Fast Track Mergers – Process in India

Fast Track Mergers

The introduction of the concept of fast track mergers or FTMs has led to a significant change in the M&A landscape. Section 233 was made effective from 15th December, 2016. Prior to the introduction of FTM vide Section 233 and Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 there was only one unified merger process for all companies in our India. This process inter alia included approval of the merger scheme from the Tribunal. This led to delays and unnecessary complications.

What is a Fast Track Merger?

Fast Track Merger as it's name suggests is a short cut route comparatively to our traditional prescribed Mergers and Amalgamations. It is very interesting to note that the term Fast Track Merger is not defined in the Companies Act, 2013. It is called with such name informally by all of us.

What all Companies are eligible for Fast Track Mergers?

Fast Track Mergers are not available for each types of Companies, only following Companies can avail the benefit of Fast Track Mergers application and approvals:

1. Two or more Small Companies;*

2. A holding company and its wholly-owned subsidiary company;

3. Two or more start-up Companies:

4. One or more start-up company with one or more small Company.

* One important point to note here that the MCA vide its notification dated 01st February, 2021 has increased the purview of Small Companies.

From 01st April, 2021, Every Private Company which has paid up capital of Two Crores Rupess and simultaneously having Turnover of twenty crores Rupees shall be considered as Small Companies. (Earlier it was 50 Lacs and 2 Crores respectively), So from 1st April, these Companies can also avail the scheme of FTM, which will help in lesser time as compared to traditional mergers.

In general from whom we have to obtain approval for FTM?

FTM requires the approval from Shareholders, Creditors, Registrar of Companies, Official Liquidator and Regional Director. 

Which forms are required to be filed under fast track mergers?

CAA-9 (GNL-1), CAA-10 (GNL-2), MGT-14, CAA-11 (GNL-1), CAA-12, RD-1, INC-28 

Can Public Company take part in Fast track Mergers?

Generally, fast track mergers are not applicable to public companies (but can be part only in one case, when holding companies are amalgamating with their wholly-owned subsidiaries).

Further, Listed Companies that fulfills the above mentioned criteria can also take part in FTM.

Benefit of Fast Track Mergers over Traditional Mergers

Under the traditional Mergers, the procedure laid down for mergers involved lengthy procedures and mandatory Tribunal intervention. This led to the process becoming highly time-consuming. The provision of a Fast Track Merger under Section 233 of the  Companies Act, 2013 simplifies this process to a large extent. Without any tribunal-intervention, it requires the approval of the members and creditors, the Registrar of Companies (“ROC“), the official liquidator, and the Regional Director (“RD”). 

Other benefits are:

Issuance of a public advertisement is not mandatory.

Lower cost involved.

The registration of such a scheme has the effect of dissolution of the Transferor Company without the process of winding up. 

Leads to reduced administrative burden.

No application to NCLT or court: earlier in the scenario of 1956 act, both the transferor and transferee companies has to file separate applications to their respective courts, then many courts in various pronouncements have decided that if a holding company is Merging with its 100% subsidiary no need of application filing by the subsidiary, only holding company's application is suffice. Then in the 2013 act, it provided for much more liberty,  for the first time fast track mergers was introduced, under this, it was prescribed if there is holding company is proposing mergers with its 100% subsidiary, then no need to approach NCLT for this, only RoC and RD approvals are sufficient for getting the mergers completed.

What will be the case in which FTM from 233 get transferred to where the scheme may have to get approval under 230 to 232?

Generally, fast track mergers scheme are approved by majority of creditors representing nine-tenths (means 90%) in value at their meetings and as well as compliance of such other conditions as prescribed under 233.

But, in case these scheme fails to get approval within the purview of section 233 of the Act, the concerned companies may, at their discretion, opt to undertake such schemes under sections 230 to 232 of the Act, as prescribed under Rule 25(8).

Dissolution without winding-up 

Transferor Company shall, be deemed to have dissolved, as per provisions of 233(8), when the Registrar duly register the scheme and issues a confirmation order of the same.

Procedural Aspects of Fast Track Mergers

Section 233 of the Companies Act, 2013 along with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 lay down the procedure for fast track mergers:-

1. Power to Amalgamate 

First of all, both the companies need to examine their respective Memorandum of Association (MoA) and assess if they have the requisite authority under the object clause to enter into a Merger or Amalgamation. 

Eventhough it will not be a hurdle in the way of FTM, as the courts have granted approval without this power also time to time, but if it is there already it will make the formalities more smooth.

Some also says that the power to Amalgamate or merger must be there in the Articles, this is only an advice and it is nowhere mandated.

However, if the transferee company intends to carry on the business of transferor company,  it must have the object clause amended as per the MoA of the Transferor Company.

2. Board meeting for approval of the FTM and the scheme

Board Approval for the Fast Track Merger 

@A draft scheme of amalgamation shall be prepared for getting it approved in the Board meetings of each company.

@To obtain declaration of solvency from the directors of the Company in Form CAA-10

@To decide and approve date, time of the general meeting of members and creditors

@To pass the necessary resolutions for approving the scheme and to authorize someone to do all acts and things as may be considered necessary and expedient in relation thereto.

