Introduction to Fast Track Mergers:
The Ministry of Corporate Affairs (“MCA”) introduced the new concept of Fast Track Merger (“FTM”) through the enactment of section 233 of the Companies Act, 2013 (“the Act”) which became effective on 15.12.2016. To complement the FTM, the MCA also notified the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 (“the Rules”) on 14.12.2016 subsequently amended it in the year 2021.
FTM is a simplified procedure for amalgamation of companies, aiming to facilitate ease of doing business in India. It provides a cost-effective solution, enabling certain companies to merge without involvement of the National Company Law Tribunal (“NCLT”).
Prior to the notification, the Registrar of Companies (“ROC”) and the Official Liquidator (“OL”) possessed powers to raise objections to such mergers or amalgamations under the FTM process (i.e., under Section 233 of the Act) without specifying a specific timeline for their response. This update focuses on the amendments introduced by the MCA, effective from 15.06.2023, vide notification no. G.S.R. 367 (E) dated 15.05.2023 (“the Notification”).
Classes of companies covered under the FTM Route (Applicability and Eligibility):
The FTM route under Section 233 of the Companies Act, 2013 allows for the implementation of merger or amalgamation schemes ("the Scheme") between specific classes of companies. The Scheme may be entered into by the following classes of companies:
Two or more start-up companies.
One or more start-up with one or more small company.
Merger between two or more small companies.
Merger between a holding company and its wholly owned subsidiary company.
However, it is important to note that the provisions mentioned in the aforementioned clause do not apply to the following:
Holding companies or subsidiaries.
Companies registered under Section 8 of the Act.
Companies or body corporates governed by any special act.
Benefits of Fast Track Merger:
There are several notable benefits associated with the FTM process:
Time Efficiency: FTM streamlines the merger process, enabling companies to complete the integration swiftly. By reducing procedural complexities, companies can expedite the realization of operational synergies.
Cost Effectiveness: By eliminating the need for court intervention, FTM reduces significant costs that would otherwise be incurred through the traditional merger routes. Companies can allocate resources more efficiently, resulting in cost savings.
Procedural Simplicity: FTM offers a simplified procedure for mergers, eliminating the requirement for mandatory approval from the NCLT. This simplified process allows companies to navigate the merger process more smoothly and ensures compliance with regulatory requirements.
Drawbacks in the pre-amendment provisions dealing FTM:
The pre-amendment provisions governing the FTM process had certain drawbacks, which created delays and hindered the efficiency of the process.
These drawbacks include:
Lack of Specific Timelines: Under the previous provisions, companies undertaking the FTM process had to invite objections or suggestions from the ROC, OL, or any affected parties. However, there was no specified timeline for the OL and the Registrar to provide their reports. As a result, the time taken by these authorities to review and issue their reports was often longer than anticipated.
Delay in Processing: The absence of specific due dates for the OL and ROC reports caused delays in processing FTM applications. While the entire authorization process was required to be completed within sixty days of filing the application, the lack of specific timelines for the authorities’ created hurdles and further prolonged the processing time for the Scheme.
Confirmation Order Delays: The delays caused by the prolonged review process by the OL and ROC also resulted in a delay in issuing the confirmation order by the Regional Director (RD). This further impacted the overall timeline of the FTM process, causing additional delays for the companies involved.
The drawbacks in the pre-amendment provisions highlighted the need for reforms to streamline and expedite the FTM process.
Details of the Notification no. G.S.R. 367 (E) dated 15.05.2023 of MCA and its purpose:
The Notification no. G.S.R. 367 (E) dated 15.05.2023, issued by the MCA, introduces important amendments to streamline the FTM process and address the delays previously encountered. The purpose of this notification is twofold:
Timelines for Objections and Deemed Approval: This Notification amends Rule 25 (5) of the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016. It specifies that the OL and the ROC involved in the Scheme have a maximum of 30 days to provide their suggestions or objections to the RD. If no objection or suggestion is raised within this timeframe or if the OL and ROC fail to raise any, it will be considered that they have no objection to the scheme. This provision ensures expedited timelines for the review process.
