Fast-Track Mergers in India: Race towards Success or Bumpy Ride?

[By Himanshu Verma]

The author is an Associate Trainee.

 

Introduction

To promote the ease of doing business and processing the scheme of arrangements involving startups, wholly owned subsidiaries, or small companies in a cost-effective and comparatively swift way, India endeavoured to establish a framework that facilitates and expedites the growth of these companies through the implementation of a fast-track merger process, effective from 15th December 2016. Thus, the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (“Principle Rules”) was introduced. This rule introduced an alternative pathway for select classes of companies to pursue mergers or amalgamations without the intervention of the National Company Law Tribunal (“Tribunal”).

However, the fast-track process faced challenges such as delays and uncertainties. In order to overcome the limitations the Ministry of Corporate Affairs (“MCA”) introduced the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2023 (“Amendment Rules”) on 15th May 2023. These Amendment Rules officially came into effect on 15th June 2023 (“effective date”). The introduction of specific timelines and deemed approval provisions in the Amendment Rules has brought some improvements. Nevertheless, as we chart this trajectory toward efficient mergers, certain areas are beckoned for further refinement. In this article, the author provides insights concerning the Amendment Rules and engages in a discussion about persisting issues, along with proposing potential approaches to navigate these issues.

Necessity of Amendment

The M&A landscape in the Indian startup ecosystem experienced a significant milestone in 2021, as a noteworthy 210 deals took place and the momentum continued in the year 2022, with an impressive count of 240 M&A deals. However, the process has not lived up to its fast-tracked designation, and the corporate organizations have shown reluctance to pursue the fast-track merger route due to uncertainty regarding eligibility criteria and delays in obtaining authorization from the Registrar of Companies (“RoC”) or Official Liquidator (“OL”), thus hindering the intended purpose of expediting mergers. Regrettably, it was observed that the reports submitted by the RoC, OL and the Regional Director (“RD”) issuance of confirmation orders took longer than expected, resulting in delays in processing applications. According to MCA 8th annual report, there were 118 pending applications as of 1st April 2021, and 369 applications were received between 1st April 2021 – 31st March 2022, out of which 164 remained pending as of 1st April 2022.

Furthermore, as per the annual report 2022-23 on 1st November 2022, 135 applications were pending and 403 applications were received between 1st November 2021 – 31st October 2022, out of which 188 were pending as of 31st October 2022. These statistics highlighted the importance of reevaluating India’s framework for fast-track mergers while acknowledging the challenges that corporations were facing.

Amendment Rules: The Current Paradigm

To instil greater confidence among companies engaging in fast-track mergers in India, the recent Amendment Rules have introduced specific timelines for government authorities. Previously, in Principle Rules no time limit was prescribed for the RoC and OL to provide any objections or suggestions to the Central Government (“CG”). However, with the introduction of the necessary changes through sub-rule 5, time limits have been established. If the RoC and OL have no objection or suggestion to the proposed scheme, they must approve it within 30 days. In the event, objections are not submitted by the RoC and OL, it shall be deemed that there are no objections, and the RD has to approve the scheme within 15 days after the 30 days have expired, provided that the RD determines the scheme to be in the public or creditor’s best interests.

The Amendment Rules have also imposed strict deadlines on the CG under sub-rule 6, if objections/suggestions are received but are not considered sustainable, then the CG has to confirm the scheme within 30 days after the expiration of the initial 30-day period. In the event the CG identifies that the scheme is not in the best interests of the public or creditors, it can file an application before the Tribunal within 60 days of receiving the scheme. Therefore, the imposition of these strict timelines under sub-rules 5 and 6 has effectively addressed the issue of unnecessary delays and brought predictability to the fast-track merger process, as now companies no longer have to endure extended periods of waiting caused by bureaucrats or government officials.

Another critical issue was what happens if the CG does not approve the scheme or refer it to the Tribunal within the timeframe specified. Would any member or creditor of the company be able to file an application before the Tribunal in such a case? MCA had given this clarification by introducing the deemed approval provision in the Amendment Rules. This provision provides assurance as well as clarity by specifying that if the CG does not issue a confirmation order within a specified timeframe or refer the scheme to the Tribunal within 60 days of receiving the scheme, it will be deemed that the CG has no objection and will be obliged to issue a confirmation order. This deemed provision also gave a clear understanding of the timeframe within which the merger schemes would be reviewed and decided upon.

Issues and Recommendations

The introduction of specific timelines has resulted in a smoother and more time-bound process, although the Amendment Rules and current provisions governing fast-track mergers still lack clarity on certain aspects and require further attention. For instance, the settled principle in India that any law altering the rights or obligations of parties should be applied prospectively, companies applying for the fast-track process on or after the effective date will benefit from the new Amendment Rules. Therefore, the author suggests that there should be a committee to clear already pending applications, failure to comply may result in a backlog of pending cases, causing delays in decision-making and imposing an undue burden on the authorities.

Another aspect of concern relates to the concept of public interest, while the Companies Act, 2013 (“the Act”) acknowledges the significance of public interest as highlighted in several sections of the Act, including sections 62(4), 129, 210, 221, 233(5) and 237, there can be variations in the interpretation of its definition between the Tribunals and the CG. Thus, there is a need for clarity on what specifically constitutes the public interest concerning the fast-track merger process. The fundamental objective of the fast-track provision extends beyond the approval of schemes in the public interest as it also aims to foster growth and development within the corporate industry across various sectors. Section 233 of the Act deals with the “Merger or amalgamation of certain types of companies” but does not specifically address whether a step-down subsidiary can be included in the scope of fast-track mergers. Consequently, due to the lack of a precise definition of the wholly owned subsidiary, its interpretation relies on other laws and judicial pronouncements, leading to ambiguities and perplexity.

The recent changes also restrict the scheme only to start-ups or small companies and schemes that align explicitly with the public interest. This limited scope may exclude other companies or sectors that could potentially benefit from the fast-track process but do not fit within the defined criteria. Thus, the scheme must be expanded to include a broad spectrum of companies. This expansion would create a balance between uplifting the corporate sector and the welfare of the general public. Additionally, a monitoring committee should be appointed which must closely analyze the different stages of the process and identify the factors causing delays on the part of government authorities or otherwise. By identifying and addressing the factors, the committee can find ways to expedite the process even faster.

Conclusion

These recent amendments, with their stringent timelines and deemed approval provisions, have injected a newfound sense of certainty into the fast-track merger process. By mandating swift responses from authorities and establishing defined review periods, the amendments have curtailed unwarranted delays, enabling businesses to move with assured momentum. However, the journey is not yet complete, but the groundwork has been laid. As businesses and governing bodies converge on this shared mission, the fast-track merger landscape has the potential to become a vibrant and dynamic arena, where efficiency and success intertwine seamlessly. In the end, it is not just about merging companies, it’s about merging aspirations, potentials, and the collective drive toward a corporate ecosystem that thrives on effectiveness and advancement.

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