Streamlining Fast-Track Mergers: The Impact of 2023 Amendment in India

Corporate restructuring and mergers and acquisitions are vital components of the global business environment, with the option between private and statutory structures acting as a pillar in deal-making strategies. While private agreements have their advantages, statutory arrangements have clear advantages that should not be neglected. Nonetheless, while deciding the best method, thorough consideration of business, legal, and tax factors must be taken into account. Furthermore, the speed and ease with which a corporation may complete a transaction play a role in this decision-making process. In India, private arrangements have grown in favour of statutory arrangements for mergers & acquisition (‘M&A’) transactions. This inclination derives from the fact that statutory arrangements require regulatory approval, adding another degree of complexity and uncertainty. Initially, statutory arrangements in India could only be undertaken with the National Company Law Tribunal (‘NCLT’)’s consent. The NCLT process in India was often deemed burdensome, particularly for transactions involving parent and subsidiary companies or small businesses. Recognizing the need to streamline procedural requirements and reduce timelines associated with statutory mergers, the Ministry of Corporate Affairs (‘MCA’) implemented a solution called the fast-track merger (‘FTM’) process. This initiative was introduced as an amendment to the Companies Act, 2013, aiming to simplify and expedite mergers within specific categories of companies.

Section 233 of the Companies Act: Expediting Mergers through Fast Track Provisions

The J.J. Irani Committee Report (Chapter X) published in 2005 put light on the significant growth potential and strategic relevance of M&A in India. The analysis emphasised the problems and constraints that exist in the M&A market, notably the delays created by judicial proceedings. To overcome these difficulties and conform with worldwide M&A practises, the committee proposed that short-form mergers be used for specified types of corporations. The MCA enacted Section 233 of the Companies Act, accompanied by Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (‘Merger Rules’), in accordance with this advice and with an emphasis on improving the ease of doing business in India. These provisions enable the execution of FTMs without the intervention and approval of the NCLT for the following entities: a) Holding companies and their wholly-owned subsidiaries; b) Two or more small companies and c) Companies prescribed under specific regulations. Moreover, recognizing the growth in the startup sector, the eligibility for FTM was extended to startup companies on February 1, 2021. Collectively, these entities are referred to as “Eligible Entities”.

Eligible Entities considering FTMs must meet specific conditions under Section 233 of the Companies Act and the Merger Rules. These include getting agreement from their individual boards of directors and informing the relevant Registrar of Companies (‘ROC’) and Official Liquidator (‘OL’) of the proposed scheme of arrangement (‘Scheme’). The entities engaged in the arrangement then amend the Scheme in response to any complaints or suggestions received from the ROC and OL. Once revised, the Scheme must be accepted by shareholders owning at least 90% of the entire share capital of each business concerned, as well as at least 9/10ths of the creditors or particular classes of creditors (in terms of value) for each company. The transferee company then files the approved Scheme with the jurisdictional ROC and OL, giving them a 30-day Objection Period to convey any complaints or suggestions to the appropriate Regional Director (‘RD’). If the RD or the Central Government considers that the Scheme is not in the public or creditor interest based on the objections or proposals of the ROC and OL, they may submit an application with the NCLT for further review. However, if the RD receives no objections or recommendations from the ROC and OL during the 30-day period, or if the RD determines that the objections or suggestions are invalid, the RD is obligated to register the Scheme and issue a confirmation order to all companies being involved.

The major goal of FTMs is to speed up the process by allowing for relaxation and exemptions. In practice, however, the lack of established timetables for RDs to issue confirmation orders following the Objection Period has resulted in severe delays, particularly in jurisdictions with high case loads. The anticipated benefits of FTMs have been weakened as a result. In response to this issue, the MCA issued a notification on May 15, 2023 (‘2023 Amendment’) amending Rules 25(5) and 25(6) of the Merger Rules. The purpose of these revisions is to provide a time-bound approval system and to introduce the idea of presumed approval for FTMs.

