India's fast-track mergers: What's new, who can use it, and how does it operate?

Mergers and amalgamations are crucial instruments for companies and businesses looking to expand, restructure, or improve operational efficiency. However, the traditional merger procedure under the Companies Act, 2013 ("Companies Act") can be time consuming and requires a thorough examination by the National Company Law Tribunal ("NCLT"). To avoid this, Section 233 of the Companies Act introduced the concept of a fast-track merger in 2016 to facilitate operations for small companies. The Ministry of Corporate Affairs ("MCA") has recently announced major changes to this fast-track merger framework in order to strike a balance between stakeholder protection and ease of doing business, which expand the list of companies that can make use of this fast-track route and provide procedural improvements.

A fast-track merger, as covered under Section 233 of the Companies Act and Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ("Fast-Track Merger Rules"), is a streamlined procedure for merging two or more companies. While a normal merger process needs NCLT approval, a fast-track merger can be approved by the Regional Director ("RD") with the permission of creditors, shareholders, and regulators. For companies where the risk to creditors and shareholders is not significant, such as small companies or intra-group companies, the fast-track route offers a less onerous path.

The standard merger procedure under Sections 230–232 of the Companies Act calls for a thorough application to the NCLT for the merger, several hearings and examinations by the NCLT, sectoral authorities and regulators' increased participation, and longer timelines.

In contrast, the fast-track merger route under Section 233 completely avoids NCLT involvement unless objections are raised; relies on approvals from shareholders and creditors (with very high thresholds); is processed through the RD, Registrar of Companies ("ROC") and Official Liquidator ("OL"); and reduces costs and timelines significantly.

In simple terms, the normal merger is judicially driven, while the fast-track merger is administratively driven.

The recent amendments expand the list of companies eligible for fast-track mergers as follows:

1. Unlisted companies with aggregate outstanding borrowings (loans, debentures or deposits) not exceeding ₹200 crores and are not in default can now use the fast-track route;

2. Earlier, only wholly-owned subsidiaries could merge with their parent company under fast-track route. Now, holding-subsidiary mergers are permitted even if the subsidiary is not wholly owned, provided that the transferor company (i.e. the company being merged) is not a listed company; and

3. Two subsidiaries of the same holding company can now merge through the fast-track process, provided that the transferor company is not listed.

The amendments clarify that a foreign transferor company may also use the fast-track option to merge with its wholly-owned Indian subsidiary. This is frequently called 'reverse flip'. Additionally, demergers would also fall under Section 233 of the Companies Act.

The amendments also provide that the companies that use the fast-track option are now required to submit a statutory auditor's certificate in Form CAA-10A attesting to the fact that the borrowings are within the allowed amount and that there is no repayment default.

Section 233 of the Companies Act and Rule 25 of the Fast-Track Merger Rules, as amended, regulate the process for completing a merger or amalgamation using the fast-track route. The general steps are as follows:

1. Establish eligibility: The companies must first confirm that they fit into the groups that are qualified for fast-track mergers and must acquire the auditor's certificate in Form CAA-10A if there are borrowings.

2. Board approval of draft scheme: Each merging company must call a board meeting to approve the draft scheme, which should address the transfer of assets and liabilities, the share exchange ratio (if applicable), treatment of employees, and the effects of the merger on creditors and shareholders.

3. Notice to ROC and OL: A notice of the proposed scheme is required to be issued to the ROC, and the OL of the jurisdiction in which the companies are registered; as well as to the sectoral regulator such as the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India or Pension Fund Regulatory and Development Authority if the company is regulated by any of such sectoral regulators and to the respective stock exchange for listed companies, within 30 (thirty) days in Form CAA-9, asking for any objections or suggestions.

3. Declaration of solvency: Each merging company must submit a statement of solvency in Form CAA-10 to the ROC before calling meetings of members and creditors. This statement of solvency confirms that the merging companies will continue to be solvent even after the merger.

4. Approval of members and creditors: The draft scheme needs to be approved by creditors who represent at least 9/10 (nine-tenths) of the outstanding debt's value, as well as members or shareholders who hold at least 90% (ninety percent) of the total number and value of shares. The scheme, the declaration of solvency, and an explanatory statement regarding the merger's effect must all be included in the notice of meeting.

5. Filing of approved scheme: The scheme, along with outcomes of the meetings of the members and creditors meetings, is submitted by the transferee company to the RD, ROC and OL in Form CAA-11.

6. Review by authorities: After receiving the scheme, the ROC and OL are required to communicate objections or recommendations within a period of 30 (thirty) days. The RD then examines the scheme along with such objections or recommendations from the ROC and OL and accepts it if the RD has no objections or if objections raised by the ROC or OL are deemed unsustainable. The RD may also refer the scheme to the NCLT in Form CAA-13 if he/she believes that the scheme is not in the public interest or prejudices the interest of creditors.

7. Approval or deemed approval: Within 60 (sixty) days of filing, the RD must give approval to the scheme. If no decision is made within this period, the scheme is deemed approved. The RD issues the approval in Form CAA-12, which is to be filed by the companies with the ROC in Form INC-28 within 30 (thirty) days.

8. Scheme implementation: After the scheme is approved, it takes effect. The transferee company must undertake the issuance or cancellation of shares, update statutory registers, notify stakeholders, file required returns, and adhere to stamp duty, tax, and other regulations in accordance with the scheme.

The recent amendments to the fast-track regulations expand the scope of the fast-track merger route under Section 233 and create greater accessibility to corporate restructuring for a greater number of companies. By permitting mergers between holding-subsidiary, sister-subsidiaries, and demergers, as well as mergers between unlisted companies with borrowings up to ₹200 crore to adopt fast-track route, the MCA has made it easier to do business in India.

About the authors: Akanksha Dua is a Partner and Aparna  Amnerkar is a Senior Associate at Obhan & Associates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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