3. Submission of notice inviting objections or suggestion

A  notice  of  the  proposed  scheme  inviting  objections or suggestions, shall be sent  in  form  CAA-9  enclosed  with  a  copy  of  the  scheme  by  each of the  companies involved in the merger. 

The Notice in CAA-9 shall be sent to the following persons:

To the  Registrar  (where  the  registered  office  of  the transferor and transferee  company  are situated)  

To the Official  Liquidator  of  the  area  where  the  registered  office  of  the transferor  company  is  situated and not of the transferee company.

To such persons affected by the scheme* 

The  objections  and  suggestions  shall  be  sent  by  the  Registrar  and  Official Liquidator  and persons  affected  by  the  scheme  to  the  Regional  Director  and  to companies involved in the merger within 30 days from the  date of the  notice. 

If not received within 30 days then it shall be presumed that they do not have any objections, even objections received after 30 days then also it shall be considered as equal to as not received any objections at all.

* Who are All such persons affected by the scheme, they have not been defined anywhere.  One example of such persons can be the Income Tax department.

Further, the CAA-9 shall be sent to each of the RoCs of respective Companies involved. Even if there is common RoC for two or all Companies, still separate CAA-9 shall be filed.

Please note that OL of transferor company is involved and RD of transferee company is involved in FTM

4. Filing of Declaration of Solvency

Each  of  the  Companies  involved  in  the  merger  files  a  declaration  of  solvency  in form  CAA-10  with  the  Registrar  where  the  registered  offices of  the companies  are  situated  before  convening  the  meeting  of  members  or  creditors  for approval of the  scheme. 

5. Convening General meeting of members or class of members

A. The notice of the meeting shall be accompanied by:

(a) A Statement disclosing the details of the compromise or arrangement pursuant to sub-section (3) of section 230 of the act read with sub-rule (3) of rule 6. However it may avoid the statement if such details are already included in the said scheme;

(b) A copy of the scheme;

(c) The declaration of solvency made in pursuance of section 233(1)(c) of the Act in form CAA.10.

Post sending of notices, the Companies shall convene their respective general meetings:-

B. The objections and suggestions received from the Registrar, Official liquidator and persons affected by the scheme shall be considered by the companies in their respective general meetings 

C. The scheme shall be approved by the respective members or class of members holding at least ninety percent of the total number of shares.*

* 90% of total no. of shares means 90% of total paid up shares of the Company, irrespective of the fact that they are present at the meeting or not, i.e. it does not mean the shareholders who are present at the meeting, 90% of total shareholders approval is to be received. (90% for each class of shares)

Further, in case Companies having preference shares or such other classes or types of shares issued, then the Companies also need to obtain approval of preference shareholders/ other shareholders  in their respective class of meetings.

Going even further, fast track merger provisions provides to obtain approval from members and creditors only. It nowhere provides to obtain approval from debenture holders. However. The authorities may prescribe to obtain their consents also. Therefore it’s advisable to obtain their approval or consents also before going to RD, to get the scheme approval from RD seamlessly.

6. Convening meeting of  creditors or  class  of  creditors 

A. The  notice  of  the creditors meeting also  shall  be  given  21  days  prior  to  the  date  of  meeting  accompanied by: 

(a)  A  Statement as per the above similar provisions and as  far  as  applicable,  referred  to  in  sub-section  (3)  of  section 230 of  the act read  with sub-rule  (3)  of  rule  6, hereof in relation to details which are  not included in the  scheme; 

(b)  A copy  of the  scheme; 

(c)  The  declaration  of  solvency  made  in  pursuance  of  clause  (c)  of  subsection (1) of  section 233 of  the Act in form  CAA.10 

B. The objections  and  suggestions  received  from  the  Registrar,  Official  liquidator  and such persons affected by  the  scheme shall  be  considered by  the  respective companies 

The scheme  shall  be  approved  by  the  majority  representing  nine-tenths  in  value  of the creditors or  class of  creditors of  the respective  companies.*

* As per above members approvals point, it is also similar i.e. nine-tenths in value means in total of nine-tenths irrespective of the fact how many of them are present or absent from the meeting.

7. Filing of copy of  scheme  and  results of  the meeting with  the Regional  Director

A. The Transferee company, within 7 days of conclusion of the meeting of members or class of  members  or  creditors  or  class  of  creditors,  shall  be  required  to  file  with the Regional Director  in  form CAA.11 the following  documents:

(a)  copy  of scheme  as  agreed to by  members  and creditors; and 

(b) a report of  the  results of  each of the  meetings   

B. Copy of  scheme along  with  the  above  mentioned  form  CAA.11  shall  also  be  filed by  the transferee  company  with :   

(a)  The  Registrar  of  companies  in  form  GNL-1 and 

(b)  The  official  liquidator  through  hand  delivery  or by  registered  post  or speed post. 

CAA-11 is to be filed within 7 days, in case creditors meeting was convened later than general meeting then do we have to calculate 7 days from latter convened meeting?

