[Yash is a student at National Law University Odisha.]
The Ministry of Corporate Affairs (MCA), via its notification, has recently introduced significant regulatory changes for companies engaged in cross-border or transnational mergers. The amended regulation introduced a new sub-rule (5) under Rule 25A of Companies (Compromises, Arrangements, and Amalgamations) Rules 2016 (Companies Merger Rules). The new sub-rule puts forth a fast track mergers route (FTM) and streamlines the existing procedural framework for such cross-border merger between a foreign holding company, and its wholly owned Indian subsidiary. The amendments aims to foster the process of reverse flipping, especially for Indian companies that are incorporated in a foreign jurisdiction but are now willing to return back.
Unveiling the Latest MCA Amendments: Important Changes You Need to Know
The amendment puts forth a simplified regulatory framework that needs to be followed when a foreign company (incorporated outside India) being the holding company, is merged with its wholly- owned subsidiary (incorporated in India) being the transferee company. Under the amended rules, both the companies i.e. transferor and transferee are required to get prior approval from the Reserve Bank of India (RBI) before moving ahead with the merger process. They must also file a declaration confirming that they are not insolvent, as required under Rule 25 of the Companies Mergers Rules. Further, the transferee company is required to apply with the central government to get a green light for such merger, as mandated under Section 233 of the Companies Act 2013 (CA 2013).
Understanding Cross-Border Mergers and Navigating its Legal Landscape
The term ‘cross-border’ merger refers to any merger or amalgamation between an Indian company and a foreign company incorporated outside the jurisdiction of India. At present, this process is regulated under Sections 230 to 234 of CA 2013 read with Rule 25 A of the Companies Merger Rules. Under the existing regulatory framework, prior approval from the National Company Law Tribunal (NCLT), in addition to RBI’s approval, is needed for such transnational mergers. This means that both companies are mandatorily required to go through the lengthy process of obtaining NCLT’s approval which often takes 6 to 9 months and thus, unnecessary delays the merger process.
Reverse Flipping: Decoding its Meaning and Analyzing its Strategic Significance
India’s emerging startup ecosystem is a nurturing ground for greater innovation and development that incentivizes and lures domestic as well as offshore corporations to set up their operational base in India. Traditionally, Indian companies used to incorporate their operational apparatus in offshore jurisdictions, such as Singapore or Mauritius, to reap the advantages of the host country’s favourable business and taxation policies. This practice in common parlance is called ‘flipping’. Interestingly in light of rising investment endeavours in the Indian marketplace, this practice of flipping is now giving way to a phenomenon called reverse Flipping often referred to as ‘internalization’. This phenomenon has witnessed the shift of Indian companies, originally based abroad, bringing their headquarters and operational base back to India.
Factors such as greater access to capital including venture capital and private equity capital, rising lucrativeness of the Indian marketplace, cost-effective listing process in the stock exchange market, young and robust population base, and favourable tax regime can be attributed to the rise in reverse flipping. Digital payments companies such as PhonePe and Groww have already gone through this process while other platforms like Razorpay and Flipkart are also considering similar options.
Looking Ahead: Commercial Ramifications of these Amendments on Indian and Foreign Companies
The amendment comes at a crucial time when an increasing number of Indian startups are urging the government to simplify the regulatory framework dealing with foreign investments. Thus, with these latest amendments, the MCA tends to streamline the procedural requirements for transnational mergers by addressing the existing irregularities.
Under the present framework, the provision of obtaining prior approval from the NCLT was seen as an onerous requirement which made such cross-border, a time consuming process. The delay even discouraged foreign company’s investments endeavours into India. But now with the newly added Rule 25A (5), the MCA has done away with the requirement of obtaining NCLT’S approval. The merging companies must now obtain approval only from the RBI. This new FTM route will greatly lower down the time taken for such merger from 6 to 9 months to just a few months and will make the return of the foreign companies much easier. Thus, by setting forth a simplified regulatory regime, the amendment significantly lowers down the compliance burden which previously demoralized companies from establishing their operational base in Indian jurisdiction.
As India moves ahead in augmenting its position as a lucrative investment destination for both the Indian and foreign corporations, the amendment will further foster the process of reverse flipping. These companies will greatly benefit from the availability of a larger pool of capital, which can be used to expand their business operations. Moreover, with the presence of a conducive listing requirements on the stock exchange, these corporations can bolster their credibility, making themselves more lucrative to the potential investors by providing a profitable exit.
Additionally, the availability of robust consumer base and a dynamic workforce will underpin these corporations in attaining huge profits. With the implementation of an investment friendly regulation regime, these entities can also enter the emerging sectors such as e-commerce, agribusiness, healthcare, and fintech.
Building a Competitive Market: Essential Requirement for a Thriving Economy
The MCA by opening the doors for foreign corporations has facilitated their return into the domestic market. This presence of numerous actors assist in the creation of a competitive market as against a monopoly which is advantageous for both the consumers as well as the other competitors. For consumers, it means the availability of alternatives options thus enhancing their choice and bargaining power. The presence of healthy competition further incentivizes the companies to continuously innovate the quality of their goods and services thereby benefitting the consumers. For competitors, it means a greater access to consumer base and production market, which assists them in expanding their business operations.
Boosting Indian Economy by Reining in Capital Flight through Reverse Flipping
Reverse flipping also helps in reining in capital flight, as the corporations that are originally based in a foreign jurisdiction can now easily invest in India marketplace. The departure of domestic assets or capital is detrimental for the economy as it greatly diminishes the purchasing power of the people and can thus, impede economic growth. Therefore, it becomes quintessential in curbing this outflow of assets or capital from the domestic market. Hence, the amendment is a right step in the direction of curbing capital flight, as it allows the Indian companies (originally based in offshore jurisdiction) to easily bring back the capital and investments into Indian market, thereby fostering Indian economic growth.
Concluding Remarks
The amendment by MCA is a notable step in the direction of streamlining and simplifying the regulatory framework for transnational mergers. By inducting FTM route and eliminating the requirement of obtaining NCLT’s approval, the amendment significantly reduces the procedural burden, time, and costs associated with previous mergers.
The amendment fuels the rising trend of reverse flipping and endorses India’s rising attractiveness for greater investment and growth endeavours. Thus, this regulatory overhaul aims at bolstering India’s global competitiveness by opening the door for greater inflow of foreign capital investment into the domestic economy. The return of these foreign companies is accompanied with the valuable experience and expertise that they have acquired overseas, thus setting grounds for greater innovation and development. Moreover, by retaining the requirement of mandatory approval from the RBI and the Central Government before such cross-border merger is done, the amendment aims at scrutinizing and regulating the potential inflow of foreign capital. This framework further ensures returning companies’ strict compliance with India’s foreign exchange legislations and deter any possible tax evasion strategy.
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