What is going around us is quite unfortunate, where no one is spared. In the current COVID-19 crisis India Inc. is likely to experience significant disruption to their business operations and will have to look at rationalising their group structure and consolidation of businesses.
By Hiren Bhatt and Vikas Pareek
What is going around us is quite unfortunate, where no one is spared. In the current COVID-19 crisis India Inc. is likely to experience significant disruption to their business operations and will have to look at rationalising their group structure and consolidation of businesses. Merger and amalgamation have traditionally been the devices available with corporates to achieve legal consolidation of businesses. The Companies Act, 2013, (the Act) vide Section 233 read with Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, introduced the concept of ‘Fast Track Merger’ (FTM) with an intent to provide options to (a) small companies; and (b) holding company and its wholly-owned subsidiary, to make the corporate merger process smoother and more efficient.
The power to approve the corporate arrangements has been entrusted upon the National Company Law Tribunal (Tribunal). Under the FTM process, the requirement of approaching the Tribunal for seeking sanction to a scheme of merger (Scheme) is done away with and instead, approval of the Central Government (CG) represented by the Regional Director (RD) with some reporting and procedural obligations is casted upon the companies.
Under the Tribunal approval process, the Scheme is required to be approved by majority of the shareholders and creditors, whereas under the FTM process, the Scheme requires approval of shareholders holding ninety percent of total number of Shares and ninety percent of total value of the creditors. Further, under the Tribunal approval process, the Tribunal directs the company to provide notice to the Registrar of Companies (ROC), Official Liquidator (OL) (only in case of merger) and Regional Director and the said regulatory authorities are required to provide their observations within the period directed by the Tribunal. Whereas in case of FTM process, there is no prescribed timelines for the Regional Director to provide approval and this practically may extend the approval process. This is on account of various other responsibilities casted upon the RD under the Cos Act. So, while the typical timeframe under the Tribunal approval process is approximately four to six months, the FTM approval process may exceed six months, thus often making it a longer process than the Tribunal route.
The FTM process requires the companies involved to file the notice of the Scheme inviting the objections/suggestions, if any, from the ROC, OL and any other authorities/persons affected by the Scheme. The Scheme after incorporating the observations, if any, of the ROC and OL, needs to be approved by shareholders holding ninety percent of total number of Shares and ninety percent of total value of the creditors. Once the Scheme is approved by the shareholder and creditors, the Scheme is submitted to ROC, OL and RD for their approval. On receipt of objections/suggestions of ROC and OL, if the RD is satisfied that the Scheme is not prejudicial to the interest of the public or creditors, the RD shall pass an order approving the scheme. Thus, from a compliance and procedural perspective, the FTM process is not significantly different from the Tribunal approval process.
Though the FTM process was introduced with an aim to curtail the overall timeframe of the merger process for certain set of companies, yet the objective sought to be achieved remains far from reality and with requirements such as Solvency Certificate, approval of ninety percent of total value of creditors and shareholders holding ninety percent of total number of Shares and no prescribed timelines of RD to provide approval, the FTM process ends up taking more time as compared with the Tribunal approval process. Further, if the RD is of the view that the Scheme is not in the interest of public or creditors, the RD may file an application before the Tribunal stating its objections and requesting that the Tribunal may consider the scheme under section 232 of the 2013 Act, which makes the FTM process less attractive and failing in its objectives. Further, though the current provision provides for merger of a holding company and its wholly-owned subsidiary, clarity about whether merger of holding company into subsidiary company will also get covered under the FTM process would really be helpful. So, while the FTM regime was aimed at doing away with some of the requirements, curtail the overall time frame for merger in certain scenarios; thereby reduction in burden on Tribunals and reduction in costs and resources of the companies involved; has it actually been successful in achieving those objectives
Now it remains to be seen that once the COVID-19 situation is beyond us, will India Inc. resort to FTM to achieve their consolidation objectives and tied over the crisis.
(Hiren Bhatt is Partner, Deal Advisory, M&A Tax & PE at KPMG in India and Vikas Pareek is the Associate Director, Deal Advisory, M&A Tax & PE at KPMG in India. The views expressed by the authors are their own)