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In order to survive in the current economic environment, expansion and up-gradation are the two critical tools for any business. Every company wants to grow its business, divert to add more business, enter into untapped markets and gain specialization. There are many ways by which a company can expand its business such as taking over the business of the competitors, starting a business supporting the main business of the company, merger with competitors, acquisition of small companies to take control of their market share and others. Merger and Amalgamation is one of the most cost-efficient and efficient way to expand the business.
In this article, we shall discuss Fast Track Merger and the process laid down under the Companies Act, 2013 (“Act”) and rules made thereunder.
Merger and Amalgamation (“M&A”) is a very complex process and involved various legal criticalities and compliances. Earlier, due to its legal complications and heavy cost, small companies were reluctant to resort to this process. With the introduction of the Companies Act, 2013, an effort has been made to simplify and remove the unnecessary hassles in the process in case of certain types of companies. The process is now faster and simple, thus, it is termed as Fast Track Merger.
According to the new provisions, two or more small companies or the major or minor companies can merge together, without the prior consent of the tribunal or the court. Section 233 of the Companies Act, 2013 read with rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 deal with Merger and Amalgamation of certain types of companies. The section came into force with effect from 15th December, 2016.
Benefits of Fast Track Merger
Following are some of the benefits of Fast Track Merger:
- Lesser administrative burden;
- No Requirement of issuing Public Advertisement;
- Less time taking and cost-effective;
- Registration of scheme deemed to have the effect of dissolution without undergoing the winding-up process;
- Removal of court convened meetings; and
- No requirement of NCLT approvals
Fast Track Merger applies only to two types of companies which are as follows:
A.Merger of two or more SMALL COMPANIES (as defined under section 2(85) of the Act)
As per section 2(85) of the Act, a Small Company means a company other than Public Company having paid-up capital not more than Rs. 50 Lakh and turnover not more than Rs. 2 Crores. (Govt. can raise the limits but not exceeding INR 100 crores)
Further, the following class of companies shall be excluded from the definition of Small Companies:
- A company which is a holding or a subsidiary company
- A company registered under Section 8 of the Act
- A company or body corporate governed by any special act
B.Merger of a Holding Company and its Wholly Owned Subsidiary
It means a subsidiary company whose 100% shares are held by its holding company. The transferor company needs to be a wholly-owned subsidiary of the holding company as on the Appointed Date of the scheme
Procedure of Fast Track Merger
The process of Fast Track Merger is divided into the following three major stages.
The process of Fast Track Merger starts with some basic steps. We would call these activities as Pre-Merger activities for the purpose of ease of understanding (this nomenclature is not mentioned anywhere). It contains all the activities required to start the merger process formally. These activities form the basis of the merger. These activities include checking the Memorandum of Association (“MOA”) of the companies, taking necessary approvals from the Board of Directors and obtaining relevant certificates from the Statutory Auditors.
The following activities are covered under the Pre-Merger stage:
- Authority in MOA: Checking the MOA to ensure the companies have the authority to enter into Merger and amalgamation. If the MOA does not have such authorization, then alter the MOA suitably in accordance with the procedure laid down in the Act and rules made thereunder.
- Checking the compliance status of the Companies: Checking the compliance status of the companies under various Acts. If the companies are non-compiled, then complete all the pending compliances.
