Analysis of Section 234 of Companies Act, 2013 notified on 13.04.2017

Overview:

Section 234 of the 2013 Act i.e. Merger or amalgamation of a company with a foreign company is notified vide Notification No. S.O. 1182(E) dated 13.04.2017. The MCA had already notified the suite of sections relating to compromises, arrangements and amalgamations on 7 December 2016. However, Section 234 relating to merger or amalgamation of a company with a foreign company was pending. The recent notification of Section 234 of the 2013 Act completed the enforcement of the entire suite of sections relating to compromises, arrangements and amalgamations. On the same date MCA has issued the Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017 inserting Rule 25A and Annexure B in prescribing rules in the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 in relation to operation of section 234.

Need for the commencement:

After the “TPP Notification” came into force, notifying the Companies (Transfer of Pending Proceedings) Rules, 2016 (‘TPP Rules’) effective from December 15, 2016. Rule 3 of the TPP Rules provides all proceedings under the 2013 Act including proceedings relating to arbitration, compromise, arrangements and reconstruction, other than proceedings relating to winding up on the date of coming into fate of the TPP rules shall stand transferred to the National Company law ‘tribunal (“NCLT”). Although the language of the TPP Rules required transfer of all proceedings relating to arrangements and reconstruction to the NCLT, without the notification of Section 234 of the 2013 Act, the NCLT wasn’t having the jurisdiction over mergers of foreign companies and hence there existed a confusion whether such cases were to be dealt in High Court or NCLT  since the TPP Rules categorically required the transfer of all proceedings to the NCLT, therefore the High Courts didn’t proceeded with the Applications filed by companies for merger with the foreign company, questioning the maintainability of the Applications before it.

Applicability:

The provisions of Section 234 and that of Rule 25A of the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 are effective from 13 April 2017.

Requirement of Section 234 of the Companies Act, 2013:

Proviso to sub-section (1) of Section 234 provides, ‘that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.’Sub-section (2) of Section 234 requires a prior Reserve Bank approval in the cross-border mergers. The requirement of approval by the RBI is expected to ensure regulatory supervision over the proposed mergers including safeguarding of interest of the concerned stakeholders.

Prior approval of the RBI:

A foreign company (incorporated in the jurisdictions of such countries as may be notified) may merge into a company registered under the 2013 Act or vice-versa after obtaining prior approval of the Reserve Bank of India (RBI).

 Payment of consideration:

The terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in depository receipts, or partly in cash and partly in depository receipts, as the case may be, as per the scheme to be drawn up for the purpose.

 Related provisions under Companies Act, 2013:

Rule 25A of the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 also notified on 13.04.2017 gives Merger or amalgamation of a foreign company with a company and vice-versa (“inbound merger”). Both inbound merger and outbound merger require prior approval of RBI. Both inbound merger and outbound merger should comply with the provisions of section 230 to 232 of the Act.

 Application to NCLT:

After obtaining the approval of the RBI and complying with the provisions of the above mentioned sections and the related Rules, the concerned company may file an application with the NCLT for approval of the merger.

Definition of Foreign Company for the aforesaid provisions:

(*’Foreign company’ means any company or body corporate incorporated outside India whether having a place of business in India or not.)

The provisions of Section 234 and that of Rule 25A of the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 are effective from 13 April 2017 can be viewed from below link: