The Ministry of Corporate Affairs (MCA) has recently amended Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (CAA Rules, 2016) vide Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (CAA Amendment Rules 2024) to provide clarity on the requirements for certain types of inbound mergers. Specifically, the amendments address the scenario where a foreign holding company, incorporated outside India, enters into a merger or amalgamation with its wholly-owned subsidiary (WOS) in India. This amendment outlines the necessary regulatory approvals and compliance procedures.
To understand the impact of these amendments, it is pertinent to understand the different forms of inbound mergers that can occur.
- Categorization of Inbound Mergers
1. The Indian company is the holding company, and the foreign company is its subsidiary.
2. The Indian company is the holding company, and the foreign company is a wholly-owned subsidiary (WOS).
3. The Indian company is the subsidiary, and the foreign company is the holding company.
4. The Indian company is a WOS, and the foreign company is the holding company (“Reverse Flipping”).
- The focus of the amendment – Ease the Process of Reverse Flipping
The amendment to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2024, specifically targets mergers where a foreign holding company, being a transferor company merges with its Indian wholly-owned subsidiary (WOS), being a transferee company.
All four kinds of mergers were governed by Section 234 of the Companies Act, read with Rule 25A and Regulation 9 of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018. This required compliance with the process laid out in Sections 230-232 of the Companies Act, involving approval of the National Company Law Tribunal (NCLT) approval and the Reserve Bank of India.
However, the recent amendment aims to streamline the process for inbound mergers where a foreign holding company merges with its Indian WOS, resulting in the Indian entity being the surviving entity after the merger, particularly to attract startups with holding companies outside India by simplifying “reverse flipping” structures.
- Implications of the Amendment
The first three scenarios of inbound mergers—(i) where the Indian company is a holding company and the foreign company is a subsidiary; (ii) where the Indian company is a holding company and the foreign company is a wholly-owned subsidiary (WOS); and (iii) where the Indian company is a subsidiary of a foreign holding company—continue to follow the original process as outlined under Sections 230-232 and Section 234 of the Companies Act,2013 read with Rule 25A of the CAA Rules, 2016. These processes still require approval of the NCLT in addition to RBI approval.
However, for the fourth scenario, the process is now simplified by removing the need for approval of NCLT. The Companies involved in such a merger must now adhere to the fast-track process under Section 233 of the Companies Act read with Rule 25 of the CAA Rules, with only RBI Approval required.
The recent amendment providing for the RBI approval for companies engaged in “reverse flipping” represents an important regulatory shift that addresses the growing trend of businesses returning to India. By creating a structured mechanism to monitor foreign capital inflows and the reintegration of these businesses, the RBI is ensuring that such transitions are aligned with India’s broader economic goals. This move is intended to close any gaps that companies might explore, particularly around foreign exchange compliance and tax planning, which have historically been areas of concern. With clearer regulations in place, the RBI aims to curb the risk of capital flight or regulatory arbitrage, where companies could take advantage of less stringent rules during the repatriation process.
- Analysis of Application of Regulation 9 (“Deemed Approval”) of the FEM (Cross Border Merger) Regulations, 2018:
The Companies Act, in conjunction with the Merger Rules, allows for the seamless merger of a foreign company with an Indian entity, provided that the necessary steps under sections 230 to 232 of the Act are fulfilled, including obtaining approval from the NCLT. Furthermore, these Merger Rules emphasize the need for prior Reserve Bank of India (RBI) approval for any cross-border mergers, ensuring that foreign exchange regulations are respected during such transactions.
In a significant development, the RBI introduced the Foreign Exchange Management (Cross Border Merger) Regulations in March 2018 to specifically address concerns related to exchange control in cross-border mergers. These regulations streamline the process by stipulating that any transaction conforming to the Cross Border Merger Regulations is automatically considered approved by the RBI, as required by Rule 25A of the Companies Merger Rules.
Under Regulation 9, deemed RBI approval applies if a company complies with the relevant regulations. A key requirement is the submission of a compliance certificate from the Managing Director (MD), Company Secretary (CS), or Whole-Time Director (WTD) alongside the application made to the NCLT under the CAA Rules, 2016.
The regulation frequently refers to the filing of applications with the NCLT and the sanctioning of merger schemes by the NCLT, making it clear that Regulation 9 operates in conjunction with Sections 230-232 and Section 234 of the Companies Act, 2013, which require both NCLT and RBI approval.
The recent amendment inserting Rule 25A (5), however, eliminates the need for NCLT approval for mergers involving a foreign holding company merging with its Indian wholly-owned subsidiary creating a streamlined path under Section 233 and Rule 25. By bringing this amendment and removing the requirement of NCLT Approval, the authority may have made a distinction between Rule 25A (1) to (3) and 25A (5) of CAA Rules.
In this context, since Regulation 9 presupposes the involvement of the NCLT, its application may be confined to mergers that continue to require tribunal approval under Sections 230-232 and 234 of the Companies Act. Therefore, as of the current date and based on the understanding of the legal framework, Rule 25A (5) may operate independently of Regulation 9, with the merger process being governed by Section 233 of the Companies Act, 2013, and the relevant rules. However, the RBI’s intent with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, was to streamline the process by removing the additional requirement for RBI approval under the Companies Act for companies that comply with these regulations. In light of this, we expect RBI may issue a clarification, potentially extending the deemed approval mechanism to mergers falling under Rule 25A(5).
In conclusion, the regulatory landscape governing cross-border mergers remains in a state of flux, particularly with the introduction of Rule 25A (5). While this rule creates a more streamlined path for certain mergers, it leaves open questions about the applicability of Regulation 9 and the deemed approval mechanism, where NCLT sanction is a pre-requisite. Until further clarification is provided by the RBI, companies engaged in such mergers must navigate both RBI and Companies Act requirements independently. As the regulatory framework evolves, there remains potential for further alignment that simplifies the approval process, reflecting the RBI’s broader aim of minimizing procedural overlaps for compliant entities.
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Authors: Abhishek Bansal, Partner ([email protected]) and Pulak Bansal, Associate ([email protected]) of ACUMEN JURIS, Law Office (DELHI | GURUGRAM), specialize in Mergers & Acquisitions, Transaction Advisory, Corporate Commercial, Startup Advisory, Forensic Due Diligence, and Global Business Setup.
Disclaimer– This Article is for information purposes only, and the views stated herein are personal to the author, and shall not be rendered as any legal advice or opinion to any person, and accordingly, no legal opinion shall be rendered by implication. The Article does not intend to induce any person to omit, commit or act in any particular manner, and you should seek legal advice before you act on any information or view expressed herein. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this Article.
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