India Mandates RBI Approval for Foreign Holding Company Mergers With Domestic Units

India’s Ministry of Corporate Affairs issued a notification on September 9, 2024, announcing changes to the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. The amendments pertain to the merger of a foreign company with its domestic subsidiary unit in India.

Officially called the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2024, the changes will take effect from September 17, 2024.

What are the changes?

Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 has been amended to include the following sub-rule after sub-rule (4).

(5) In the case where a foreign holding company incorporated outside India (transferor) and an Indian wholly owned subsidiary (transferee) enter into a merger or amalgamation:

1. Both companies must obtain prior approval from the Reserve Bank of India (RBI).
2. The Indian subsidiary must comply with Section 233 of the Companies Act, which covers mergers and amalgamations.
3. The Indian company needs to apply to the Central Government under Section 233 of the Companies Act, and the provisions in Rule 25 will apply to this application.
4. The declaration specified in sub-rule (4) needs to be provided when submitting an application under Section 233.

Further, by removing the need for time-consuming clearance from the National Company Law Tribunal (NCLT), India will fast-track such mergers and amalgamations, for example, between the merger of a start-up incorporated outside the country and its wholly owned Indian unit.

In cases involving mergers with companies incorporated in countries that share a land border with India (for example, China), a declaration in Form No. CAA 16 must be submitted to the Central Government through the jurisdictional Regional Director.

What is rule 25?

Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 outlines the process for mergers or amalgamations of certain companies:

1. When a merger or amalgamation is proposed, a notice must be issued (using Form No. CAA.9) to invite objections or suggestions from authorities like the Registrar, official liquidator, or any affected parties under Section 233 of the Companies Act.
2. Mergers or amalgamations can take place between:
   – Two or more start-up companies, or
   – One or more start-up company and one or more small company.

(A “start-up company” refers to a private company incorporated under the Companies Act (2013 or 1956) and recognized as a start-up by the Department for Promotion of Industry and Internal Trade, as per a notification from February 19, 2019.)

What is Section 233 under the Companies Act, 2013?

In the Companies Act, 2013, under chapter 10, Compromises, Arrangements, and Amalgamation, Section 233 states:

(1) Notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:—
(a) a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies are situated or persons affected by the scheme within 30 days is issued by the transferor company or companies and the transferee company;

(b) the objections and suggestions received are considered by the companies in their respective shareholder meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety percent. of the total number of shares;

(c) each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar (Department) of the place where the registered office of the company is situated; and

(d) the scheme is approved by majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of clear 21 days at any such shorter notice provided that shorter notice consent obtained from the shareholders holding more than 95 percent of shares along with the scheme to its creditors for the purpose or otherwise approved in writing.

Industry experts welcome the amendment

Experts have welcomed the changes, viewing them as beneficial for companies looking to move back to India. Per various media reports, many Indian founded start-ups have been engaging in “reverse flipping”.

Several Indian technology companies and start-ups, including fintech entities, were initially structured as wholly owned subsidiaries of offshore parent companies. However, with the Indian government’s business-friendly reforms and growing investor confidence in Indian companies, many are considering a reverse flip, relocating their parent holding entities back to India.

Law experts also note that the resilience and growth of India’s capital markets make the country an attractive destination for companies to relocate, providing both favorable valuations and exit opportunities for investors.

With inputs from Neeraj Khatri.

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