Corporate restructurings often are tailored to the needs of the business undergoing the overhaul. The main objective behind corporate restructuring is realignment of business divisions, positioning the company to be more competitive, surviving an adverse economic climate, or acting on the self-confidence of the corporation to move in an entirely new direction. In commercial parlance it is to streamline process of merger providing for a simplified, quick and time-bound procedure in comparison to the procedure for a traditional merger. There was a long felt need to simplify the procedure where the interest of third party is not significant.
With the introduction of this concept, India is going to come in line with global practices in terms of mergers and amalgamations of companies. Ministry of Corporate Affairs (“MCA”) notified the new provisions with respect to merger and acquisition under the Act, 2013 vide its notification dated 7 December 2016 which came in force from 15 December 2016.
By virtue of this notification, the much awaited section 233 of the Companies Act 2013 (“Act, 2013”) came into force, dealing with “Merger and amalgamation of certain companies.” As per this section,whereby a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed can merge without following the cumbersome restructuring procedure under Companies Act 1956 (“Act, 1956”).
Simultaneously, on the date of enforcement of sections, Ministry introduced the Companies (Compromise, arrangement and amalgamation) Rules 2016 “CAA Rules” which deals with the procedure for making an application for restructuring. Under this fast Track merger Central Government has appointed Regional director, who has the power to approve the scheme and need not approach the National company law tribunal, (“NCLT”) by notification dated the 19 December 2016.
The framework or Fast track Merger under Companies Act, 2013
After a thorough examination of provisions of restructuring, it was found in foreign jurisdictions, that merger and amalgamation does not require intervention of Courts/Company Courts. Section 233 of the Act, 2013 proposes to simplify the norms for merger for prescribed classes of companies the merger between the following types of companies can be possible under this section.
- Holding company and its wholly-owned subsidiary: A holding company [1] can avail the benefit of this section for merger of its wholly-owned subsidiary into itself. Holding company and its wholly-owned subsidiary[2] can be public or private company or it may be Section 8 Companies. Further, it seems from the text of Section 233 that if the holding company desires to merge with more than one of its wholly-owned subsidiary, it has to make more than one application. The consolidate one scheme cannot be filed under this section.
- Merger between two or more small companies: A small company [3] is a company other than public company with paid up company not exceeding Rs. 50 lacs and turnover as per last profit and loss account does not exceeds Rs. 2 crore. Therefore, this option is not meant for public company
- Such other class or classes of companies as may be prescribed: However, the rules under CAA Rules, 2016 have been enforced from the 15.12.2016, but these do not define the other prescribed class or classes of Companies.
Procedure for Fast Track merger
- Issue of notice of Proposed Scheme: A notice is issued by the Transferor Company or Companies and the transferee company in form CAA-9 of the proposed scheme[4] inviting objections or suggestions from Registrar of Companies, Official Liquidators, Persons affected by the scheme;within 30 days of the issue of notice to them[5].
- The Companies involved in the merger are required to file declaration of solvency in form CAA-10 along with a copy of scheme with the Registrar of Companies, where the company has its registered office of the company is situated .
- For holding a meeting of shareholders, the notice of the general meeting should be accompanied by- the statement disclosing the details of the compromise or arrangement, the declaration of solvency shall be made under Form No. CAA.10 and a copy of the Scheme [6].
- In the General meeting, the company shall consider the objections and suggestions received above and the scheme should be approved by the members present in the meeting, holding at least 90% of the total number of shares in the general meeting.
- The notice of the meeting of creditors should be convened by giving at least 21 days of notice to the members and notice be accompanied by all the documents mentioned above for holding a general meeting.
- The companies will hold meeting of creditors for approval of the scheme by creditors or class of creditors present in the meeting, representing at least 9/10thof value of creditors [7].
- The transferee company shall within 7 days of after the conclusion of the meeting of members or creditors file a copy of the scheme so approved by the members and the creditors along with a report of the result of each of the meeting in form No.11 to the Central Government (Regional Director), Official Liquidator (“OL”), and to the Registrar of Companies (“ROC”) in the form No.GNL-1[8].
- On receipt of the scheme if the registrar or official liquidator has any objections or suggestions, they may communicate the same in writing to the Central Government (Regional Director) within 30 days[9].
