Background
The trend of ‘reverse flipping’ has been picking up in India for many startups in recent times. Some of the reasons for such trend are the resilience and growth of the country’s IPO market which provides investors with a viable exit strategy and good valuation, and government support for the startup eco system.
Considering the above and to ease up such merger process, the government has notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (‘the Amendment’) with the objective of easing ‘reverse flipping’ norms in India. The Amendment shall be eective from 17 September 2024.
What is reverse flipping
Before getting into the details of the Amendment, let us understand what is ‘reverse flipping’. Few Indian startups had setup their holding company outside of India like in the US or Singapore while their business operations were predominantly in India. Earlier, such structures were created with the intention to globalise the company, listing in the overseas jurisdiction, it was perceived that the tax and regulatory framework were favourable in those jurisdictions.
But with the ease of regulations in India and better valuation in the IPO market, the trend has changed and hence the startups are considering moving their holding companies back to India. Few recent examples were PhonePe, Groww and Pinelabs.
How reverse flipping is achieved
Reverse flipping can be achieved, broadly, by below options:
- The shareholders swapping their shares of the foreign holding company against the shares of the Indian subsidiary company or
- Merger of the foreign holding company with its Indian subsidiary
The pre amended Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the Merger Rules) permits foreign companies to merge with an Indian company by obtaining prior approval of the Reserve Bank of India (RBI) and the National Company Law Tribunal (NCLT).
The Amendment has introduced Rule 25A(5) to the Merger Rules, permitting the merger or amalgamation of a foreign company being a holding company into an Indian company being wholly owned subsidiary to be undertaken through the fast track merger scheme as per Section 233 of the Companies Act, 2013 (the Companies Act) read with Rule 25 of the Merger Rules. A fast track merger is approved by the Regional Director (RD) and does not require an approval from the NCLT. This would reduce the overall timeline for such merger.
The conditions laid down in the Rule 25A(5) are as follows:
(i) both the transferor and transferee companies shall obtain the prior approval of the Reserve Bank of India;
(ii) the transferee Indian company shall comply with the provisions of Section 233;
(iii) the transferee Indian company shall make an application to the RD under Section 233 of the Companies Act and provisions of Rule 25 of the Merger Rules shall apply to such application; and
(iv) a declaration, if the foreign company is incorporated in a country which shares a land border with India, shall be made that the approval had been obtained under the FEMA regulations, at the time of making application with the RD.
FEMA Regulations
It is imperative to note that the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (‘FEM Regulations’), covers merger of foreign company with an Indian company or vice versa. It provides that if the cross border merger is in accordance with the said regulations then it shall be deemed to have prior approval of the RBI as required under Rule 25A of the Merger Rules.
Summary of approval requirements under the Companies Act and FEMA Regulations
The below table summarizes the approval requirements under the Companies Act and the Merger Rules vis-à-vis FEMA Regulations:
| Section and Rule | Approval requirements | Companies covered |
| Rule 25 of the Merger Rules read with section 233 of the Companies Act | Fast track merger approved by RD. RBI approval not applicable. | Scheme of merger between Indian Small Companies1 and scheme of merger between Indian holding and its Indian wholly owned subsidiary company |
| Rule 25A sub section (1) to (4) of the Merger Rules read with section 230-232 of the Companies Act | Normal cross border merger approved by NCLT.Deemed approval from RBI if compliant as per the FEM Regulations. | Merger of foreign company with an Indian company and vice versa. No requirement of holding company and wholly owned subsidiary company relationship |
| Rule 25A sub section (5) of the Merger Rules read with section 233 of the Companies Act | Fast track cross border merger approved by RD. For RBI approval requirement refer our comments below. | Merger of foreign company being a holding company with an Indian company being its wholly owned subsidiary company. |
Kretha Sphere comments:
Given the Government’s impetus on ease of doing business and promote startups in India, the Amendment under the Merger Rules is a welcome move. However, the Government / RBI needs to provide clarity on the below aspects:
1) A question may arise if the regulations regarding deemed approval from RBI will be applicable in case of merger involving foreign holding company under fast track route as well, if compliant as per the FEM Regulations. In our view, a fast track merger may not be covered within the purview of the deemed approval from RBI under the FEM Regulations since the RD approval process is not specifically provided under the said Regulations and if the cross border merger is carried out with the RD approval it may not strictly be compliant with the FEM Regulations.
However, a contrary view is possible that the deemed approval from RBI shall be applicable for the fast track route as well under the FEM Regulations since the FEM Regulations refer to Rule 25A and the new sub Rule has been inserted as part of the said Rule.
RBI clarification is expected to provide clarity in this regard.
2) While the Amendment had been brought to bring ease in reverse flipping scenario, hence provided only for such cross border merger involving merger of foreign holding company with its Indian wholly owned subsidiary company. However, the said Rules can be made applicable to a cross border merger involving merger of a foreign wholly owned subsidiary company with its Indian holding company. Extension of the Rules to such cases will ease the timeline for Indian MNCs in implementing the merger of their foreign wholly owned subsidiary.
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Author: Jagannathan M, Partner, M&A Tax and Regulatory Services, Kretha Sphere Advisors LLP, Email ID: [email protected]
