Corporate Affairs Ministry amends mergers and acquisitions rules

By Pune Media On Sep 14, 2024 24

The Ministry of Corporate Affairs has amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, concerning mergers and acquisitions, in a likely attempt to ease the process of reverse flipping for startups. The amendments align with the recommendations put forward by the expert committee set up to encourage companies to return to India.

The amended rules apply when a foreign holding company (incorporated outside India) enters into a merger or amalgamation with an Indian company (incorporated in India) that is a wholly owned subsidiary. Companies must now obtain approval only from the RBI. Previously, they were required to obtain approval from the National Company Law Appellate Tribunal (NCLAT). The transferee Indian company must make the application to the Central Government under section 233 of the Companies Act, 2013. The same company must also submit interim reports to Central Government and on conclusion of investigation a final report to the Government, as it awaits approval. However, each of the companies involved must file the declaration of insolvency, under rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These provisions come into force from September 17, 2024.

Some context on the Indian Government’s concern on flipping

Companies moving their domicile to foreign countries is called flipping or externalization. In such cases, companies can also transfer the entire ownership of the company to a foreign entity.

An Economic Survey released by the Indian government for 2022-23 noted this phenomenon as a major concern. The survey noted “many Indian companies have been getting headquartered overseas, especially in destinations with favourable legal environments and taxation policies,”.

Thus, the Government set up a expert Committee in March 2023 to create a roadmap to prevent this flipping. The Committee also acknowledged the concern of “brain drain” and provided recommendations to encourage “reverse flipping” i.e. bringing startups and companies back to India.

The committee submitted a report to the International Financial Services Centres Authority (IFSCA). It laid out over thirty recommendations across a range of domains such as taxation, infrastructure, company law, dispute resolution etc. to encourage startups to relocate to the International Financial Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT City).

One of these recommendations included exempting mergers from NCLAT approvals. It noted that “reverse flipping” may require mergers and acquisitions (M&As). These were earlier subject to approvals from the National Company Law Tribunal or the RBI. It is recommended that this be limited to the RBI to ease the process of mergers.

Companies returning to India

In recent times, multiple companies have shifted their domicile back to India. Fintech company Groww moved from the US back to India in March 2024. Similarly, Pinelabs recently received approval from the Singapore court to ‘reverse-flip’ to India. PhonePe’s parent company Walmart paid nearly the Indian government $1 billion in tax to shift its startup’s headquarters from Singapore to India.