Fast Track Merger under Companies Act, 2013

Corporate restructuring and mergers and acquisitions (M&A) have long been critical tools for businesses to achieve growth, streamline operations, and maintain competitiveness in a dynamic market. While M&A can be achieved through private contractual arrangements or statutory processes, statutory mergers in India often faced criticism for being lengthy and cumbersome. To address these challenges, the Ministry of Corporate Affairs (MCA) introduced the Fast Track Merger mechanism under Section 233 of the Companies Act, 2013. This process, specifically designed for small and specified companies, simplifies the merger process, reduces procedural burdens, and promotes ease of doing business.

This article delves into the Fast Track Merger provisions under the Companies Act, 2013, the procedural framework, amendments to enhance efficiency, and the challenges that still need to be addressed to maximise its potential.

Meaning of Fast Track Merger

The Fast Track Merger mechanism was introduced as part of the Companies Act, 2013, based on recommendations from the J.J. Irani Committee Report (2005). The report highlighted the need for streamlined M&A processes in India to address delays associated with traditional court-driven merger procedures. The Fast Track Merger process was introduced to benefit:

1. Small companies
2. Holding companies and wholly-owned subsidiaries (WOS)
3. Start-up companies (added in 2021)

These eligible entities can merge without undergoing the lengthy procedures outlined in Sections 230 to 232 of the Act, which require National Company Law Tribunal (NCLT) approval. Instead, Fast Track Mergers rely on approvals from regulatory authorities such as the Regional Director (RD), Registrar of Companies (ROC), and Official Liquidator (OL).

Key Provisions of Fast Track Merger under Section 233

Eligibility

Fast Track Mergers are available for specific classes of companies, including:

• Small Companies:
  • Paid-up share capital ≤ ₹50 lakhs (extendable to ₹10 crores).
  • Turnover ≤ ₹2 crores (extendable to ₹100 crores).
• Holding and Wholly-Owned Subsidiary Companies.
• Start-Up Companies:
  • Private companies recognised as start-ups under relevant government notifications.

Key Exclusions

Certain entities cannot use the Fast Track Merger route:

• Public companies.
• Section 8 companies (non-profit entities).
• Companies governed by special Acts.

Approval Process

To proceed with a Fast Track Merger, the following approvals are mandatory:

1. Board Approval: Approval of the draft scheme by the boards of directors of the merging companies.
2. Shareholder Approval: Consent from shareholders holding at least 90% of the total share capital.
3. Creditor Approval: Approval from creditors representing at least 9/10th in value of the total creditors.
4. Regulatory Approvals:
   • Scheme filing with the ROC and OL.
   • Consideration of objections and suggestions from ROC/OL by the RD.

Procedure for Fast Track Merger

1. Preparation Stage: Ensure that the Memorandum of Association (MOA) of the companies permits mergers. If not, amend the MOA accordingly. Prepare provisional financial statements and draft the scheme of merger.
2. Board Meetings: Approve the merger scheme in the board meetings of both companies. Authorize necessary filings with the Registrar of Companies (ROC) and Official Liquidator (OL). Fix dates for shareholder and creditor meetings to seek their approval.
3. Notification to Regulatory Authorities: Notify the ROC and OL by submitting Form CAA-9, inviting objections or suggestions within 30 days. File a declaration of solvency (Form CAA-10) with the ROC before convening meetings of stakeholders.
4. Approval from Stakeholders: Convene meetings with shareholders and creditors to discuss and approve the merger scheme. Obtain approvals from:
   • At least 90% of shareholders (in terms of total share capital).
   • Creditors holding at least 9/10th of the total value of outstanding debts.
5. Regulatory Review: Submit the approved scheme to the ROC and OL for their final review. The Regional Director (RD) evaluates any objections or suggestions raised by the ROC and OL.
6. Final Approval: If no objections or only unsustainable objections are raised within 30 days, the RD issues a confirmation order (Form CAA-12) approving the scheme. File the confirmation order with the ROC by submitting Form INC-28 to complete the merger process.

2023 Amendments: Enhancing Efficiency

Recognising delays caused by the absence of fixed timelines, the MCA amended Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules in May 2023. Key changes include:

1. Time-Bound Approvals: The RD must issue a confirmation order or refer objections to the NCLT within 60 days. Failure to act within the prescribed period results in deemed approval of the scheme.
2. Predictability: Provides certainty to companies about the timelines for approvals. Reduces delays caused by jurisdictional workload in certain regions.
3. Investor Confidence: Foreign investors gain confidence in India’s business environment due to increased efficiency in statutory processes.

Advantages of Fast Track Merger

1. Simplified Process: No requirement for NCLT involvement, public advertisements, or special audits.
2. Cost-Effective: Reduces compliance and procedural costs.
3. Time-Saving: Estimated duration of 90-100 days compared to traditional processes.
4. Ease of Doing Business: Encourages internal restructuring and M&A activity, especially for smaller entities.
5. Enhanced Flexibility: Facilitates mergers between related entities, such as holding companies and their WOS.

Challenges in Fast Track Merger

Despite its benefits, the Fast Track Merger process faces certain hurdles:

Creditors’ Approval

• Obtaining approval from 9/10th in value of creditors can be challenging for companies with a large number of creditors.
• Written notices and consents increase logistical complexity and costs.
• Suggested Reform:
  • Introduce flexibility for intra-group mergers.
  • Limit creditor obligations to intimation requirements, as practised in jurisdictions like Singapore and Delaware.

Shareholders’ Approval

• The 90% shareholder approval threshold is onerous, especially for public and listed companies.
• Suggested Reform:
  • Amend Section 233 to require:
    • Approval from 75% of shareholders present and voting.
    • Approval from more than 50% of the total shareholders.
  • Exempt holding-WOS mergers from dual shareholder approvals.

Multiple Consent Requirements

• Approvals are required from multiple authorities (ROC, OL, RD) and stakeholders (creditors, shareholders).
• Suggested Reform:
  • Reduce regulatory checkpoints to a single statutory authority, similar to international practices.

Conclusion

The Fast Track Merger mechanism under the Companies Act, 2013, is a progressive step towards simplifying statutory mergers and fostering ease of doing business in India. By eliminating NCLT involvement and introducing time-bound approvals, the Fast Track Merger process significantly reduces procedural complexities and costs for eligible entities.

However, to maximise its potential, further reforms are necessary to address challenges related to creditor and shareholder approvals and multiple consent requirements. Drawing lessons from international best practices, India can streamline the Fast Track Merger process to encourage wider adoption and position itself as a global hub for efficient corporate restructuring.

The 2023 amendments mark a pivotal step forward, but continuous improvement and stakeholder engagement will be key to achieving the full potential of Fast Track Mergers in India.