Post-Restructuring Compliance Steps: NCLT-Approved M&A

In the times to come restructuring activities will play a key role in the economy. Several factors have been instrumental in paving way towards high value M&A transactions in India. With huge FDI being pumped in the economy, solid financials of domestic companies, and liberal foreign policies have made India a lucrative M&A hub and an attractive non-US destination for capital. Further, giant domestic groups regularly rely on restructuring activities to consolidate and attain operational efficiencies which lead to wealth maximization.

In this article, we shall be discussing the compliance activities required once a merger/ demerger order is approved by the NCLT and is required to be put on record.

Key steps to be followed once NCLT approves a restructuring activity

Following are the key steps that are required to be followed once the NCLT approves a restructuring activity:

1. Filing of Form INC 28 for taking in record the NCLT order

2. Passing of Board Resolution/ Shareholder’s Resolution in case there is an increase in authorized share capital (if required)

3. Payment of MCA fees for increasing the authorized share capital (if required)

4. Issue of shares post increase in authorized share capital (if required)

5. Adjudication and payment of stamp duty

6. Filing Form PAS 3: Return of allotment

7. Filing of Form SH-4/ Form FC in case there is domestic/ foreign investment being transferred from amalgamating/ demerged entity to amalgamated/ resulting entity

8. Intimate the income tax authorities vide letter addressed to the income tax authorities

9. Transfer of TDS/ TCS/ advance tax from the amalgamating/ demerged entity to the amalgamated/ resulting entity

10. Revision of financial statements to take into effect the merger/ demerger activity

11. Filing of ITR-A along with revised ITR u/s 170A of the IT Act

12. Intimate the internal and external members of the entity (including banks) who are directly/ indirectly affected by the merger/ demerger activity

13. Initiate HR activities including transfer of employees and employee welfare accounts, IT assets,

14. Intimate the courts, against pending litigations, if any

15. Intimate the income tax authority for surrendering PAN in case the amalgamated/ demerged entity ceases to exist.

The post restructuring implementation activities is a tiresome process and at times, it takes years to standardize entity functioning after a merger/ demerger is carried out.

In this article, we shall be discussing key issues that one faces while carrying out post implementation activities:

Consolidation of financial statements after the appointed date

Although the term ‘appointed date’ is not defined in the Companies Act, 2013 (CA, 2013), it is imperative to provide an appointed date in the scheme of arrangement filed with the NCLT. Such appointed date is considered as the date from which the scheme is considered effective. Although, there is no restriction for the entity to choose an appointed date as per CA, 2013, however, for ease in consolidation purposes, it is always suggested that the appointed date should be the beginning of the financial year, to avoid discrepancy in calculation of balances to be transferred.

Payment of additional MCA fees for increase in authorized share capital

In case there is an increase in authorized share capital in the event of a restructuring process, it is important to ensure that the additional fees is calculated after considering any old fee disbursed to the MCA in relation to the authorized share capital. It is important to ensure that old disbursement records are maintained in the event of subsequent fee payment.

Filing of Form PAS-3 and requirement for shareholder’s resolution for issuing shares

While filing PAS-3, when selecting type of security as equity, the next step is to identify the “Type of allotment”. In case “private placement” is selected, passing a shareholder’s resolution and the details thereof need to be filled in PAS-3. However, if “Others” is selected, passing a shareholder’s resolution can be avoided.

Filing of Form FC

With the recent amendment in Foreign Exchange Management (Overseas Investment) Directions, 2022 and Master Direction – Reporting under Foreign Exchange Management Act, 1999, Form FC was introduced. Although, no specified timeline has been mentioned in the master direction, however, in practical scenario, it is suggested to file within 30 days of taking the NCLT order in record. In the event of delay in filing Form FC, a late submission fee of minimum INR 7,500 is required to be paid.

Stamp duty adjudication

Payment of stamp duty is required under the following instances:

• Merger/ demerger order
• Issue of securities (equity shares, preference shares etc)

It is important to ensure that the amount of stamp duty to be paid is thoroughly validated by the stamp duty authority.

Composite scheme of arrangement including reduction of share of capital filed with NCLT

In the case of an approved scheme of arrangement that includes reduction of share capital, it must be noted the separate compliance requirements for intimating reduction of share capital including filing of Form RSC-7 is not required to be followed. Form INC-28 in itself is sufficient intimation to the MCA in regard to the NCLT order approving the scheme of arrangement and reduction of share capital.

Filing of modified return in ITR-A

With the amendment in the Act and insertion of section 170A vide Finance Act 2022, it has become mandatory for entities to file modified income tax returns for assessment years against which the business reconstruction is applicable. Such modified return is required to be filed within six months from the end of the month is which order for such restructuring is issued.

As per Section 170A,

(1)Notwithstanding anything to the contrary contained in section 139, in a case of business reorganisation, where prior to the date of order of a High Court or tribunal or an Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) (hereinafter referred to as order in respect of business reorganisation), as the case may be, any return of income has been furnished by an entity to which such order applies under the provisions of section 139 for any assessment year relevant to the previous year to which such order applies, the successor shall furnish, within a period of six months from the end of the month in which the order was issued, a modified return in such form and manner, as may be prescribed91, in accordance with and limited to the said order.

There still exists ambiguity whether a modified return is required to be filed by the demerged entity as well, in case, the entity does not cease to exist since as per the section, a modified return is required to be furnished by the ‘successor’.

Transfer of TDS/TCS/advance tax from the amalgamating/ demerged company to amalgamated/ resulting company

Although, there is no particular provision in the Act wherein it is compulsory to intimate the income tax authority about any restructuring activities carried out by the entity through an intimation letter. However, with the introduction of section 170A and the requirement of filing modified return in ITR-A, an entity faces multiple challenges. Hence, it is always advised to intimate the income tax authority about any restructuring activities carried out by the entity through an intimation letter which aids in filing the modified return and ambiguity, if any, can be avoided.

The most common issue faced while filing modified income tax return is the transfer of TDS/ TCS/ advance tax. In the event of any restructuring activity being carried out by the entity, it is impractical to ask the deductor to revise their TDS returns to ensure that the amalgamated company/ resulting company is able to claim TDS credit in their modified tax returns filed in ITR-A. Accordingly, two approaches are often adopted by the entities undergoing restructuring activity:

1. Retain the TDS in the demerged entity and claim TDS refund by furnishing a modified return where entity does not cease to exist

2. Transfer the TDS as per section 199 read with Rule 37BA. It is to be noted that relevant provisions for transfer of TDS does exist in the law, however, no extant provisions exist for transferring TCS and advance tax. Accordingly, entities face a lot of challenge in transferring the same, especially in case of amalgamation where amalgamated companies cease to exist.

Accordingly, it is always suggested that the appointed date should neither be very backdated and old in order to avoid risk in claiming TDS/ TCS/ advance tax refunds and it is always beneficial to intimate the income tax authority regarding transfer of tax claims.

Revision of tax audit report

With the insertion of section 170A vide Finance Act, 2022, the filing of modified return by entities in the event of any restructuring activity is loud and clear. However, there still exists an ambiguity whether in the event of filing modified returns, is revision of tax audit report also mandatory.

In conclusion, navigating post-restructuring challenges demands meticulous compliance with NCLT-approved steps and vigilance in addressing key issues. Entities must adapt to evolving regulations and ensure seamless transitions for sustained success in the transformed landscape.