Tag Archive for: scheme of arrangement

– Barsha Dikshit and Sourish Kundu | corplaw@vinodkothari.com

Introduction

The recent notification of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025, (‘Amendment’) by the MCA represents a significant move towards further declogging the burden of NCLTs and promoting a more business-friendly restructuring environment. By introducing minor procedural refinements and widening the classes of companies eligible for FTM, the amendments make this route accessible to a larger segment of the corporate sector. 

The fast-track merger (FTM) route was introduced under Section 233 of the Companies Act, 2013 (“the Act”), allowing certain classes of companies to get the schemes approved by Regional directors having jurisdiction over the Transferee Company instead of filing of application/ petition before NCLTs having jurisdictions over transferor and transferee company and getting the same approved after following lengthy proceedings. Basically, the FTM route was designed to ease the burden of NCLTs, with a simplified process and a deemed 60-day timeline for completion, making it a quicker and a more cost-effective alternative.

This article explores the key changes introduced through Amendment, the opportunities they create for faster and more economical reorganisations, and the practical considerations and potential challenges that companies may face while opting for this route.

Additional classes of companies can opt for the fast-track route: 

Section 233 of the Companies Act, 2013 read with Rule 25 of the CAA Rules, 2016, presently allows the following classes of companies to undertake mergers under the fast-track route:

• Two or more small companies;
• Merger between a holding company and its wholly-owned subsidiary;
• Two or more start-up companies;
• One or more start-up companies with one or more small companies.

Often referred to as the “RD Route” in general parlance, the key features of a FTM, include the elimination of NCLT approval, replaced instead by confirmations/approvals from the RoC, OL, members/creditors representing 90% in value, and lastly an order by the jurisdictional RD confirming such merger. [Read the procedure here]

The key change introduced is to extend the benefit of the RD route beyond the presently eligible companies to include the following additional classes:

1. Scheme of arrangement between holding (listed or unlisted) and a subsidiary company (listed or unlisted) – regardless of being wholly-owned

Until now, only mergers/demergers between WOS(s) and holding companies were permitted under the existing fast track route. However, pursuant to the recent Amendment, merger/demerger between subsidiaries (not limited to wholly-owned ones) and their holding companies are also allowed under FTM route. This effectively removes the ‘wholly-owned’ limitation and extends the benefit to any subsidiary, whether listed or unlisted.

However, it is worth noting that the fast track route will not be available in cases wherein the Transferor company (whether holding company or subsidiary) is a listed company. That is to say, while subsidiaries can be merged with/demerged into a holding company or vice versa under the fast track route, this is only permissible when the transferor company is not a listed company. 

2. Scheme of arrangement between two or more Unlisted Companies

Another significant addition is to allow fast track schemes between two or more unlisted companies subject to certain conditions as on 30 days prior to the date of inviting objections from regulatory authorities u/s 233 (1) of the CA, 2013:- 

1. None of the companies involved should be a section 8 company;
2.  total outstanding loans, debentures and deposits for each company must be less than ₹200 crores , and 
3. There must be no default in repayment of any such borrowings. 

All the aforesaid conditions are required to be satisfied on two occasions viz. within 30 days prior to the date of inviting objections from the regulatory authorities u/s 233(1) and on the date of filing of declaration of solvency in form CAA-10. The latter is to be accompanied with a certificate of satisfaction of the conditions above, by the auditor of each of the companies involved, in a newly introduced form CAA-10A, which will form part of the annexure to the respective declarations of solvency. 

It is pertinent to note here that no common shareholding, promoter group, or common control is required between the unlisted companies seeking to merge under this route. In other words, even completely unrelated unlisted companies can now opt for a fast track merger, provided they meet the financial thresholds and other prescribed conditions.

3. Scheme of arrangement between two or more Fellow subsidiaries

As of now, inter-group arrangements, like schemes between two or more fellow subsidiaries, were excluded from the purview of the FTM route. However, the Amendment now brings schemes between fellow subsidiaries – i.e., two or more subsidiary companies of the same holding company – within the scope of Section 233, provided that the transferor company(ies) is unlisted. Notably, the requirement of being unlisted is applicable only to the transferor company/ies. That is to say, the Transferee Company can be a listed company.

