Fast Track Merger Under Companies Act 2013—A Need For Expansion In Scope

Fast track merger was introduced in the Companies Act, 2013 (“Act”), basis the recommendations of the JJ Irani Committee (“Irani Report”). This simplified procedure of amalgamation, compromise, or arrangement of companies came into force as of December 15, 2016 to change the Mergers and Amalgamations (“M&A”) landscape in India by erasing the existing cumbersome merger process. However, in practice, the multiple level of clearance by regulators and interference by tribunals render the “fast track” merger superfluous and time-consuming.

Simply put, fast track merger seeks to do away with the usual time- consuming process of amalgamation, compromise, or arrangement by eliminating court intervention. Fast track merger bypasses the approval of the National Company Law Tribunal (“NCLT”),requiring, instead, approvals by shareholders, creditors, the Registrar of Companies (“ROC”), the Official Liquidator, and the Regional Director of the respective transferor and transferee companies.

Section 233 of the Act postulates for a fast-track method to facilitate an amalgamation, compromise, or arrangement between a wholly owned subsidiary (“WOS”) and its holding company. Small companies (including one-person companies) that meet the threshold of Section 2(85) of the Act and start-ups can also avail this amalgamation route.  

LIMITED SCOPE OF FAST TRACK MERGERS

The current fast track mechanism for merger is only available to a WOS and its holding company. The question is whether the Fast-Track Merger procedure encompasses mergers between all companies within a group. In other words, is the holding company required to own the entire share capital directly or even indirectly, for example, through a step-down subsidiary?  

The Act does not define the term WOS. However, we can draw reference of the term WOS from the following:

The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004 under Rule 2(q) defines a WOS as a 100% subsidiary of the holding company. 

As per clause 10.11 of the Account Standards (18), WOS can either be a direct subsidiary or an indirect subsidiary, i.e., where its holding company owns complete interest in the WOS either itself or through another subsidiary.

It has been held that for a subsidiary company to be considered a WOS of its holding company, the holding company shall hold all the equity shares of the subsidiary company [reference IJM (India) Infra Ltd. v. CST (2007) 5VST143(AAR)].

Section 736(2) of the Companies Act, 2006 (UK) defines “Wholly Owned Subsidiary of another company if it has no members except that other and that other’s wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries”.

Therefore, the definition of WOS is broad enough to include not only those holding companies that hold interest directly in the WOS, but also through its step-down subsidiaries. 

Under the forms prescribed in Companies (Compromises, Arrangements, Amalgamations) Rules 2016, to qualify for the fast-track merger route, ROC requires the parent company’s 100% shareholding in the WOS to be indicated in its annual return filed with the ROC for the previous financial year. 

Currently, fast track mergers between companies within a group are limited to a WOS and its immediate 100% subsidiary. This is contrary to the Irani Report, which reviewed international models of M&A and observed that the Act should prescribe for a fast-track merger process between a “holding company” and its “subsidiary/associates”.

It is logical that for mergers within a group, the Act should prescribe for a fast-track method of amalgamation. Conceptually, a scheme of amalgamation or merger between the holding company and the subsidiary company is on a different footing from amalgamation and merger between two independent companies. 

It is well settled that in a merger between companies within a group, a transferor company does not need to file a separate application as:

the scheme does not affect the rights of the members of the transferor company; 

the scheme does not affect the rights of the creditors of the transferor company; and

the scheme does not involve any re-organization of share capital/ issuance of new shares to the transferor company.

Therefore, the Act should provide for lesser regulation in respect of mergers among group companies without limiting the same only to WOS and its immediate holding company. 

CONCLUSION

Covid-19 has catapulted various companies into liquidity issues as well as significant disruption in business operations. Consequently, it is essential to remove roadblocks in the implementation of restructuring and consolidating of group companies in a timely manner. 

An expansion in scope of the fast-track route under Section 233 of the Act to include mergers between subsidiary and holding/group company, and not just wholly-owned subsidiaries, will go a long way in improving the ease of doing business in the current market scenario. This is also in line with the Irani Report which prescribed fast track mergers for all companies within a group.

This expansion in scope will reduce not only the administrative process for more companies, but also the burden of backlog faced by the currently understaffed NCLTs.