Introduction
Recently, on the 17th of September, 2024, the Ministry of Corporate Affairs (“MCA”) finalised significant changes to the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 to streamline the cross-border merger and acquisition transactions in India. New changes in the rules also aim at the simplification of the mechanism of operations between the foreign parent companies, known as “holding companies”, and their subsidiaries in India, while at the same time strengthening the existing safety nets. As a result of prior clearances from the Reserve Bank of India (“RBI”) and compliance with the provisions of theForeign Exchange Management Rules and Regulation, the amendments reflect India’s policy of opening up to Foreign direct investments (“FDI”) while at the same time ensuring the sovereignty of the country, particularly with regards to its neighbours.
This article offers a three-part exploration of the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2024 (“Amendment Rules, 2024”). Firstly, it provides the background and rationale for those changes, secondly, it describes the new, non-complex processes and the fast-track measure enshrined under Section 233 of the Companies Act, 2013 (“CA, 2013”), discussing how such changes are intended to increase the speed of international business transactions. Lastly, the article offers a detailed discussion of the potential impact of the Amendment rules and specific recommendations for firms seeking to adapt their merger plans to the new regulatory environment.
Addressing the Gaps: The Rationale Behind the 2024 Amendments to Cross-Border Merger Rules
The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 under the CA, 2013 formulated by the MCA are aimed at proper order of merging, acquiring, and restructuring business undertaking in a way that is beneficial to the company, its shareholders, creditors, and other stakeholders as well as encourages economic growth and investment. The MCA regulates these provisions to ensure that the rules are clear in order to meet international practices. However, the one released in 2016 posted certain challenges, especially in cross-border mergers. Due to the requirement of National Company Law Tribunal (“NCLT”) clearance, these procedures were time-consuming and the absence of efficient merger mechanisms resulted in cumbersome formalities that lengthened the reorganisation processes, which kept multinational firms away from restructuring operations in India. Second, there was a lack of supervision on cross-border mergers with companies that posed security risks, particularly those from countries with potential geopolitical tensions. This gap left room for foreign entities to acquire stakes in Indian firms without adequate scrutiny, raising concerns over national security and economic stability.
Identifying these loopholes, the 2024 Amendment Rules have provided a new and less cumbersome route for some mergers to avoid NCLT under section 233 of the CA, 2013. Some of the important aims of the amendment are encouraging cross-border mergers, and seeking RBI’s approval for better compliance with Foreign Exchange Management Rules for maintaining national security. This approach is designed to attract foreign investment without compromising India’s financial and economic security.
Evolving Corporate Landscape: Key Revisions in the Companies Amendment Rules, 2024
TheAmendment Rules, 2024bring about major changes in the processes of cross-border mergers and increased supervision. The key changes are discussed below:
First is the Mandatory RBI Approval, which requires that any cross-border merger, which requires that a foreign holding company and its wholly-owned subsidiary in India, should be approved by the RBI. This step would make sure that FDI of the accompanying countries adheres to the policies of India’s economic and financial framework, particularly for countries of geopolitical concern such as the People’s Republic of China. The amendment provides for pre-approvals improving security in cross-border investments.
Second are the changes brought in the context of Fast-Track Mergers under Section 233 of the CA, 2013. The amendment allows for qualifying mergers including Wholly Owned Subsidiaries (“WOS”) to take place without NCLT approval, through the fast-track route under Section 233. This hastens the merger process; in which the applications are processed by the Regional Director (“RD”) of the MCA. However, integration of this fast-track mechanism with Section 232 may cause some interpretational confusion, particularly in areas where their provisions overlap, raising concerns about the clarity and consistency of the regulatory framework governing mergers.
Third is the increased Scrutiny for Bordering Nations which enhances the legal requirements on investment from neighbouring countries. RBI’s clearance along with compliance with the Foreign Exchange Management (Non-debt Instruments) Rules underscores the primacy of national security considerations while providing the right regulatory environment for business along with the protective guard rails.
Fourth is De Minimis Exemption Thresholds, which increase thresholds under the Competition Act, 2002, which modifies the regulations concerning mergers in that these can now take place without regulatory approval if the value of the gross assets of any of the merging firms is less than INR 4.5 billion or the annual turnovers of such firms is less than INR 12.5 billion. This change is beneficial to Micro, Small, and Medium Enterprises (“MSMEs”) and startups, which frees the Competition Commission of India (“CCI”) to address more significant mergers and acquisitions impact while also alleviating the paperwork burden for smaller entities.
These reforms make cross-border mergers easier while dealing with the financial compliance, security, and procedural aspects in the changing structure of corporate India.
