The government has extended the fast-track route for approval of mergers and amalgamations to a more categories of companies, a move that will promote ease of doing business, and catalyse the trend of “reverse flipping” or the process of Indian start-ups and other companies to shift domicile to the country from overseas.
The ministry of corporate affairs (MCA) has notified amendments to the relevant Rules making more types of companies eligible for fast-tack merger process under Section 233 of the Companies Act, 2013. This route of approval doesn’t involve the National Company Law Tribunal.
Wider scope for fast-track
The amendments has enabled fast-track route for mergers between (unrelated) unlisted companies where the aggregate borrowings, including loans, debentures and deposits, are below Rs 200 crore and there is no default.
Further, the fast-track scheme will now be applicable to various other transactions also, including mergers between a holding company (listed or unlisted) and its subsidiary (listed or unlisted), except where the transferor company is listed. Also, mergers between subsidiaries of the same holding company can get fast-track approvals, provided the transferor companies are not listed.
Inbound cross-border reverse mergers were subject to the NCLT’s approval until a year ago. On September 17 last year, the government amended the Rule 25A for cross-border deals to speed up the approvals for such proposals. With the latest amendment, this rule has been made consistent with the Rule 25 that pertains to fast-track approvals to avoid any doubts, sources said.
Instances of merging a foreign holding company with its Indian wholly owned subsidiary have become more frequent in recent years, as many India-born or India-connected start-ups opted to shit base here. One of the incentives was the likelihood of exit at higher valuation in India. The move to streamline easier approvals for such mergers is likely to benefit foreign companies who are planning to shift their base to India to leverage the buoyant capital markets for potential listings and to consolidate group companies, analysts said. Over the past 2-3 years, Flipkart, Dream11, Meesho, PhonePe, Zepto, Razorpay, Pepperfry and Groww have changed the domiciles of their parent companies from foreign jurisdictions back to India.
“For reverse-flipping transactions under fast-track route, two separate rules have to be simultaneously applied. They have now explicitly added the merger of overseas parent with Indian wholly-owned subsidiary – as specified under the cross border rules (Rule 25A) – in the fast track rules (Rule 25) as well to bring parity,” said Abheet Sachdeva, partner (M&A) at Nangia Andersen LLP.
Experts said that the amended and expanded rules highlight the government’s intent to make corporate restructuring exercises more flexible. “By not putting any threshold in the case scheme of arrangements involving unlisted holding-unlisted subsidiaries, the government has eased the approval process for a wide variety of companies,” said Sachdeva.
Currently, fast-track approvals for mergers are limited to start-ups and “small” companies defined in terms of turnover etc.
Boost for reverse flipping and start-ups
Reverse flipping has gained currency also because of special start-up promotion schemes and more access to capital. Some relaxations in round-tripping restrictions have come in handy.
The fast-track route would still entail seeking a nod from the regional director of the MCA. “Even though there’s no prescribed time frame for fast-track schemes, it typically takes 4-6 months,” said a company law expert.
Even as the merger rules have been eased, the amendments have made it mandatory for the companies to inform the sectoral regulators about such mergers. “In case of a company regulated by a sectoral regulator such as Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) or Pension Fund Regulatory and Development Authority (PFRDA), the notice shall be issued to the concerned regulator and to respective stock exchanges for listed companies for objections or suggestions within the period specified…” the MCA notification said.
“The earlier Section 233 required companies covered within its ambit to issue notices to the Registrar and Official Liquidator to seek objections and suggestions. In order to make the process more robust and transparent, regulated entities would be additionally required to notify sectoral regulators in case of listed companies,” said the company law expert quoted above.