheme. In the event that no such objections are raised, and the Regional Director believes that the scheme is in furtherance of public interest or in the interest of the creditors, he shall issue Form CAA-12 and a confirmation, which shall be considered as the Order sanctioning the proposed scheme of merger between the Transferor and Transferee Company.
On the contrary, if any objection or suggestion is issued within a period of 30 days to the Regional Director in writing, he shall take them into account and review the scheme. In the event that the Regional Director believes that the scheme is against public interest or the interest of the creditors, he may apply to the National Company Law Tribunal within 60 days stating the reasons for objections. The objections and suggestions given should be clearly mentioned for the NCLT to consider the scheme.
Additionally, the RD may request the Tribunal to consider the scheme under the regular procedure established under Section 232 of the Act. On the receipt of an application by the RD or any other person on this account, if the Tribunal opines that the provision under Section 232 should be followed, it may direct that the scheme be filed accordingly. If, however, it is of the opinion that there is no issue, it may pass the scheme accordingly.
However, if there are no objections raised or suggestions provided by the Official Liquidator and the Registrar, or the Regional Director considers the raised objections to be unsustainable, and conveys them to be in public/creditors’ interest, he may issue Form CAA-12 as a confirmation Order for the said scheme. Here, no application is made to the Tribunal.
Registration of the scheme
The confirmation Order passed, along with the prescribed fee under the Companies (Registrations, Offices and Fee) Rules, 2014 is to be filed with the respective Registrar of Companies within 30 days of the receipt of the Order by the Transferee Company, based on the jurisdiction. The Registrar shall register the scheme and issue a confirmation of the same to the companies. This shall then be communicated to the Registrar who had jurisdiction over the Transferor Company.
Critical Analysis of the process of Fast Track Mergers
The scheme of Fast Track Mergers under Section 232 of the Act opens an easier gateway for some companies to merge, and has paved an alternate restructuring process. However, there are some lacunae within this scheme that raise concerns.
- While the scheme eliminates the involvement of the NCLT, it gives significant power to the Registrar of Companies and the Central Government (delegated to the Regional Director). If the RD believes that the scheme of merger is not in public interest or the creditors’ interest, they may file an application before the NCLT and request that the merger take place under Section 232. The result of this defeats the very purpose of a ‘fast track’ merger. In turn, the time taken to complete the merger process increases manifold.
- It is a view taken by ROCs that in order to access or avail of the Fast Track Merger scheme, the Holding Company’s 100% shareholding in the Wholly-Owned Subsidiary must be necessarily indicated in the immediately preceding year’s financial report filed in Form MGT-7 by the Company. Until the 100% shareholding is not indicated in the e-Form, the ROC refrain from passing the scheme and issuing an Order to that effect. Obtaining the necessary documentation and completing the Fast Track Merger may take up to a year in certain cases, making it highly cumbersome. Companies may also have to resort to the normal merger scheme enshrined in Section 232 of the Companies Act, 2013. Thus, the time-frame for completion of the merger increases considerably.
How Can You Prove a Company to be a Wholly-Owned Subsidiary?
Forms MGT-4, MGT-5, and MGT-7 are to be filed to prove a Holding Company and its Wholly-Owned Subsidiary.
- The scheme involves filing certain forms and documents with the ROC and the Official Liquidator. Moreover, the final approval is given by the Regional Director. Practically, this might take a long time. The process may take a dip into the black-hole of bureaucracy. The pre-existing administrative burden on the officers may prove taxing for the companies, and the scheme might lose its essence.
- Section 233 of the Act provides that the consent of the creditors’ to the scheme may be procured either in a meeting or in writing, with the proviso that at least 90% or nine-tenths of the value of the creditors should give consent. However, there is no mention of whether this is applicable to shareholders also. It is pertinent to note that the objections or suggestions of the ROC and the affected persons are discussed in the general meeting. In the backdrop of the object and purpose of the legislation, it seems as though the written consent alternative is not applicable to the shareholders. Coming back to the time issue, this might increase the amount of time taken.
- Pursuant to Section 233(1)(d) the scheme is to be approved by a majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company. The terms used in the section suggest that the approval of the creditors present and voting in a meeting might be adequate. On the other hand, if approval via written consent is taken from the creditors or class of creditors, the requisite number or majority applicable would be from among all the creditors. This may have varied outcomes and cause ambiguity.
Some Successful Fast Track Mergers
The following Transferee Companies availed of the benefit of Section 233 of the companies Act, 2013:
- Township Developers India Limited.
- B.D. Textiles Mills Private Limited.
- Shishir Realty Private Limited.
- Ascon Shipping Agency Private Limited.
- Stanley Black & Decker India Private Limited.
- Dadajee Dhackjee Logistics Private Limited.
- Samagra Wealthmax Private Limited.
- Glint Infraprojects Private Limited.
- Vishkul Leather Garments Private Limited.
The Fast Track Merger Scheme is undoubtedly a welcome step. The idea and intention behind its inception is commendable. Having excluded the involvement of the NCLT for certain types of companies, it not only reduces the burden on the Tribunal but also paves the way for faster disposal of such schemes. Not to mention the costs that are significantly reduced owing to the fact that several hearings before the NCLT are avoided, and the time that is saved, when the process is uninterrupted.
However, the role of the Central Government is monumental. To a large extent, the success of this scheme’s passage depends on how enterprising and active the Central Government is. Mere stacking of schemes waiting for approval will take away the essence of a ‘Fast Track’ Merger.
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