Streamlining FTMs: MCA’s Notification Introducing Time-Bound and Deemed Approval

Recently, the MCA released a critical Notification presenting a change to Rule 25 of the Mergers Rules. This Notification introduces two key innovations designed to speed up the process of FTMs. To begin, it provides accelerated timetables for the ROC or OL to file complaints or make suggestions. Second, it serves to strengthen the notion of presumed permission. These revisions are critical in accelerating the FTM process and protecting the interests of the enterprises involved by reducing unnecessary delays.

Before the notification, there were no time constraints for the ROC or OL to deliver their answer. Even though the full permission procedure was supposed to be completed within sixty days of filing the application, the lack of precise due dates for the authorities’ produced impediments and delays. This lack of clarity led to disagreements and blame-shifting among the agencies concerned. The notice now includes set deadlines for the ROC and OL to submit objections or suggestions. Following notice, the ROC or OL must respond within 30 days of the application submission with any objections or suggestions. If no objections or suggestions are made and the proposal is assessed to be in the public interest, the Central Government is required to issue a confirmation order within 15 days of the thirty-day period expiring. When the ROC or OL offers an objection or proposal, the Central Government must either affirm or send the subject to the Tribunal within 30 days of the thirty-day term expiring. Furthermore, if the application is not processed, granted, or referred to the Tribunal within 60 days, it is considered accepted.

Enhancing Ease of Doing Business: 2023 Amendment Streamlining Fast Track Mergers

The introduction of the 2023 Amendment effectively tackles a significant challenge, particularly in specific regional jurisdictions in India where a substantial volume of Schemes is submitted, resulting in prolonged approval timelines for FTMs. By establishing clear and enforceable timetables for RDs, the amendment has successfully created a more streamlined and predictable process for enterprises seeking FTMs. This development is a positive signal for international investors who are considering FTM transactions in India, as they can now anticipate reduced timeframes and improved efficiency. By cultivating a business-friendly environment through the FTM process, the government is providing companies with greater assurance regarding timelines, which plays a pivotal role in evaluating suitable statutory arrangements for M&A. The 2023 Amendment serves as a significant step towards enhancing the ease of doing business in India. It addresses the issue of lengthy approval times, which previously caused delays and uncertainty for companies pursuing FTMs. With the establishment of defined timelines, the amendment brings clarity and efficiency to the process, instilling confidence in both domestic and foreign investors. Overall, the amendment’s impact extends beyond improving efficiency; it also fosters investor confidence and reinforces India’s commitment to facilitating a conducive business environment for M&A activities.

Advancing Towards Efficiency: A Positive Step with the 2023 Amendment in FTMs

Undoubtedly, the 2023 Amendment represents a significant and positive step as it aims to eliminate potential delays in receiving responses from jurisdictional agencies such as the ROC and OL. This amendment holds promise for applicants seeking FTMs by streamlining the process and reducing uncertainties. It seeks to foster the inorganic growth of the MSME sector and startup companies while ensuring a balance between regulatory certainty and the protection of public and creditor interests. However, despite the notable improvements brought about by the amendment, certain aspects require further clarification. The absence of directives or instructions from the MCA regarding the amendment’s applicability to ongoing FTMs raises questions. It remains uncertain whether companies already undergoing FTMs will benefit from the amendment or if it only applies to companies applying for authorization after June 15, 2023. Additionally, the practical implementation of the amendment will need careful monitoring to assess its effectiveness in achieving the intended objectives. Nonetheless, the 2023 Amendment demonstrates the government’s commitment to improving the ease of doing business in India. Its aim to expedite the FTM process and provide greater certainty to stakeholders is commendable. As the commercial and legal communities in India look ahead, they remain hopeful for a truly efficient and expedited experience in FTMs, further enhancing the business environment in the country.

This article is written by Mr Aayush Akar & Mr Aditya Gautam, students of National Law University Odisha.