AMENDMENT TO COMPANIES RULES: STREAMLING NORMS FOR HOLDING- WOS CROSS-BORDER MERGERS

The Ministry of Corporate Affairs (MCA) vide its notification dated September 09, 2024 has introduced a sub-rule (provided below) which is effective from September 17, 2024 to further amend the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which affects cross-border mergers involving a Foreign Holding Company and an Indian Wholly-Owned Subsidiary in order to provide clarity around the process and compliance requirements with regulatory bodies as per the Companies Act, 2013 (the “Act”):

New Sub-rule 5:

“(5) Where the transferor foreign company incorporated outside India being a holding company and the transferee Indian company being a wholly owned subsidiary company incorporated in India, enter into merger or amalgamation –

1. both the companies shall obtain the prior approval of the Reserve Bank of India;

2. the transferee Indian company shall comply with the provisions of section 233;

3. the application shall be made by the transferee Indian company to the Central Government under section 233 of the Act and provisions of rule 25 shall apply to such application; and

4.the declaration referred to in sub-rule (4) shall be made at the stage of making application under section 233 of the Act.“

Key Highlights of the New Sub-rule 5:

1. Approval from the Reserve Bank of India (RBI):

Both the Foreign Holding Company and the Indian Wholly-Owned Subsidiary must obtain prior approval from the RBI before proceeding with the merger or amalgamation. Notable Aspect: Rule 9 of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 states that “any transaction on account of a cross-border merger undertaken in accordance with these Regulations shall be deemed to have prior approval of the Reserve Bank as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016.”

Therefore, prior approval under the new sub-rule will have to be read with said Regulation 9, and RBI approval will only be required if the transaction is not in compliance with the applicable requirements of Foreign Exchange Management (Cross Border Merger) Regulations, 2018.

2. Compliance with Section 233:

The Indian subsidiary, as the transferee company, is required to comply with Section 233 of the Companies Act, 2013, which lays down a simplified procedure for fast-track mergers for certain companies.

3. Application to Central Government:

The Indian Transferee Company must submit an application to the Central Government under Section 233, and the provisions of Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 will govern this application process.

Rule 25 outlines the process for making an application to the Central Government for mergers or amalgamations, particularly under Section 233 of the Companies Act, 2013 (related to fast-track mergers). It specifies the documents and procedures that need to be followed when filing for approval, including submitting necessary documents, resolutions, and schemes for the merger to obtain Central Government sanction. This Rule ensures that the application process is clear, structured, and compliant with the Act.

4. Declaration under Sub-rule 4:

The Indian subsidiary will need to make a declaration as required under Sub-rule 4 at the time of submitting the application under Section 233.

In case of a compromise or an arrangement or merger or demerger between an Indian company and a company or body corporate which has been incorporated in a country which shares land border with India, a declaration in Form No. CAA-16 shall be required at the stage of submission of application. This declaration is a legal statement made by companies involved in the merger, confirming that the proposed merger or amalgamation is in compliance with applicable laws and regulations. It must be submitted along with the application to ensure transparency and to affirm that all legal requirements are met before the approval process moves forward. It helps prevent any later-stage legal issues by requiring a formal declaration of compliance early in the process.

Intent of the Notification:

Regulatory Streamlining:

Ensures cross-border mergers comply with India’s Foreign Exchange Regulations by requiring RBI approval, preventing regulatory gaps.

Simplified Merger Process:

Aligns cross-border mergers with the fast-track provisions of Section 233, reducing procedural burdens for holding-subsidiary mergers.

Clear Application Process:

Provides transparency by specifying that the Indian subsidiary must file with the Central Government under Section 233, streamlining the approval pathway.

Enhanced Compliance:

Requires declarations to ensure early-stage compliance with the Act, reducing future disputes and ensuring transparency in the merger process.

CONCLUSION:

The notification is aimed at fostering a more predictable, transparent, and compliant environment for cross- border mergers between Foreign Holding Companies and Indian Wholly-Owned Subsidiaries. It strengthens regulatory oversight while simultaneously providing companies with a clearer, simplified route for mergers under Indian Corporate Law. This aligns with the government’s broader objective of encouraging foreign investments, avoid tax evasion strategies and align with national economic interests.