- Appointment of a Registered Valuer: Appoint a Registered Valuer duly registered with Insolvency and Bankruptcy Board Of India (IBBI) with the approval of the board for obtaining valuation report for determining share exchange ratio. (Valuation report would only be required in case of a merger between Small Companies, not in the case of a merger between a holding and a wholly-owned subsidiary of the company)
- Approval of other services from the Statutory Auditors of the Companies: Boards to approve the following non-audit services from respective statutory auditors’ under section 144 of the Act and to fix their fees for the same:
- Obtaining certificates from the statutory auditors of the respective companies certifying that accounting treatment of the proposed Scheme of Merger is in conformity with the accounting standards prescribed under Section 133 of the Act; and
- Obtaining of Auditor’s report on the statement of assets and liabilities;
- Board meeting for approvals: After drafting the Scheme of Merger, board meetings of both the Transferor and Transferee companies should be held physically (not through video conferencing etc) for the following purposes:
- To take note of the valuation report along with Share exchange ratio, if required;
- To approve Scheme of Merger and give necessary authorization such as authorisation to file MGT-14 under section 179 of the Act as per applicability;
- To take note of Auditor’s Accounting treatment certificate under section 133 of the Act;
- To approve the latest Statement of Assets and Liabilities (prepared in the format as annexed with Form CAA.10);
- To take note of Statutory Auditors’ reports on Statement of Assets and Liabilities;
- To approve the draft of Form CAA.10 i.e. Declaration of Solvency and give authority for signing the same;
This phase is the essence of the Fast Track Merger wherein all the main activities related to the merger are carried out. We would call these activities During Merger activities for the purpose of ease of understanding (this nomenclature is not mentioned anywhere). We can also term this phase as the operational phase of the process. The activities under this phase include obtaining objections and suggestions from various concerned authorities on the Scheme of Merger, getting the scheme approved from the Shareholders / Creditors and filing various forms with the Regional Director and ROC etc. Following are the steps involved in this stage:
- Issuing notice inviting observation/ comments: After approval of the Scheme of Merger by the Board of Directors of the respective companies, a notice in physical Form CAA.9 (Click here to download the format of the form) along with the scheme of Merger shall be sent by both the companies to concerned Registrar of Companies (“ROC”), Official Liquidators, Income tax department (“Authorities”) or any other concerned authority for inviting their objections or suggestions on the Scheme of Merger.
- Filing documents with ROC: Form GNL-1 with ROC after annexing the following document shall be filed with challan;
- Copy of the form CAA.9
- Declaration of Solvency in physical Form CAA.10 (click here to download the format of the form) along with Audited Statement of Assets and Liabilities;
- Certified Copy of Scheme of Amalgamation;
- Certificate of Accounting treatment u/s 133 given by Auditor;
- Board resolution approving the Scheme;
- Power of Attorney or Board resolution in favour of professional for appearance before various concerned authorities and departments
- Holding a Board Meeting: After the expiry of 30 days from the date of notice given in Form CAA.9 to authorities, hold another board meeting (either physical or through video conferencing or pass circular resolution) of Transferor and Transferee Companies for following purposes:
- To take note of the observations or suggestions letter, if any, received from respective authorities; If no objection or suggestion letter is received, then the Scheme of Merger would be treated as the final Scheme;
- To take note of the List of Creditors of Transferor & Transferee Company (as on cut-off date) duly certified by Chartered Accountant or Statutory Auditors of the respective Companies;
- To approve and send notice of general meeting containing details as per Rule 25(3) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 for obtaining the consent of members holding at least 90% of total paid-up capital;
- To approve and send notice of Creditor’s meeting containing details as per Rule 25(3) of Merger Rules for obtaining the consent of majority creditors representing nine-tenths in value of the creditors as on cut-off date (Alternatively, in case of creditors, the Company may take consent from the creditors (as on cut-off date) by way of obtaining no objection Affidavits instead of calling the creditor’s meeting);
- Holding meetings of members and creditors: Meeting of members and creditors of both Transferor and Transferee Company shall be held for approving the Scheme. After holding the general meetings of Transferor and Transferee Company for approving the Scheme, copy of the resolution should be filed in Form MGT-14 by respective companies under section 117 of the Act.
- Filing documents: Within 7 days of the conclusion of the meeting of members and creditors for approving the Scheme, the “Transferee Company” would file following documents with Regional Director, Registrar of Companies and Official Liquidator having jurisdiction over the respective companies:
- Physical Form CAA.11 (Click here to download the form);
- Certified Copy of Scheme of Merger;
- Board Resolution approving the Scheme;
- Notice of the general meeting and creditors meeting sent in accordance with section 233(1)(a);
- List of shareholders as on record date who were eligible to attend the general meeting;
- Signed Minutes of general meeting approving the Scheme;
- List of Creditors as on cut-off date duly certified by Chartered Accountant who were eligible to attend the general meeting or to give NOC by way of Affidavits;
- Signed minutes of creditors meeting or requisite NOCs by way of affidavits approving the Scheme; and
- Certificate of Accounting treatment u/s 133 given by Auditor
Above documents shall be filed with ROC in Form GNL-1, with Regional Director by the Transferee Company through E-Form RD-1 and with Official Liquidator through hand delivery or by registered post or speed post within 7 days of obtaining approval of members and/or creditors on the scheme.