While the amendments have commendably widened the ambit of fast-track mergers to include mergers between fellow subsidiaries and step-down subsidiaries, a regulatory overlap with SEBI LODR framework may still persist. Under Regulation 37 of the SEBI LODR read with SEBI Master Circular dated June 20, 2023, listed entities are required to obtain prior approval from stock exchanges before filing a scheme of arrangement. This requirement is waived only for mergers between a holding company and its wholly-owned subsidiary. 

Given that earlier fellow subsidiaries/ step down subsidiaries were not permitted to opt FTM Route, in an informal guidance, SEBI clarified that this exemption does not extend to structures involving step-down subsidiaries merging into the ultimate parent, thereby requiring compliance with Regulation 37 in such cases. 

Accordingly, while the Companies Act now permits fellow subsidiaries and step-down subsidiaries to utilize the fast-track route, the benefit of exemption from prior SEBI/stock exchange approval may not be available, particularly in cases where the transferee company is listed. Unless SEBI extends the exemption framework, listed entities may still need to follow the standard approval process under Regulation 37, which could offset some of the intended efficiency gains of the FTM mechanism

4. Reverse Cross-Border Mergers involving Indian WOS of foreign companies

While cross-border mergers are governed under Section 234 of the Act and Rule 25A of the CAA Rules, it is amended to absorb the merger between a foreign holding company and an Indian wholly owned subsidiary, currently covered under sub-rule (5) of Rule 25A, into Rule 25 itself to make the index of companies eligible under the FTM route more comprehensive and complete. 

The additional compliances applicable in such instances are the requirement to obtain prior approval from the RBI, and submission of declaration in form CAA-16 at the stage of submitting application, in case the transferor holding company happens to share a land border with India.

Implications and Potential Practical Challenges

NCLTs are overburdened with the Companies Act cases and IBC cases. As a result, scheme of arrangement cases often receive limited attention and are subject to significant delays. The recent amendments are undoubtedly a step forward in simplifying and accelerating mergers/ demerger processes. However, certain aspects of implementation may give rise to procedural challenges that warrants careful consideration: :

1. Seeking approval of shareholders and creditors particularly when the transferee company is a listed company

Section 233(1) of the Act requires approval of the members holding 90% of the total number of shares. This threshold has been observed to be onerous, not just practically, but also duly recognised in the CLC Report, 2022, as the requirement is approval by those holding 90%cent of the company’s total share capital and not 90% of shareholders present and voting. This threshold becomes particularly difficult to achieve in the case of listed companies and may significantly delay the approval process, thereby defeating the very objective of fast-tracking mergers.

This was a practical difficulty faced by companies going through this route, as the approving authority i.e. the RDs, of different regions, did not take a consistent approach, some of them warranting compliance with the letters of law. However, with practice it has been observed that obtaining approval of the requisite majority as present and voting is also accepted as sufficient compliance. 

Here, it also becomes important to note that the approval threshold is more stringent in case of FTMs, as compared to arrangements under the NCLT route, which requires a scheme to be approved by three-fourths in majority in an NCLT convened meeting, but the same is again offset by the time and cost involved. 

2. Scheme where transferor company(ies) / demerging undertaking has immovable properties

The NCLT, constituted under Sections 408 of the Companies Act, 2013, is a quasi-judicial body whose orders carry significant statutory weight and are widely recognized by authorities such as land registrars for purposes like property registration and mutation. Concerns may arise w.r.t. the validity of the RD’s order on such schemes. In this regard, it is to be noted that Regional directors function as an extended administrative arms of the Central Government and orders issued by the RD, are legally on par with those of the NCLT. However, an area of concern remains w.r.t. transfer of immovable property as such a transfer is required to be registered with the local registrars, where practically, RD approved schemes may not be having the same effect as that of NCLT approved scheme.