- Where no objection or suggestion is received to the scheme from the RoC, OL and the Central Government is of the opinion that the scheme is in the public interest or in the interest of creditors, the Central Government shall issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA.12.
- The confirmation order of the scheme issued by the Central Government shall be filed, within 30 days of the receipt of the order of confirmation, in Form INC-28 with the RoC having jurisdiction over the transferee, transferor companies and the person concerned respectively .
- The Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where Transferor Company or companies were situated [10].
Effect of Registration of Scheme
- After the registration of the scheme, transferor Companies shall be deemed to have the effect of dissolution without process of winding-up[11].
- Transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company. The chargeson the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company.
- Legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company. where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company[12].
Transferee Company Compliances
- A Transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation[13].
- The transferee company shall file an application with the Registrar along with the scheme registered, indicating the revised authorized capital and pay the prescribed fees due on revised capital[14].
- The fee, if any, paid by the transferor company on its authorized capital prior to its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorized capital enhanced by the merger or amalgamation[15].
Procedure in case of ROC or OL raise Objections
The provisions of fast track Merger in the situation where registrar or official liquidator raise any objections or suggestions and send the same to Central Government within a period of 30 days.[16]If the Regional Director[17] appointed by the central government after receiving objections or suggestions is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of 60 (sixty) days of the receipt of the scheme in Form No.CAA.13, stating its objections or opinion and requesting that Tribunal may consider the scheme under section 232 of the Act.[18]On receipt of an application from the Central Government, 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. Once its directed by the tribunal to file the application as per procedure given in section 232 then the Companies involved in M&A will file the applications and follow the lengthy process of Merger and Amalgamation.
Conclusion
With the introduction of Fast track merger,government has taken a step forward to ensure that the transaction is completed in a time bond and a cost effective manner over traditional merger. It is a non judicial process as the Regional director appointed by Central Government rather than going through Tribunal or Court. Three regulatory authorities are involved namely Regional Director, Registrar of Companies and Official Liquidator in the whole process of authorising this scheme.
Moreover, the heading of the section reads as merger or amalgamation of certain companies means demerger is excluded from the purview of this section.
Under registration of this scheme, the transferor company will get dissolved without undergoing the process of winding up. This Act, 2013 offers Comprehensive and transparent system of fast track merger and demerger ensuring the stakeholders interest which will simultaneously reduce the corporate litigations & frivolous complaints and representation of income tax department and other interested parties.
In my opinion, the new provisions should make it easier for corporations proposing for merger as a good system of check and balances will prevent the abuse of these provisions as well as improve the scheme approval process. MCA is making effort to reduce the procedural requirements as well as proposing fast track regulations for the ease of doing business in India which will bringing India at par with the developing nations.
[1] As defined under Section 2(46) of the Act, 2013
[2] Wholly-owned subsidiaries are the result of the parent company owning all (100%) of the subsidiary’s shares.
[3]As defined under section 2(85) of the Act, 2013
[4]Scheme Approved by Board of directors.
[5]Refer to Section 233(1)(a) of the Act , 2013 Read With Rule 25(1) of CAA Rules,
[6]Refer to Section 233 (1) (c) of the Act, 2013 Read with Rule 25(2) of CAA Rules, 2016.
[7]If 90% in value of creditors agree by way of affidavit then meeting of creditors can be dispensed.
[8]Refer to Section 233(2) of the Act, 2013 read with Rule 25(4) of CAA Rules, 2016.
[9]Refer to Section 233(4) of the Act , 2013
[10]Refer to Section 233(7) of the Act , 2013 read with Rule 25(7) of CAA Rules, 2016
[11]Section 233(8) of the Act, 2013
[12]Section 233 (9) of the Act, 2013
[13]Section 233(10) of the Act, 2013
[14]In Form SH-7 for increase in authorised capital ; Section 233(11) of the Act, 2013
[15]Section 233(11) of the Act, 2013
[16]Section 233(4) of the Act , 2013 read with Rule 25(5) of CAA Rules, 2016
[17]The power has been delegated from Central Government to Regional Director vide Notification S.O. 4090(E) dated 19th December, 2016.http://www.mca.gov.in/Ministry/pdf/Notification_PowerRD_20122016.pdf
[18]Rule 25 (6) of CAA Rules, 2016
