FAST TRACK MERGER FOR START-UP COMPANIES

While delivering Union Budget 2021, Hon’ble Finance Minister Nirmala Sitharaman proposed to revise definition under Companies Act, 2013 for small companies by increasing their threshold for capitalisation from not exceeding INR 50 Lakh to not exceeding INR 2 Crore and turnover from not exceeding INR 2 Crore to not exceeding INR 20 Crore. Accordingly, Ministry of Corporate Affairs (MCA) vide notification[1] dated 1^st February 2021 amended the definition of Small Company under the Companies Act, 2013 which is effective from 1^st April 2021. Finance Minister also mentioned that proposed change in the criteria for the small companies will benefit more than 2 Lakhs Companies in terms of Compliance requirements under Companies Act, 2013.

By notification[2] dated 1^st February 2021, MCA also amended the Companies (Compromise, Arrangement and Amalgamation) Rules, 2014 (CAA Rules) by enabling “start-up companies” to enter scheme of merger or amalgamation under the Companies Act, 2013 which is effective from 1^st February 2021.

Fast Track Merger and Start-up Companies

What is Start-up company?

As mentioned in the CAA Rules “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 127 (E), dated the 19^th February, 2019 issued by the Department for Promotion of Industry and Internal Trade (DPII).

Pursuant to the notification[3] of DPII following conditions are required to be fulfilled for the registration as start-up:

1. The Start-up should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
2. Turnover should be less than INR 100 Crores in any of the financial years since the date of its incorporation.
3. An entity shall be considered as a start-up up to 10 years from the date of its incorporation.
4. The Start-up should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-up”.

As on the 31^st December 2019, “26804” start-ups have been recognised as start-ups by the DPII.

What is Fast Track Merger

Fast Track Merger as the name suggests is comparatively faster route for the specific companies to enter into scheme of merger or amalgamation. Following companies are eligible to take the route of fast track for the scheme of merger or amalgamation –

1. a) Small Companies
2. b) Holding Company and its wholly-owned subsidiary
3. c) Two or more start-up companies
4. d) One or more start-up company with one or more small company.

Pursuant to the amendment in the rules mentioned above, now Two or More Start-up Companies or Start-up Company with One or small Company can enter into scheme of merger or amalgamation under section 233 of Companies Act, 2013.

The point to be noted is that even though the Start-up Companies are allowed to take route of Fast Track Merger, if the scheme of merger and amalgamation is being entered between the company which is not a small company and neither a start-up company, the scheme has to be routed through National Company Law Tribunal. The Same is applicable for the Small Companies Also. Further, since section 233 contains wording only “Merger and amalgamation”, the scheme of arrangement including demerger is not eligible to take fast-track route.

Further, even though Companies Act, 2013 allows Holding and its wholly-owned subsidiary to enter into scheme of merger or amalgamation through section 233, in case of listed companies, SEBI LODR Regulations are silent on the same.

Following are the key difference between the Normal Route i.e., through National Company Law Tribunal (NCLT) and the Fast-Track Merger –

Pursuant to report available on the Working & Administration of the Companies Act, 2013 for the year ending 31^st March 2018 only 319 applications were received under section 233 (Fast Track).

Though Start-up companies are allowed for fast-track merger, some questions need to be resolved–

1. If a small company which is not involved in working towards innovation of new/existing products merges with the Start-up Company whether the registration given by DPII will be still valid?
2. If the Start-up company merges with the small company whether the small company can avail the income tax benefits availed by the start-up company.

Why the Fast-Track merger is not adopted

1. Eligibility Criteria not getting fulfilled.
2. Less Streamlined Procedure as compared to NCLT.
3. Compulsory convening of meeting of shareholders
4. NCLT Procedure being more streamlined, professional dealing with M&A cases also suggest the route of NCLT.
5. If the Central Government is of the opinion that the scheme should route through NCLT, it can pass such orders which further delays the process.

Small Company

With effect from 1^st April 2021, for small companies, threshold for capitalisation will be maximum INR 2 Crore and turnover maximum INR 20 Crore. Point to be noted is that, only Private Company can be categorised as a small company and both the conditions are required to be satisfied simultaneously. Even though Public Company satisfies the criteria for capital and turnover, it cannot be categorised as a Small Company.

Further, following companies also cannot be categorised as a small company irrespective of amount of Paid-up capital and turnover –

1) A holding or subsidiary Company

2) Section 8 Company

3) a company or body corporate governed by any special act.

The Company can be a non-small company in one year or small company in immediate next year. Though there is threshold for the capital or turnover, Companies Act, 2013 is silent as on what date the Turnover or Capital is to be computed. To keep the categorisation as a “Small Company” companies can take the help of provisions like Buy-back or Reduction of Capital or Demerging of profitable undertaking through the scheme of arrangement.

Benefits/exemptions available to Small Companies –

1. Only 2 Board Meetings in a year
2. Rotation of Auditors in not applicable
3. Less disclosures in Boards Report
4. No need to attach Cash Flow Statements to the Financial Statements
5. Lesser Penalties under Companies Act, 2013
6. No certification from professional (CA/CS) for filing e-forms.
7. Fast Track Merger/Amalgamation.

Conclusion

The Union Budget 2021 proposed major change in Companies Act, 2013 by amending the definition of Small Company effective from Next Financial Year i.e., 2021-2022. Allowing start-up companies to enter scheme of merger through fast-track route is also welcome move, but the process should be more streamlined.  It may also be considered to include other types of restructuring like demerger, reduction of capital etc. This will ease the compliances for larger number of companies.

[1] http://www.mca.gov.in/Ministry/pdf/SpecificationAmndtRules_02022021.pdf

[2] http://www.mca.gov.in/Ministry/pdf/AmalgamationsAmndtRules_02022021.pdf

[3] https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf