ICAI Guidelines for CA Firm Merger and Demerger

Introduction (short title, scope, commencement)

• Status & scope. These are the ICAI (Merger & Demerger of CA firms) Guidelines, 2024, applicable to “firms” as defined in s.2(ca) of the Chartered Accountants Act, 1949. They take effect from the date of Gazette notification. Implication: do not rely on pre‑2024 Council rules unless a specific grandfathering clause applies.
• Practical takeaway. If you’re a CA in individual practice without a firm/trade name, these Guidelines don’t apply (see also Miscellaneous).

Definitions

• Institute/Council/Act/Committee/Firm are defined by reference to the CA Act, 1949; “Firm” picks up the Act’s meaning. Compliance tip: when constituting/altering entities, ensure consistency with the Act’s definitions (e.g., FRN, firm constitution).

Concept & Background

• Why these Guidelines? Partnership Act, 1932 doesn’t address merger/demerger; ICAI fills that gap to promote consolidation for scale and competencies. Think of this as an administrative/regulatory framework layered over general partnership/LLP law.
• Entity‑compatibility.
  • Sole prop ↔ can merge into sole prop/partnership/LLP.
  • Partnership ↔ can merge with partnership/LLP.
  • LLP ↔ cannot merge with a sole prop or partnership (LLP↔LLP only). Risk: attempted cross‑type mergers involving LLP→non‑LLP will be non‑compliant.
• LLP note. Sections 60–62 of the LLP Act, 2008 govern LLP compromises/arrangements/mergers; ensure dual compliance (ICAI + LLP Act) for LLPs.

Merger (operational rules)

1. Filing & timelines

• Form MDG‑1 within 30 days of merger; also file re‑constitution deed with Registrar of Firms/ROC as applicable. Missing the 30‑day window can jeopardize recognition/seniority traceability.

2. Freezing of pre‑merger firm names

• On request, ICAI freezes the names of merging firms under s.20B so no one else can get them; partners cannot do any professional activity under a frozen firm/FRN. All UDINs for past work must already have been generated.
• Unfreezing triggers/limits:
  • Unfreezing requires Form MDG‑3, typically during demerger; ICAI issues a certificate and maintains a freeze/unfreeze trail.
  • Consent of 75% of surviving partners is needed to unfreeze; those who retired/resigned must give NOC authorizing the survivors. Tip: build this consent pathway in the merger deed upfront.
  • Name freeze ends if ICAI receives intimation of death/retirement of the linked authorized MRN or removal under s.20C.

3. Pre‑write your demerger terms

• Mandatory: lay down demerger terms at the time of merger (or amend later with consent of all concerned), consistent with the Act/Regulations/Guidelines. This is crucial for later unfreezing and seniority continuity.

4. Authentication & technology flow

• Each merging firm must authorize a Managing Partner (and co‑authorized partner) to authenticate the merger on SSP (OTP‑based); upload digitally/originally signed docs with MDG‑1. If the Managing Partner retires/deceases, the co‑authorized partner takes over. Joining/retiring partners of the merged firm must also OTP‑authenticate changes thereafter. Keep an internal register of authorized signatories/MRNs.

5. Document custody & ethics alerts

• The authorized (co)‑managing partner must retain core practice documents (deeds, partner changes, staff employment, approvals, property, tax, bank signatories, etc.) for possible ICAI requisition—plan for succession of custody.
• At merger time, disclose restrictions under Companies Act s.144, non‑permissibility of audit rotation among merging firms, and any Code of Ethics/other law issues. This reduces later conflict/independence breaches.

Demerger (how to split and reclaim)

1. Who can demerge & how consent works

• Only firms that previously merged can demerge. The merger agreement must already contain demerger terms. No acceptance is required from other continuing partners to effect your demerger if your threshold is met.
• Threshold: if ≥75% of the continuing partners of any one erstwhile firm want to demerge, they can, by giving notice in Form MDG‑2 to the other partners and to ICAI. (Fractions round up.)

2. Effects of demerger

• For the demerging firm, the merger comes to an end; the remaining firms may continue by executing a reconstituted merger/partnership deed. All new joining/leaving of firms/partners post‑merger must follow full due process (note: death/retirement ≠ demerger).
• Old trade name right: the demerged firm can practice in its old pre‑merger name (that had been frozen), but only after 1 year and within 10 years from the date of merger, subject to the freezing/unfreezing rules. Missing the 10‑year window forfeits the right.
• Seniority continuity: Constitution Certificate will show original establishment date → merger date → demerger date; total seniority includes pre‑merger years + years in the merged firm. This is key for empanelments/eligibility thresholds.
• Formality & authentication: File MDG‑2 with originally/digitally signed papers; authentication via SSP OTP by the originally authorized Managing Partner (or co‑authorized if the Managing Partner retired/deceased).
• Illustrations in the Guidelines show name‑freeze and seniority results under different timelines (e.g., demerger beyond 10 years → name cannot be unfrozen). Use these to plan your merger clock.
• Window to demand demerger: After 1 year and within 10 years from merger date (also echoed in the Merger Agreement format). Plan exit options accordingly.

3. Post‑demerger filings

• Both the merged and demerged firms must file Form 18 under the CA Regulations, 1988 within prescribed period after such constitution changes. This is separate from MDG forms and is often missed.

Miscellaneous

• Individual practitioners (no firm/trade name) are outside the Guidelines’ ambit. If you want merger benefits, first adopt a trade/firm name and FRN.
• Events like death/insolvency/surrender of COP etc. don’t force a demerger; instead, notify ICAI and update deeds. For future unfreezing, ensure retiring/resigning partners give NOCs to empower survivors (ties back to unfreezing rule).
• Grievance Redressal Cell (M&SS Directorate) exists—use it for process clarifications. The Council can issue clarificatory circulars if difficulties arise.
• Repeal & savings. Earlier merger/demerger rules are repealed, but actions under them are recognized under the corresponding new provisions. Transitional relief: firms that merged before commencement and haven’t completed 5 years post‑merger can also avail the benefits (e.g., demerger/name unfreezing within the 1–10 year construct).

Forms — MDG‑1 (Merger), MDG‑2 (Demerger Notice), MDG‑3 (Unfreezing)

• MDG‑1 (Merger Agreement):
  • Records oldest firm’s establishment date as the merged firm’s establishment date; lists partners; requests freezing of erstwhile names; pre‑agrees key demerger entitlements (≥75% rule, seniority carryover, old name right, 1–10 year window). Also embeds ethics/Section 144 alerts and document custody undertakings.
• MDG‑2 (Demerger Notice):
  • Confirms authorization, merger details, that the applicants form ≥75% of continuing partners of the erstwhile firm, and requests unfreeze of the pre‑merger name. Timing must satisfy the 1–10 year rule.
• MDG‑3 (Unfreezing Request):
  • Lists surviving partners out of those who sought the original freeze; confirms ≥75% of surviving partners consent, annexes NOCs from those who resigned/retired, and undertakes document custody/compliance. Demerge first, then unfreeze.

Appendix 1 — Council decisions on seniority (practical rules)

• Name/seniority logic across scenarios:
  • Sole prop → firm with same name: seniority = original trade name establishment date; different new firm name: seniority = approval/establishment of new name, whichever later.
  • Death: if trade name is assigned within one year and practice continues in same trade name, seniority follows the deceased member’s recognized date; if continued under a new name, seniority is the new name’s approval/establishment date.
  • Two‑partner firm: on death/retirement of one, same firm name → no change in establishment date; new firm name → seniority from new approval/establishment. >2 partners continuing in same name → no change.
  • Merger/Amalgamation: seniority of the merged firm = oldest establishment date among merging firms; if name changes, name changes from approval date but establishment date doesn’t change. Old names are frozen and can be unfrozen per requests/conditions.
  • Simple change in firm/trade name: name changes from approval date; establishment date unchanged; old name frozen for three years with “formerly known as …” notation in constitution certificate; option to revert within that period if all partners apply. (This “3‑year” mechanism is separate from the merger/demerger 1–10 year window.)

Actionable checklists

Before you merge

• Map entity compatibility (LLP with LLP only; others as permitted).
• Draft MDG‑1 with: oldest establishment date, freeze request, demerger terms, ≥75% rule, Section 144/rotation caveats, document custody, OTP roles. File within 30 days; file deed with RoF/ROC.
• Identify linked MRNs, co‑authorized partner/legal heir, and maintain a consent/NOC plan for future unfreezing.

