by Rashi Srivastava
The whole procedure of effectuating a Merger or acquisition deal is hectic and tedious in nature, mostly in the cases of small companies. In order to come over this problem, fast-track mergers were introduced by the Ministry of Corporate Affairs on December 15th, 2016, and have been categorized under Section 233 of the Companies Act, 2013 read with Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. In the latest scenario, the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2021 were introduced on February 01, 2021, in order to amend the rules of 2016[i].
Basically, in the previous times, before introducing the new provisions, the NRIs were not permitted to incorporate Person Companies. With the introduction of the amended rules, any natural person who is an Indian Citizen, whether residing in India or otherwise would be allowed to form a One Person Company[ii]. Following this, the Government eased rules for one-person companies and small companies which are two special legal forms allowed under the Companies Act- and also offered a fast-track merger and acquisition (M&A) process for the startups. The objective of doing so was to lessen the compliance burden and further improve ease of doing business.
So, what Fast Track Merger actually is? The answer is here- The Fast Track Merger is a procedure that provides for a simple and convenient approach for mergers between small companies and mergers between holding and subsidiary companies[iii]. The Ministry of Corporate Affairs introduced separate orders, thus giving effect to new rules on one-person companies and small companies from April 1 and fast-track Mergers and Acquisitions clearance for startups with immediate effect. According to the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2021, M&As among and between the startups and similarly, small companies will be eligible for the fast-track procedure.
The amendment modifies Section 25 dealing with Merger or Amalgamation of many companies and inserts a new clause providing a scheme of Merger or Amalgamation under Section 233 of the Act that may be entered between any of the following categories of the companies- firstly is the two or more start-up companies and secondly, one or more start-up company with one or more small company. Also, a one-person company has only one shareholder. Small companies are those having less than the specified paid-up capital or sales threshold. These entities are entitled to certain compliance relaxations. The said amendment also provides a definition and explanation to the Rule defining the term ‘start-up company” as a private company incorporated under the Companies Act, 2013 of Companies Act, 1956. It is also worth mentioning that these categories of companies would also be entitled to of Court/Tribunal process of compromise or arrangement as per Section 233 (12) of the Companies Act, 2013. Such compromise or arrangement can be between the company and the creditors or any category of them or can be between the company and its members or any class of them.
Also, a statement was released from the ministry which said that rules on one-person companies and small companies were further liberalized to motivate and push the small companies to involve within the realm of the formal corporate sector. Thus, the NRIs or non-resident Indians can now set up a one-person company in India. Further, there could be a conversion of one Person Company into a public limited company or a private limited company and it could be allowed anytime. Thus, this new Act[iv] has made the process simple given the fact that it does not involve judicial processes as concerned with the National Company Law Tribunal. In addition to that, the companies are now necessitated to take the permission from just three regulatory bodies, namely, Regional Directors, the Registrar of Companies, and Official Liquidator. Another advantage that the process of Fast Track Merger invites is that the duration of completion of the process has been lessened to 90-100 days at the maximum. Also, mandatory approval of the National Company Law Tribunal is not required as already mentioned above. Lower costs are involved in such a process. The registration of such a scheme has the effect of dissolution of the Transferor Company without the process of winding up. In addition to that, the administrative burden has been reduced.
There is a certain procedure of fast-track mergers and amalgamation. There should be a power to amalgamate with the other companies in the Memorandum of Association of the companies that are willing to merge. If there is a case where no such power is provided in the MOA, then the MOA should be amended to introduce the provision that empowers the companies to get it merged with the other companies. Also, the transferor and the transferee companies should prepare the provisional financial statements as of the date[v]. According to a Rule 25 Sub-rule (1), Notice of proposed scheme should be filed to the Registrar of the Companies and Official Liquidator too in order to invite their rejections or suggestions, if there happens to be any. In addition to that, if there happens to be any objections or suggestions, the Registrar of Companies will take 30 days to give objections/suggestions. Thus, these were some of the procedures required for mergers and acquisitions according to the amended rules.
From the above mentioned, it can be observed and can be concluded that with the introduction of fast track mergers and amalgamations, the companies have been able to witness the procedure of merger and amalgamation easily, quickly, and also within the fixed time period. There is no such approval of NCLT required, thus reducing the burden on the Tribunal and also paving the path for faster disposal of such schemes. Also, costs are also lessened given the fact that many hearings before the NCLT are avoided, leading to time consumption because of the uninterrupted process. However, the Government’s role in this scheme is of vital importance. The success of this initiative depends upon the Government’s handling and tackling of schemes.
[iv] Companies Act, 2013
[vi] Picture: Inter slice