Limited Role of NCLT in Fast Track Mergers in India

Introduction 

Corporate restructuring in India can be achieved through both private and statutory arrangements. Previously, under the Companies Act of 1956, all mergers and restructurings were required to undergo lengthy procedures, with mandatory intervention from the High Court. This made the process time-consuming and expensive, creating various challenges and obstacles in the M&A landscape, particularly due to substantial delays in court proceedings. However, Section 233 of the Companies Act, 2013, along with Rule 25 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, came into effect on December 15, 2016, introducing the concept of simplified mergers. A significant aspect of the fast track merger process is that it eliminates the need for court approval through the National Company Law Tribunal (NCLT). 

Eligibility Criteria for Fast Track Merger Applications: 

Companies eligible to make application under Fast Track Merger: 

The scheme of merger or amalgamation may be entered into: 

1. between two or more small companies or 
2. between a holding company and its wholly-owned subsidiary company 
3. such other class or classes of companies as may be prescribed. (please note that other classes of companies has not yet been prescribed) 

The process prescribed for Fast Track Mergers requires the parties to the merger scheme to: 

1. Send notice of the proposed merger scheme to the concerned registrar of companies (“RoC”) and official liquidators (“OL”) and consider their objections and suggestions in a general meeting; 
2. File a declaration of solvency with the RoC; and 
3. Seek approval of: (a) shareholders in a general meeting holding at least 90% of the total number of shares (“Shareholder Threshold”); and (b) majority of creditors in a meeting representing at least 90% in value (“Creditor Threshold”). 

After the proposed merger scheme is approved by the shareholders and creditors in accordance with the Shareholder Threshold and the Creditor Threshold, it is filed with the regional director (“RD”), the RoC and the OL. 

The RD, after considering any objections or suggestions of the RoC and/or the OL to the merger scheme, may either (a) register the merger scheme and issue a confirmation to the parties to the merger scheme; or (b) if it is of the opinion that the merger scheme is not in public interest or in the interests of the creditors, file an application before the NCLT to assess whether the proposed merger scheme should be considered under the NCLT route and not the Fast Track Merger route. 

 This blog is a part of our The Complete Guide to NCLT in India: Powers, Structure, and Jurisdiction Blogpost.

Advantages of Fast Track Mergers 

The benefits of fast-track mergers in comparison to traditional mergers can be outlined as follows: 

1. Lower Administrative Burden: The fast-track process simplifies the necessary requirements, making it less cumbersome. 
2. Quicker Timeframes: The time involved in completing a fast-track merger is significantly reduced compared to traditional mergers. 
3. Cost Advantages for Smaller Companies: Smaller companies that are below certain threshold limits benefit from decreased costs associated with the merger process. 
4. Elimination of Mandatory NCLT Approval: There is no need for mandatory approval from the National Company Law Tribunal (NCLT) with this process. 
5. Automatic Dissolution of Transferor Companies: Once registered, the merger scheme is considered effective for the dissolution of transferor companies without requiring the winding-up process. 

Approval Process for Fast Track Mergers 

According to Sections 233 (2) and (3) of the Companies Act, 2013, after obtaining approval from shareholders and creditors, the transferee company must submit the merger scheme to the applicable authorities based on the jurisdiction of its registered office. These authorities include: 

1. The Central Government (with powers delegated to the Regional Director) 
2. The Registrar of Companies (RoC) 
3. The Official Liquidator (OL) 

Fast Track Mergers vs. Pre-Amendment Regime under the Companies Act 

Section 233 of the Companies Act permits mergers and amalgamations to occur without the involvement of the NCLT through the fast-track route, which requires approval from the relevant Regional Director rather than the NCLT. Previously, the fast-track process was limited to domestic mergers between specific categories of companies, such as small companies, start-ups, and mergers involving Indian companies and their wholly-owned subsidiaries in India. 

Key changes under the Amendment Rules 

The Ministry of Corporate Affairs (the “MCA”) recently amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Amalgamation Rules”) by notifying the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (“Amendment Rules”). The Amendment Rules, which came into force on 17 September 2024, now permit a fast-track merger between foreign companies and their wholly owned subsidiaries. 

Rule 25A(5) of the revised Amalgamation Rules now allows a specific form of inbound merger, enabling a foreign holding company (referred to as the “Foreign Transferor Company”) to merge with its wholly-owned Indian subsidiary (termed the “Indian WOS Transferee”) through the Fast Track Process, provided the following conditions are met: 

1. Both the Foreign Transferor Company and the Indian WOS Transferee must obtain prior approval from the Reserve Bank of India (RBI). 
2. The Indian WOS Transferee must adhere to Section 233 of the Companies Act and submit a copy of the merger scheme to the Regional Director. 
3. A declaration must be submitted to the Central Government via the Regional Director, confirming whether the Foreign Transferor Company is incorporated in a country sharing a land border with India, and if so, whether prior government approval has been secured. 

Impact and Analysis 

1. Enhancing Ease of Doing Business in India: The inclusion of the Fast Track Process for inbound mergers represents a significant addition to the Indian Government’s ongoing initiatives, reforms, and promotional efforts aimed at fostering a conducive business environment and stimulating India’s burgeoning market. 
2. Facilitating ‘Reverse Flip’ Structures: This amendment comes at a crucial time, as more companies—particularly in the fintech sector—that initially established their holding companies abroad are now considering a ‘reverse flip’ to relocate their parent entities back to India. A primary factor driving this decision is the expanding IPO market in India, which makes it attractive for companies to list locally and simplify their legal and tax structures. 
3. Applicability of Deemed RBI Approval: The Amendment Rules do not clearly outline whether Deemed RBI Approval is applicable to cross-border mergers executed through the Fast Track Process. However, given that Deemed RBI Approval pertains to the prior approval from the RBI as stipulated in Rule 25A, it may be reasonable to interpret that such approval should be considered granted for cross-border mergers following the Fast Track Route and complying with the relevant regulations. Nevertheless, it remains to be clarified whether Regional Directors will hold differing views in the absence of explicit guidance. 
4. Is the Fast Track Process Truly Expedited? Although the Fast Track Process aims to speed up mergers by circumventing the requirement for NCLT approval, it doesn’t guarantee a swift experience. Should statutory authorities (including sectoral regulators, Official Liquidator, or Registrar of Companies) raise any objections, the Regional Director may direct that the merger scheme be forwarded to the NCLT for review. In such cases, the merging companies would have to submit a new application to the appropriate NCLT bench, potentially restarting the process from scratch and prolonging what was intended to be an expedited procedure. 

In summary, the fast-track merger concept is a positive move toward simplifying the merger and amalgamation processes for small companies and the merger of holding companies with their wholly-owned subsidiaries. Compared to the traditional merger process, which necessitates NCLT approval, the fast-track process is less time-consuming and involves reduced costs and paperwork. However, the overall duration of the fast-track merger process ultimately relies on the timely action of the concerned authorities.