While merged

• Ensure no professional work is done under frozen names/FRNs; keep UDINs complete; run all constitution changes (join/retire) via SSP OTP.

If you plan to demerge

• Check the clock: only after 1 year and within 10 years of merger; file MDG‑2; after demerger, file Form 18; then file MDG‑3 to unfreeze old name (with ≥75% of surviving partners + NOCs).

Common pitfalls to avoid

• Trying LLP ↔ partnership/sole mergers (not permitted for LLP).
• Missing 30‑day MDG‑1 filing or RoF/ROC updates.
• Ignoring s.144 service restrictions & audit rotation issues across merging firms.

Attempting unfreeze beyond 10 years from merger: you’ll lose the old name.

Checklist for filing the forms MDG1, MDG2 and MDG3

MDG-1: Merger Agreement & Filing Checklist

(To be filed within 30 days of merger)

Basic Details

• Name of Firm 1: ___________________________
• FRN: ___________ Date of Establishment: __________
• Name of Firm 2: ___________________________
• FRN: ___________ Date of Establishment: __________
• Date of Merger Agreement: ___ / ___ / ____

Consent & Signatories

• All partners signed merger deed? ☐ Yes ☐ No
• Managing Partner authorized (Name & MRN): __________________
• Co-authorized Partner designated (Name & MRN): ______________

Freezing of Old Names

• Request made to ICAI to freeze erstwhile firm names ☐ Yes ☐ No
• UDINs generated for all pre-merger work ☐ Yes ☐ No

Demerger Terms (must be in deed)

• Clear provision: ≥75% of erstwhile firm partners can demerge ☐ Yes ☐ No
• Timeline noted (after 1 year, within 10 years) ☐ Yes ☐ No
• Seniority carryover agreed ☐ Yes ☐ No
• Right to revive old name recorded ☐ Yes ☐ No

Ethics & Restrictions

• Sec. 144 Companies Act restrictions disclosed ☐ Yes ☐ No
• Audit rotation limitations acknowledged ☐ Yes ☐ No

Document Custody

• Person responsible for custody (Name): __________
• Location of storage: __________

Filing

• MDG-1 uploaded on SSP portal with digital/original signatures ☐ Yes ☐ No
• Reconstitution deed filed with ROC/RoF ☐ Yes ☐ No

MDG-2: Demerger Notice Checklist

(Applicable after 1 year, within 10 years of merger)

Basic Details

• Name of Merged Firm: ___________________________
• FRN: ___________
• Date of Original Merger: ___ / ___ / ____
• Date of Demerger Notice: ___ / ___ / ____

Eligibility

• Demerger terms included in original merger deed ☐ Yes ☐ No
• ≥75% of continuing partners of erstwhile firm consent ☐ Yes ☐ No
• Fractions rounded up ☐ Yes ☐ No

Consent

• List of consenting partners (≥75%): ___________________________
• Managing Partner authorized to file: ___________________________

Unfreezing Request

• Request for revival of old firm name made ☐ Yes ☐ No
• Confirmation that request is within 1–10 year window ☐ Yes ☐ No

Filing

• MDG-2 filed on SSP portal ☐ Yes ☐ No
• Form 18 filed by merged firm (constitution change) ☐ Yes ☐ No
• Form 18 filed by demerged firm ☐ Yes ☐ No

MDG-3: Unfreezing Old Name Checklist

(Only after valid demerger has been approved)

Basic Details

• Name of Firm (requesting unfreeze): ___________________________
• FRN: ___________
• Date of Original Freeze: ___ / ___ / ____
• Date of Demerger: ___ / ___ / ____

Consent Requirements

• ≥75% of surviving partners of erstwhile firm consent ☐ Yes ☐ No
• List of surviving partners: ___________________________
• NOCs from retired/resigned partners obtained ☐ Yes ☐ No

Supporting Docs

• Copy of ICAI Freeze Certificate attached ☐ Yes ☐ No
• Copy of Demerger approval attached ☐ Yes ☐ No
• Updated Partnership Deed attached ☐ Yes ☐ No

Custody of Documents

• Person responsible for record custody confirmed: ______________

Filing

• MDG-3 submitted with digital/original signatures ☐ Yes ☐ No
• SSP OTP authentication completed ☐ Yes ☐ No
• Await ICAI Unfreeze Certificate (must maintain in firm records)