Speeding up fast-track mergers: Govt proposes wider scope, action awaited

Company Law experts said listed companies were unable to take the benefit of the fast-track mechanism for mergers with a wholly owned subsidiary since approval of all shareholders was required

Last week, the Ministry of Corporate Affairs brought a much awaited proposal on widening the scope of fast-track mergers under the Company Law. Steps such as allowing mergers of any subsidiary, as long as it is not listed, with its wholly owned subsidiary or mergers between fellow unlisted subsidiary companies belonging to the same group were in line with industry demand. However, a lot remains in the industry wishlist when it comes to the fast-track mechanism and simplifying mergers.  

Lowering thresholds for shareholder approval, allowing listed entities to merge in fast-track mechanism and easing the process for micro, small and medium enterprises (MSMEs) are some of the expert suggestions for policymakers in this area. Also, capacity enhancement at the National Company Law Tribunal (NCLT) benches, which are currently inundated with Insolvency and Bankruptcy Code (IBC) cases, must go hand in hand with merger and acquisition (M&A) reforms, legal experts have said. Besides the NCLT, multiple regulators need to approve mergers under the Companies Act, 2013, and the Competition Act, 2002. From the Competition Commission of India (CCI) to the Securities & Exchange Board of India (Sebi), Reserve Bank of India (RBI) to sectoral regulators, entities looking to merge go from one authority to another, leading to excessive delays.  

“The introduction of a single-window clearance mechanism for mergers and acquisitions, along with predefined timelines for approvals, can greatly enhance efficiency,” said Sonam Chandwani, managing partner, KS Legal and Associates.  

Finance Minister Nirmala Sitharaman in her latest Budget speech had said that the government would rationalise the requirements and procedures for speedy approval of company mergers. The Budget had promised to widen the scope for fast-track mergers while simplifying the process.  

Under the current mechanism, only specific categories of companies benefit from the fast-track route, including two or more small companies, wholly-owned subsidiaries and their holding companies. Officials believe that expanding the mechanism to include mid-sized businesses, startups, and distressed entities undergoing restructuring under IBC could be a game-chan­ger, thereby accelerating consolidation. 

“Simplifying the documentation process and ensuring that NCLT intervention is only needed in cases of disputes rather than routine approvals can also significantly improve deal closure timelines,” Chandwani added.  

 

MSME challenges  

Compliance burdens, lack of access to structured financing, and difficulty navigating legal complexities are some of the major challenges for MSMEs in the current M&A regime. Experts have called for a dedicated MSME restructuring framework, where smaller firms can restructure or merge through a simplified process with reduced compliance requirements.  

Then there’s a dichotomy between the definition of “small companies” under the Companies Act and the MSME Act. The turnover threshold of ₹40 crore under the Companies Act against ₹50 crore under the MSME Act has excluded many from using the benefits of the fast-track mergers. That needs ironing out.  

The MCA, in its draft rules, has proposed that those unlisted companies which have reasonable debt exposure of less than 

₹50 crore and have no default in repayment can go through the fast-track mechanism under Section 233 of the Companies Act.  

“Introducing M&A norms for corporate entities registered as MSMEs would be a significant game changer for India Inc. Valuation of shares of a company or stake of an LLP is another crucial aspect that needs to be considered in restructuring activities since they do not have shares and hence would require enterprise valuation,” said Gaurav Pingle, Practising Company Secretary. 

Experts feel that reducing manual interference, introduction of standardised guidelines and implementing mandatory timelines for approvals may help reduce delays in regulatory approvals.  

“A key aspect of simplifying the merger regime includes bringing forth a change in transactional jurisdiction of NCLT such that merger-related approvals can be approached before a single designated NCLT instead of multiple NCLTs when entities are spread across different jurisdictions,” said Sucharita Basu, managing partner, AQUILAW. 

Basu said that in cases where multiple approvals are required from various regulators, a unified digital interface for single window clearance should be created for further streamlining along with digitisation of approvals to reduce procedural bottlenecks. 

Another pertinent issue could be bringing the merger of two listed companies within the scope of the fast-track procedure.  

The fast-track mechanism of merger requires no involvement of the NCLT and can be availed by small companies, startups, and for mergers between holding companies and its wholly owned subsidiary.  

Company Law experts said that listed companies are unable to take the benefit of the fast-track mechanism for mergers with a wholly-owned subsidiary since approval of all shareholders is required.  

“If the applicability is extended to such companies, the government should also consider revising the shareholder threshold from the 90 per cent criteria to 75 per cent. Considering the vast number of shareholders in a listed company, listed companies may be reluctant to pursue the fast-track merger route, even if permitted,” said Saurav Kumar, partner, IndusLaw. 

As on November 30, 2024, 53 applications regarding amalgamation of small companies and those of mergers between a wholly-owned subsidiary and holding company were pending, according to data from the Ministry of Corporate Affairs. Between April 1 and Novem­ber 30, 2024, 431 such applications were disposed of.  

For applications which require the approval of the NCLT, the MCA data showed that as on November 30, 2024, 309 applications were pending.  

Industry bodies are also preparing their proposals to air concerns to the MCA around the current M&A regime.  

The expert committee on company law, in its proposal for changes in the Act while reviewing the provisions for M&A, said the fast-track process for mergers can be made more robust while also protecting the minority shareholder’s interest.  

In addition, it suggested that the Section 233 of the Act should be amended to permit fast-track mergers between a holding company and its subsidiary company or companies, other than wholly-owned, if such companies are not listed and meet such other conditions as may be prescribed.  

Will these suggestions achieve the government’s target of a simplified fast-track merger procedure? The jury’s out on that, still.  

EXPANDING SCOPE

  MCA proposals in its draft rules

  *  Unlisted companies with less than ₹50 crore borrowings and no default

  *  Mergers of the subsidiaries of the same holding company if transferor company is not listed

  *  Holding company’s (listed or unlisted) merger with its unlisted subsidiary company or companies