The Ministry of Corporate Affairs (MCA) has introduced important regulatory changes for companies involved in mergers and amalgamations, particularly in cases involving foreign entities. According to the new rules, any merger between a foreign holding company incorporated outside India and its wholly-owned subsidiary (WOS) incorporated in India will now require prior approval from the Reserve Bank of India (RBI).
Why has the Ministry of Corporate Affairs introduced these rules?
The amendments have been made to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, specifying that both the foreign transferor company and the Indian transferee company must comply with these new requirements.
These changes aim to enhance compliance with India’s foreign exchange regulations and create a more streamlined regulatory framework for such mergers.
What are the new merger rules?
Under the amended regulations, foreign holding companies must obtain permission from the RBI for mergers with Indian corporations.
In addition to obtaining RBI approval, the transferee Indian company must also adhere to the provisions of Section 233 of the Companies Act, 2013, which outlines the process for mergers and amalgamations. This includes the requirement for the Indian company to file an application with the central government as part of the merger process.
The updated regulations emphasise that the application for mergers must be submitted under Section 233 of the Companies Act, reinforcing the need for legal and regulatory oversight in cases involving cross-border mergers.
Mergers between Indian and foreign entities
Speaking to PTI, Sandeep Jhunjhunwala, partner at Nangia Andersen LLP, commented on the changes, noting that the recent trend of “reverse flipping,” where Indian subsidiaries merge with foreign holding companies, has been prevalent among many startups.
The new rules, in his view, come at a time when India’s IPO market is thriving, offering a robust exit strategy for investors. With the introduction of the new sub-rule, both the foreign transferor holding company and its wholly-owned Indian subsidiary must secure prior approval from the RBI for mergers or amalgamations.
Additionally, the Indian transferee company is required to submit an application to the central government under the existing provisions of Section 233 of the Companies Act and Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, to seek approval for such inbound mergers.
