Summary: The Ministry of Corporate Affairs (MCA) has introduced a significant change with its notification dated September 9, 2024, effective from September 17, 2024, permitting cross-border mergers under Section 233 of the Companies Act, 2013, using the fast-track merger process. This amendment applies to mergers between a foreign holding company and its wholly-owned Indian subsidiary. Traditionally governed by Section 234 and requiring compliance with RBI approval and various sections of the Companies Act, 2013, these mergers now benefit from streamlined procedures. The updated Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, exempts such mergers from certain compliance requirements, simplifying the process. The Indian transferee company must still seek RBI approval and adhere to Section 233, but the overall process becomes more efficient and less costly. This amendment is expected to facilitate quicker and more cost-effective cross-border mergers, enhancing the global integration of Indian companies and helping them leverage strategic benefits.
The Ministry of Corporate Affairs (MCA), through its notification dated September 09, 2024 which would be effective from September 17, 2024, has opened the door for Cross-Border Mergers under Section 233 of the Companies Act, 2013 i.e., via the fast-track merger process, for merger or amalgamation enters into between a foreign transferor company (incorporated outside India as a holding company) and an Indian transferee company (a wholly-owned subsidiary incorporated in India).
Let’s briefly discuss the concept of a Cross-Border Merger and the implications of the aforementioned MCA notification.
Cross-Border Merger
A Cross-Border Merger refers to a merger or amalgamation between an Indian company (incorporated under the Companies Act, 2013) and a foreign company (incorporated outside India).
Foreign Company – A foreign company means any company or body corporate incorporated outside India, whether or not it has a place of business in India.
Purpose of Cross-Border Merger
Cross-Border Mergers are often undertaken to achieve objectives such as:
1. Market Expansion
2. Diversification
3. Elimination of Competition
4. Brand Recognition
5. Access to New Customers
6. Access to Resources
7. Synergies and Economies of Scale
Applicable Provisions
Cross-Border Mergers are primarily governed by Section 234 of the Companies Act, 2013, read with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, and the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.
As per Section 234 read with Rule 25A:
- A merger or amalgamation between an Indian company and a foreign company requires prior approval from the Reserve Bank of India (RBI).
- Companies must comply with the provisions of Sections 230–232 and Section 234 of the Companies Act, 2013.
Based on these requirements, companies engaging in Cross-Border Mergers, then, the concerned company (i.e. either transferor or transferee company incorporated in India) shall adhere with the procedure stipulated under the provisions of Section 230-232 of the Companies Act, 2013.
What does the Amendment Change?
The MCA’s recent amendment to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, provides an exemption to mergers or amalgamation between a foreign holding company (transferor) and its wholly-owned Indian subsidiary (transferee) from complying with the sub-rules (1) to (3) of Rule 25A, which mandate RBI approval and compliance with Sections 230–232 of the Companies Act, 2013.
After the amendment, if the Transferor Company (being a Foreign and Holding Company) and Transferee Company (being an Indian and Wholly Owned Subsidiary Company) enter into merger or amalgamation, then,
i. both companies must still obtain prior approval from the RBI;
ii. the transferee Indian company shall comply with the provisions of section 233;
iii. the application shall be made by the transferee Indian company to the Central Government under section 233 of the Act and provisions of rule 25 shall apply to such application
Implications of the Amendment
This amendment simplifies the merger or amalgamation process for holding and wholly-owned subsidiary companies, making it more time- and cost-effective by streamlining compliance requirements under the fast-track merger mechanism outlined in Section 233 of the Companies Act, 2013.
Conclusion
The MCA’s notification, represents a significant step towards simplifying cross-border mergers, particularly for mergers between a foreign holding company and its wholly-owned Indian subsidiary. By allowing such mergers to proceed under the fast-track mechanism of Section 233 of the Companies Act, 2013, the process becomes more efficient and cost-effective.
This amendment is likely to encourage more cross-border mergers, fostering greater integration of Indian companies into the global business landscape and enabling them to realize synergies and other strategic benefits more swiftly.
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