3. Deemed Approval within 60 Days

Section 233 (5) of the Act requires RD’s to either approve the Scheme within the period of 60 days from the date of receipt of scheme or to file an application before NCLT, if they are of the opinion that such a scheme is not in public interest or in the interest of the creditors.

The section also provides that if the RD does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme, and the Scheme will be considered as approved. This “deemed approval” mechanism is in line with international practices, where intra/inter-group restructurings are not typically required to undergo intensive regulatory scrutiny, and schemes are considered approved once sanctioned by shareholders and creditors. For instance, the Companies Act of Japan (Act No. 86 of July 26, 2005) and the Companies Act, 2006 (UK) does not require specific approval of any regulatory authority, except in certain specific circumstances. 

It is also important to note that the RD does not have the power to reject a scheme outright. As held by the Bombay High Court in Chief Controlling Revenue Authority v. Reliance Industries Ltd., that the order of a Court itself constitutes an instrument as it results in the merger and vesting of properties inter-se the merging parties. In cases of deemed approval, there seems to be a gap on whether the shareholder and creditor approved scheme is to be itself construed as the instrument of transfer, as there is no explicit approval order of the RD sanctioning the scheme. On the other hand, if the RD believes the scheme is not in public or creditor interest, the appropriate course is to refer the matter to the NCLT. In such cases, the fast-track process effectively resets, and the scheme follows the standard route before the NCLT, potentially undermining the objective of speed and efficiency that the fast-track mechanism aims to achieve.

4. Power of RD vis-a-vis NCLT

For schemes sanctioned by the NCLT, any amendment or variation thereto can be carried out by making an application to the tribunal, by way of an interlocutory application, and NCLT, after considering the observations of the regulatory authorities, if any, has the power to pass necessary orders. That to to say, for the Schemes originally sanctioned by the NCLT, any amendment thereto will also be done by NCLT and not any other forum. Here, a question may arise as to whether the RD, which is the ultimate authority to approve fast track schemes, has similar power, or it has to refer the application seeking amendments to the schemes originally approved by it to the NCLT?

It is a settled principle of law that the authority having the power to approve, only has the authority to allow changes therein. Thus, in case of FTMs, if schemes are originally approved by RD, application for amendment thereto may also be preferred before the RD, unless, the RD itself is on the opinion that the matter requires consideration by the Hon’ble Tribunal. 

5. Regulatory Approvals in Case of Cross-Border Mergers

Regulation 9(1) of the FEMA (Cross-Border Merger) Regulations, 2018, provides that mergers complying with the prescribed framework are deemed to have RBI approval. Yet, as a matter of process, notices of such schemes must now be served on all relevant regulators, including the RBI, SEBI, IRDAI, and PFRDA, for their comments or objections. This strengthens oversight but could also lengthen timelines, as companies may need to wait for regulator clearances before giving effect to the scheme.

6. Administrative Capacity of RD Offices

A further consideration is the capacity of RD offices to process the increased number of cases that the expanded FTM eligibility is expected to generate. While there are nearly 30 NCLT benches handling merger matters across India, there are only seven RDs, each with jurisdiction over multiple states and union territories. The RD already endowed with oversight of conversion of public company into private company, approval in case of alteration of FY, rectification of name, etc., in addition to the widened ambit of FTMs. This concentration of responsibility may create administrative bottlenecks, and timely disposal will be critical to preserve the efficiency advantage of the fast-track route.

Conclusion

The Amendments mark a progressive step towards making corporate restructurings quicker and more efficient by widening the scope of Fast Track Mergers, introducing financial thresholds for unlisted companies, and streamlining procedural requirements. Importantly, a specific clarification has now been inserted to state that these provisions shall, mutatis mutandis, apply to demergers as well, thereby removing any interpretational ambiguity on the subject, modifying the forms as well. If implemented effectively, these changes have the potential to substantially declog the NCLTs while giving companies a smoother, time-bound alternative for reorganizations.

Read more:

Fast Track Merger- finally on a faster track

MCA enabled fast track route for cross border mergers and added additional requirements in IEPF Rules

Budget 2025: Mergers not to be used for evergreening of losses