Section 234 of the Companies Act 2013 notified | KPMG | IN

First Notes - 24 April 2017

Section 234 of the Companies Act 2013 notified

MCA notifies provisions relating to merger or amalgamation of a foreign company

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Background

On 7 December 2016, the Ministry of Corporate Affairs (MCA) notified certain sections of the Companies Act, 2013 (2013 Act) which, inter alia, relate to compromises, arrangements and amalgamations.

Further, the rules in relation to compromises, arrangements and amalgamations came into effect on 15 December 2016.

New development

On 13 April 2017, MCA issued the following notifications:

  • Notification of Section 234 of the 2013 Act (merger or amalgamation of a company with a foreign company)
  • Insertion of new sub-rule 25A (merger or amalgamation of a foreign company with a company and vice-versa) in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Compromises Rules).

Overview of the notified provisions

  • Section 234 of the 2013 Act: Merger or amalgamation of a company with a foreign company
    • Prior approval of the RBI: A foreign company* (incorporated in the jurisdictions of such countries as may be notified) may merge into a company registered under the 2013 Act or vice-versa after obtaining prior approval of the Reserve Bank of India (RBI).    
    • Payment of consideration: The terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in depository receipts, or partly in cash and partly in depository receipts, as the case may be, as per the scheme to be drawn up for the purpose.
    • Applicability: The provisions of Section 234 are effective from 13 April 2017.
  • Rule 25A of the Compromises Rules: Merger or amalgamation of a foreign company with a company and vice-versa
    • Prior approval of RBI and compliance with other sections of the 2013 Act: A company may merge with a foreign company* (incorporated in any of the jurisdictions as specified in the table below) after obtaining prior approval of the RBI and after complying with the provisions of the following sections of the 2013 Act and related Rules:
      • Section 230: Power to compromise or make arrangements with creditors and members  
      • Section 231: Power of National Company Law Tribunal (NCLT) to enforce compromise or arrangement
      • Section 232: Merger and amalgamation of companies.
    • Specified jurisdictions of a foreign company: A company can merge with a foreign company* which is incorporated in the following jurisdictions:
         Sr. no.                          Jurisdictions
      1.

      Securities market is a signatory to International Organisation of Securities Commission’s MultilateralMemorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with Securities and Exchange Board of India (SEBI) 

      2.

      Central bank is a member of Bank for International Settlement (BIS) and

      3.

      Jurisdiction which is not identified in the public statement of Financial Action Task Force(FATF) as:  

      a)   A jurisdiction having a strategic anti-money   laundering or combating the financing of terrorism deficiencies to which counter measures apply or

      b)  A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

    • Valuation conducted by valuers as per international standards: The transferee company would need to ensure that valuation is conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect would be required to be attached with the application made to RBI for obtaining its approval.
    • Application to NCLT: After obtaining the approval of the RBI and complying with the provisions of the above mentioned sections and the related Rules, the concerned company may file an application with the NCLT for approval of the merger.
    • Applicability: The provisions of the Rule 25A are applicable from the date of their publication in the official gazette. Further, it has been clarified that no amendment to Rule 25A will be made without consulting the RBI.

(*’Foreign company’ means any company or body corporate incorporated outside India whether having a place of business in India or not.)

Our comments

The MCA had notified the suite of sections relating to compromises, arrangements and amalgamations on 7 December 2016. However, Section 234 relating to merger or amalgamation of a company with a foreign company was pending. The recent notification of Section 234 of the 2013 Act completes the enforcement of the entire suite of sections relating to compromises, arrangements and amalgamations.

The notification of Section 234 and the related Rules is expected to pave way for Indian companies intending to merge with foreign companies (domiciled in the jurisdictions given above).  Further, the requirement of approval by the RBI is expected to ensure regulatory supervision over the proposed merger including safeguarding of interest of the concerned stakeholders. 

The companies would need to carefully evaluate the regulations of the jurisdiction of the foreign company with which a merger is intended and may have to comply with additional requirements that may be specified by the foreign jurisdictions.

Additionally, companies should also consider and evaluate the tax impact as per the Income-tax Act, 1961 of merger with a foreign company.

To access the text of MCA notifications on:

  • Commencement of Section 234 of the 2013 Act, please click here
  • Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017, please click here.

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