Then do we also need to file 2 separate CAA-11?

8. Approval of scheme by the Regional Director

Now, here may be two cases:

1st. Where no objection or suggestion is received to the scheme from the Registrar of Companies and Official Liquidator within a period of 30 days, then the Central Government (Regional Director) shall register the scheme and issue a confirmation thereof to the companies; 

(It also means that RoC and OL has to mandatorily review the scheme and provide there objections/ suggestions within 30 days else it will be presumed that the scheme is OK from there side or

2nd. where the objection or suggestion of Registrar and Official Liquidator is deemed to be not sustainable and the Central Government (Regional Director) is of the opinion that the scheme is in the public interest or in the interest of creditors, the Central Government (RD) shall issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA-12.

3rd. 

Contents include in a scheme of merger

However, from a practical standpoint, it is also imperative to know what are the ingredients / contents

One should include in a scheme of merger. These ingredients are:

Preamble

Definitions of the terms used in the scheme

A detailing of the pre-merger and the post-merger capital

The way the assets and liabilities shall be transferred

Appointed and effective date of the scheme

Tax treatment of the scheme

Benefits to be given to the staff

Consolidation of the authorised share capital

Dissolution without resorting to winding-up

Notice of approval of the scheme

Any amendments or modifications to the scheme

Post-Merger Effect

The following consequences shall result out of the merger:

The transferor company shall stand dissolved on the registration of the scheme. No winding-up shall be required for the same.

All the assets and liabilities of the transferor company shall be transferred to the transferee company.

Any charge on the transferor’s property shall stand transferred to the transferee.

Payment of social security benefits of employees will now be the responsibility of the transferee company.

Practical Difficulties in fast track Merger Process

Merging the authorised capital of all companies in the transferee company may not be practically viable.

Form INC 28 which finally registers the scheme does not provide for the following:

A separate drop-down menu for Section 233

Change in the status of the transferor company

There is doubt regarding whether the Regional Director can suggest changes to the scheme. It appears that if the ROC, Official Liquidator does not have objections to the scheme, the Regional Director has to confirm without any suggestions of his own.

If we look minutely section 233(1)(a) then we would find that it provides for sending notices to RoC and OL or persons affected by the scheme. Here using of word “or” denotes that it is optional at the hands of the companies to send notices of their persons of choice and not mandatorily to RoC and OL. However it’s actual meaning that it is optional at the hands of the companies to send notices to such other persons as they think fit in their own interpretation and not to send at all if they don’t wish to, but to send mandatorily to RoC and OL.

If the Company or Companies are not solvent so that they cannot submit declaration of solvency then in this case, they cannot go through fast track merger route as it is a mandatory requirement under FTM route. However, they can still go for mergers under 230-232 of the Companies Act. Hence, Only solvent companies can utilize the benefits under Section 233 [ NATIONAL COMPANY LAW TRIBUNAL, MUMBAI BENCH - I C.P. No. 87/MB/2019]

One liner:

BM - CAA-9 - CAA-10 - GM - CAA-11 - CAA-12

FTM can be completed in approx. 90 days.

What are the criteria for fast track merger?

Small Companies: Should not be public, with paid-up capital under ₹4 crore and turnover below ₹40 crore. ...

Start-ups: Private companies, incorporated within the last 10 years, with turnover under ₹100 crore.

Is a valuation report required for a fast track merger?

In the event that the consideration is through a swap of shares, the Registered Valuer shall recommend a share exchange ratio as part of the Valuation / Share Exchange Ratio Report. In case the merger is of a Wholly Owned Subsidiary, no Share Exchange Ratio Report is required.

What are the approvals required for merger?

The existing Law requires that a scheme for merger and/ or any arrangement should be approved by a majority in number representing also 3/4th in value of shareholders/creditors present and voting.

What is an example of a fast track merger in India?

For Example, Scheme of Amalgamation between ABC Info Private Limited ('Transferor Company), situated in the state of Maharashtra within the of Jurisdiction of MUMBAI ROC, with XYZ Info Limited (Transferee Company), situated in the state of Gujarat within the of Jurisdiction of AHMEDABAD ROC.. They shall present a consolidated scheme and get the approval of the required authorities. 

What are post-merger compliances?

A. ROC Compliances (e-forms INC-28, PAS-3) After getting the order of merger, both the transfer and transferee companies must file Form INC-28 within 30 days from the date of receiving the certified copy of the order of merger. INC-28 should have a copy of the order and declaration related to the increase in capital.

What is Section 233 of the Companies Act, 2013 fast track merger?

Section 233 of the Act and Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 offer certain classes of companies an alternative option of merger, with fewer legal requirements and a quicker approval and registration process.

What is the difference between Section 232 and 233 of the Companies Act 2013?

Differences between Mergers of Listed and Unlisted Companies

NCLT is the approving authority as per section 232 instead of Central Government in case of section 233. The draft scheme has to be approved by a 3/4th majority by the shareholders and creditors of the merged entity as per section 232. In case of section 233 it had to be approved by 90% of shareholders and creditors and by the RD. 

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