- Approval of the Scheme by the Regional Director: If no objection from ROC and Official Liquidator is received within 30 days of filing of Form RD-1, the Regional Director would approve the Scheme of Amalgamation by issuing confirmation order in Form CAA.12. If any observations are received and on the basis of objections or suggestions made by ROC and Official Liquidator or otherwise, Regional Director is of opinion that the scheme is not in the public interest, it may file an application before Tribunal in Form CAA-13 within 60 days of receipt of the scheme and requesting Tribunal may consider the scheme under section 232 of the Act.
- Transferor and Transferee Company should file the certified copy of the order from the Regional Director in Form INC-28 along with the copy of Scheme within 30 days of receipt from Regional Director.
(Ensure that no other E-Form/ return is pending for filing or approval with ROC by Transferor Company or Transferee Company)
Activities under this phase are initiated after the approval of the scheme of merger. We would call these activities Post Approval activities for the purpose of ease of understanding (this nomenclature is not mentioned anywhere). These activities are done to bring the Scheme of Merger in effect. These activities include amending the MOA of the Transferee company to change the capital clause, intimation to various authorities and departments and other related activities.
- Amendment in MOA: After approval of the scheme of merger and pursuant to the scheme, if required, the capital clause of MOA of the Transferee Company should be amended by merging the Authorized Capital of dissolved Transferor Company. For this, no seperate approval from the shareholders would be required as the alteration is by virtue of Scheme of Merger.
- Intimation to departments: Intimation of the merger should be given to the following concerned departments/authorities and stakeholders along with a certified copy of the order and the Scheme of Merger:
- Income Tax Department;
- GST Department;
- All Banks, where A/c of Transferor and Transferee Company are being maintained;
- Vendors/suppliers of Transferor Company;
- ESI Department, if required;
- PF / Gratuity Department, if required;
- Intimation to Insurance Companies;
- Revenue department for adjudication of Stamp duty; and
- Other concerned authorities.
- Other activities:
- A revised balance sheet of Transferee Company would be prepared reflecting all assets and liabilities being transferred pursuant to merger w.e.f the Appointed date (date from which the merger would be effective pursuant to the Scheme of Merger).
- Transferee Company will take over all assets and liabilities of Transferor w.e.f. Appointed date.
- Cross Investment/ Loan / Advances made or given by Transferee Company into Transferor Company would be cancelled and the net effect shall be presented in the financial statement of the Transferee Company.
- Pending legal proceedings by or against the Transferor Company shall be continued by or against the Transferee Company.
- Upon the registration of the scheme, Transferor Company or Companies shall be deemed to have the effect of dissolution without the process of winding-up. Thus, Fast Track Merger could be an option while taking decision regarding winding up of a small company in the group or a Wholly Owned Subsidiary (WOS).
- The fee, if any, paid by the Transferor Company on its authorized capital prior to its merger or amalgamation with the Transferee Company shall be set-off against the fees payable by the transferee company on its enhanced authorized capital due to merger or amalgamation.
- The charges, if any, on the property of the Transferor Company shall be applicable and enforceable as if charges were on the property of the Transferee Company.
- On merger, the share capital held by the Transferee Company in the Transferor Company would have to be cancelled and cannot be allotted to any trust either on its behalf or on behalf of any of its subsidiary or associate company.
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The article is written only for the purpose of providing information and knowledge related to Fast Track Merger. This article is based on the provisions in force as on date and our interpretation of the law. Kindly check the relevant laws and provisions before relying on this article.