Background
The Ministry of Corporate Affairs (MCA) has published the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (“Amendment Rules”), through its notification dated: September 09, 2024, and the same have come into effect from September 17, 2024.
Section 234 of the Companies Act, 2013 (“Act”), read with Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Merger Rules”), deals with mergers/amalgamation between Indian companies and foreign companies. In the event a foreign entity plans to merge into an Indian company, the parties are required to comply with the mechanism set out under Section 230 to 232 of the Act, wherein both the entities are also required to seek permission from the National Company Law Tribunal (NCLT) and the Reserve Bank of India (RBI).
Due to the requirements under Section 230 to 232 of the Act, the merging entities faced delay in carrying out the mergers, since they were not able to attain the consent of the NCLT in a timely manner, in light of the back-log of legal cases pending before the authority.
Amendment to Rule 25A of the Merger Rules
In light of the Central Government measures towards ensuring ease of doing business in India, ‘reverse flipping’ has now become increasingly popular between start-ups, wherein the start-ups which were initially set-up in overseas countries due to favorable operational laws and tax regimes, are merging back into their wholly-owned subsidiaries in India.
For the purposes of efficiently effectuating the ‘Reverse Flipping’ of companies/business into India, the MCA published the Amendment Rules, wherein Rule 25A(5) have been introduced into the Merger Rules, allowing merger or amalgamation of a foreign holding company into an Indian subsidiary through the fast-track merger scheme set out under Section 233 of the Act.
Additionally, as part of the approval mechanism set out under the Amendment Rules: (i) both the Indian wholly owned subsidiary and the foreign holding company shall be required to obtain prior approval of the RBI; and (ii) a declaration in prescribed form is required to be submitted before the Central Government in case of a merger between an Indian company and any other company/ body corporate incorporated in a country which shares a land border with India.
Analysis:
The introduction of the Amendment Rules is a welcome move towards streamlining the approval process towards ‘Reverse Flipping’ transactions.
Even though the Amendment Rules provide for seeking a prior approval of RBI in relation to the merger/amalgamation transaction by both the Indian wholly owned subsidiary and the foreign holding company, it is important to note that the merge schemes which are in conformity with the rules laid down under Foreign Exchange Management (Cross Border Merger) Regulations, 2018, shall have a deemed RBI approval towards the transaction, and no express consent shall be required towards the same, unless a formal clarification is published towards that effect.