Evaluating the 2024 Amendment Rules: Shortcomings, Impact, and Future Directions
The Amendment Rules, 2024 bring incremental changes but also have their drawbacks. First, the condition that any cross-border Mergers and Acquisitions (“M&A”) require approval from the RBI and may harm the investment climate through time constraints especially if the merger is complex or in mergers with neighbours. Secondly, Section 232 of the CA, 2013 which requires approval of NCLT and Section 233 which requires approval of the RD both have similar structures which may create confusion for companies. Despite the fact that both sections relate to mergers, they are provided with rather different norms and have various procedures. Section 232 which demands clearance from NCLT is for complicated mergers, particularly international deals that need more attention. However, under RD approval Section 233 allows for a faster process for mergers that are simple such as a merger between wholly-owned subsidiaries as well as small companies as defined under the Act. This overlap has caused confusion mainly for organisations that engage in moderately complicated transactions, which shows that there is a need for standards to help the firms’ understanding about when and how to apply the sections to avoid compliance issues.
Implementation Roadmap: Strategies for Effective Execution
A successful strategic plan is vital for realising the improvement of the regulation of cross-border M&As. While existing difficulties are addressed systematically, the organizations can work through the problems while creating the conditions that support growth and investment. The following recommendations point out major directions that, if implemented, will enhance the process and increase clarity and efficiency of regulatory compliance.
Firstly, there should be an RBI Approval Streamline for Cross-Border Mergers to improve the governing of cross-border M&As. This help desk, which will be operated by the RBI, would help in clearing up procedural uncertainties in M&As, just as the Foreign Exchange Management Act (FEMA) Guidance and the Liberalised Remittance Scheme (LRS) have helped in giving clear direction on cross border movements of funds. More especially, it would assist in ascertaining whether NCLT approval under Section 232 of the CA, 2013 applies or RD approval under Section 233 of the Act is applicable for the given transactions. RBI’s earlier initiatives have borne fruits, such as Overseas Direct Investment (ODI) Regulations to facilitate smoother compliance for companies expanding abroad, have borne fruits in ensuring adherence to regulatory norms. A help desk for cross-border M&As will similarly eliminate delays, explain the new rules, and also help companies steer clear of possible problems.
Secondly, the overlap between Section 232 and Section 233 of the CA, 2013 needs to be reconciled. The MCA must frame clear guidelines and specify circumstances in which these provisions are applicable. Guidelines or some frequently asked questions might assist firms in eradicating ambiguities when it comes to the selection of the fast track or a standard option.
Thirdly, introduce Provisional Approval Mechanisms, through which RBI could regulate mergers with companies that have good compliance history or have clean transaction trails could be given temporary approvals with the condition that mergers will be subjected to audits after the mergers. This would enable firms to go forward faster, with RBI audits being conducted to check compliance after a transaction has occurred.
Lastly, to provide more support to MSMEs & startups, the MCA could offer simple templates & clear policies that will help these companies that are seeking this de minimis exemption. The following initiative would facilitate the compliance of these businesses with the competition law in an efficient manner to allow them to expand their businesses since they will be able to effectively know the legal requirements that need to be complied with thus enhancing the development of the conducive environment for business development and innovation.
With the help of these recommendations, the amendment rules can achieve the balance between the cautiousness of the legislation and the business opportunities to make the climate safe for international investments.
Concluding Remarks: The Path Ahead for Cross-Border Mergers
Even though the need for an Amendment was recognized, the quandary regarding the implementation remains persistent. The same has to be resolved to meet the stated objectives of the Amendment Rules. Thus, the Amendment Rules, 2024, initiate a qualitative shift in India’s involvement in cross-border mergers, potentially enriching the framework and benefiting companies, particularly those with subsidiaries in foreign territories. While the necessity of such changes was quite evident to align with international requirements and boost FDI several issues persist that hinder the effective application of the rules in practice. The RBI approvals required, the duplication in the procedures spelled out in sections 232 and 233 and the additional scrutiny of investment from neighbouring countries bring in compliance issues that might impact the amendment’s intended outcomes.
For these amendments to achieve their set goals, actions such as Simplified RBI procedures, well-defined policies on the channels to approach regulatory authorities, and a targeted approach to support MSMEs, and startups can prove to be beneficial. Additionally, this can prove to be crucial to achieve national security and ease of doing business.
Although the Amendment Rules are progressive in nature, the continuing task is to implement them properly. If these issues are not addressed, then the advantages of these Rules might not be met, affecting investors’ interest in India, as well as the regulatory efficiency of both domestic and cross-border M&As. Thus, there is a need for a clear, balanced, and well-substantiated regulation in order to achieve the twin aims of the Amendment, namely security and business effectiveness.
This article is a part of the DNLU-SLJ (Online) series, for submissions click here.
Student at Hidayatullah National Law University
