The Ministry of Corporate Affairs in April proposed amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, to expand the scope of the fast-track merger process under section 233 of the Companies Act, 2013. Burgeon Law senior corporate partner Ketan Mukhija examines the proposals.
Q1. What are your thoughts on the proposed changes?
The amendments will enhance the ambit of fast-track mergers. The problem is twofold. Number one is that the (NCLT) takes care of section 233 matters and IBC [Insolvency and Bankruptcy Code] cases as well. I will give you the NCLT’s Chandigarh bench as an example … there’s such a backlog of cases that compromises section 230, which basically compromises [section] 233, which is mergers and amalgamations, and the IBC cases.
I am dealing with a [regular] merger. The petition was filed in 2021 and it’s still pending. We don’t even know what stage it’s at because the local counsel is handling it,but it’s not completed.
Fast-track mergers do not go to the NCLT for validation. It happens at the regional director level. I think the Ministry of Corporate Affairs thought that these could go through slightly faster. It’s a progressive step overall.
Q2. What other changes are needed for the fast-track merger process?
I will compare it to what happens under the IBC. [Cases] go on for years and years [so] some kind of a tight timeline and oversight are needed. The IBBI [Insolvency and Bankruptcy Board of India] now penalises the resolution professional, if he’s delaying or deflecting. Similarly, there must be checks and balances because the fast-track merger is between two or more small companies where time is of the essence. The purpose becomes infructuous if it takes years.
Next, there is no fast-track demerger process. The law is silent about it. It does not say it is permitted, but it also does not say it’s enabled and empowered. I don’t know what the rationale is behind not allowing it because it’s the same as restructuring a business. Just like for a merger we consolidate, but the demerger would be to carve out and siphon off [assets]. Foreign jurisdictions allow for a fast demerger as well.
Q3. What are the key challenges associated with the fast-track merger?
We have seen the recent trend of reverse flipping, for which India has become a destination. Earlier, the holding company would be in the US and India would be the subsidiary. But now India is the hub and the Indian market is becoming the destination to raise capital.
One challenge is the cross-border aspect, whether its inbound or outbound, which needs to be clarified and streamlined. There’s still a lot of haze and ambiguity around that. [Inbound mergers] have been initiated – for example, in the case of Groww, PepperFry, Zepto, even PhonePE – but they have not been completed. Next are the implementation deficits in terms of delays. One reason why people go for a merger or demerger is tax neutrality. But if it takes a year or two, then the entire purpose is defeated. If you are still going through the court process, people can still do a business transfer agreement, which will achieve the same purpose. But of course, that will not be tax neutral.
Q4. Do you feel the requirement for an entity to meet the “small company” definition with its limited thresholds for paid-up capital (INR40 million – USD458,000) and turnover (INR400 million), limits the usefulness of fast-track mergers?
This is the same conundrum the MSME Act [Micro, Small and Medium Enterprises Development Act, 2006] also faces. In MSMEs, the threshold has been successively increased … on what constitutes a micro, small or medium enterprise. If small companies have been defined, or intertwined with their paid-up capital, soon an industry lobby group like the CII [Confederation of Indian Industry] or ASSOCHAM [Associated Chambers of Commerce and Industry of India] will propose to the government that “it is not really serving the interest of most of the companies which fall usually in the category according to the operations and functions, and therefore increase the limit”.
It’s like a moving part and a variable, which will see the light of the day. It’s not technically a legal question, but market-wise, it should be a co-variant with what the market’s requirement is or should be.