Confirmation Order Timelines: The Notification also sets specific timelines for the RD to issue the confirmation order for the Scheme. These timelines are as follows:
If no objection or suggestion is received from the OL or ROC, the RD must issue the confirmation order within 15 days.
If any objection or suggestion is received from the OL or ROC, the RD must issue the confirmation order within 30 days.
This provision ensures that the RD promptly reviews the objections or suggestions raised and issues the confirmation order accordingly in Form No. CAA-12.
Additionally, the Notification amends Rule 25 (6) (a) of the Rules. Where the amendment states that if objections or suggestions are received from the OL or ROC within the 30-day period, and they are deemed to be unsustainable, the Central Government may issue the confirmation order for the Scheme in Form CAA-12 within 30 days after the expiry of the 30-day period. However, if the application is not in the best interest of the public and creditors, the CG may file an application before the NCLT in Form No. CAA-13. If the NCLT does not act on the application within 60 days, it will be deemed to be accepted.
These amendments aim to expedite the FTM process, ensure timely responses from the OL and ROC, and provide clarity on timelines for the RD to issue the confirmation order.
Benefit of the Notification to streamline the process of FTM:
The following are the advantages of the Notification in facilitating a more efficient FTM process:
Timely Compliance and Completion: The specified timelines introduced by the Notification ensure that companies involved in the FTM process can adhere to the prescribed time limits. This helps in expediting the completion of the scheme, eliminating administrative delays that were previously encountered. By setting clear deadlines, the Notification promotes timely compliance and resolution of FTM applications.
Elimination of Court Intervention: The Notification is a welcome move as it reduces the dependency on courts for FTM approvals. The earlier FTM process involved lengthy court procedures, causing delays and hindrances. With the amendments introduced by the Notification, the need for court intervention is minimized, making the FTM process more efficient and less time-consuming.
Ease of Doing Business: The specified timelines implemented through the Notification contribute to the ease of doing business for companies undertaking FTM. By limiting the time taken by regulating authorities such as the OL and ROC, the Notification facilitates faster resolution of objections and suggestions. This streamlines the FTM process and enables companies to merge or amalgamate in a time-bound fashion.
Boost to Deal Making Opportunities: The Notification grants power to the Central Government to determine whether the Scheme is in the public interest. This provision is particularly beneficial for the dynamic startup sector and larger companies, as it enhances deal-making opportunities. The swifter and expedited FTM process provided by the Notification encourages corporate restructuring and facilitates smoother mergers and amalgamations.
Overall, the Notification plays a crucial role in improving the efficiency of the FTM process, ensuring timely compliance, reducing delays caused by regulatory authorities, and promoting a more business-friendly environment for corporate restructuring.
Key Points discussed:
Time effectiveness: The Notification eradicates undue delay by specifying timelines for the ROC and the OL to raise objections, and for the RD to issue a confirmation order.
Cost effectiveness: The Notification does not require companies to approach the NCLT for approval, which can save companies time and money.
Deemed approval: If the ROC and the OL do not raise any objections, their approval is deemed.
Easier procedure: The Notification makes the process of merging or amalgamating easier for companies eligible to apply for the scheme.
Power of Central Government: The Central Government (CG) has the power to determine whether the Scheme is in the public interest.
Swifter expedition: The Notification expedites the process of merging or amalgamating by specifying timelines for each step of the process.
Conclusion:
The Notification brings positive changes to the process of merger or amalgamation for specific entities, such as small companies and start-ups. It addresses the challenges related to timely approval of the Scheme, which was previously dependent on jurisdictional authorities. By specifying and prescribing time limits, the Notification ensures a more efficient outcome for the acceptance or disposal of the Scheme. These reforms by the MCA to expedite mergers or amalgamations are highly encouraging and contribute to enhancing India's commercial environment and investment appeal.
Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views are personal and do not constitute legal opinion.
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