Rule 25A Amendment: Doing Away with NCLT Approval in Cases of Reverse Flipping

[Pranjal is a student at Bennett University.]

By doing away with the need for National Company Law Tribunal (NCLT) authorization for certain cross-border mergers, especially those involving foreign corporations and their Indian Wholly Owned Subsidiaries (WOS), India implemented a major change through the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules 2024 which came into force on 17 September 2024. This modification is expected to expedite the merging process, cutting the duration from twelve to eighteen months to roughly three to four months. This will incentivise Indian startups based overseas to come back and take advantage of the thriving domestic initial public offering (IPO) market. Due to factors like investor choices, tax savings, and the ease of accessing global finance, many Indian startups were initially incorporated overseas. However, many of them now seek to get listed in India due to the country's expanding stock market and supportive startup environment. This reform eliminates a significant barrier for these companies by shortening merger timelines, making it easier for them to move back to India and benefit from the flourishing domestic IPO market, streamlined regulatory compliance, and availability of local funding, which lessens dependency on foreign financing and increases the appeal of stock market listing.

This blog analyses the merger process under the new rules while comparing it with the process under older regulations, its impact on India’s business environment, and the lingering uncertainties that need to be addressed. 

Mechanism under the New Rules

Sections 230–234 of the Companies Act 2013 (CA), as well as Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016 (CAA Rules 2016) have significantly altered the procedure for inbound cross-border merger of a foreign holding corporation and its Indian WOS. Such mergers were earlier subject to a methodical but drawn-out procedure that needed several approvals, including that of the NCLT. This procedure is now replaced by a less laborious one. Under the old framework, the merger plan had to be presented to creditors and members for approval after being accepted by the boards of both companies. This condition was applicable even when there were no third-party equity investors involved in the merger of a parent company and WOS. These procedural necessities, however, have been greatly lowered in the new framework, which adheres fast-track merger process under Section 233 of CA, in recognition of the low degree of risk that these types of mergers provide to external stakeholders. Previously, the merger wasn't possible until the NCLT examined and approved the plan, even after receiving member and creditor approvals. Furthermore, Reserve Bank of India (RBI) permission was required, but the foreign company obtained it before moving forward with the transaction. Now, inbound mergers in which a foreign corporation merges with its Indian subsidiary are no longer subject to NCLT clearance under the updated rules. Rather, the Central Government (acting through the Regional Director of that jurisdiction) receives the application directly and works alongside the RBI to guarantee regulatory compliance. Also, unlike in the past, when only the foreign company was responsible for this, both the foreign corporation (transferor) and the Indian WOS (transferee) must now obtain RBI permission.

Previously, all applications concerning foreign firms had to be filed under Sections 230–232 of CA 2013 pursuant to Rule 25A of CAA Rules 2016. This required thorough disclosures and review by regulators. It was applicable for both inbound and outbound mergers, irrespective of the enterprises' corporate structures or risk profiles. In order to create a more effective route for inbound mergers between a foreign holding entity and its Indian WOS, Rule 25A (5) has been added to the new mechanism. Such transactions are now administered under Section 233, which typically is utilised only for national fast-track mergers because they don't include third-party interests. 

Furthermore, the amended mechanism ensures a more consistent regulatory approach by placing a shared burden on both merging corporations, whereas previously the Indian entity was principally responsible for ensuring conformity to Rule 25A.

Effects on Corporate Ecosystem 

A major shift in the corporate and investment environment in India has occurred with the removal of NCLT permission for cross-border mergers involving multinational corporations and their Indian WOS. This reform's potential to draw in foreign direct investment through expediting corporate restructuring and cutting down on red tapism is one of the primary impacts. The streamlined approval procedure makes it easier for international investors and multinational companies to increase their presence in India. Also, it is in line with India's more comprehensive economic reforms, which emphasise the development of an open and competitive environment.

Moreover, by combining with their Indian subsidiaries, Indian startups that originally established themselves outside India (in Singapore, the United States, or the United Kingdom) can now change their legal domicile to India, a practice known as “reverse flipping”. These companies stand to gain from increased access to money, investor confidence, and favourable valuations caused by India's thriving IPO market. 

India is establishing its standing as a global startup hotspot by removing regulatory barriers and bolstering RBI's supervision, which will promote economic expansion, innovation, and smooth cross-border corporate operations. This reform represents a forward-thinking change in India's business environment, making it a desirable location for both returning Indian companies and overseas investors.

Lingering Uncertainties

In spite of the recent addition of rules for simplification of the process, several concerns persist that need to be addressed. Notably, under Rule 25A(5)(ii) and (iii), the change establishes a fast-track merger process and mandates adherence to Section 233 by using the word “shall”. Section 233(14), on the other hand, gives companies the option of choosing between the fast-track method and the conventional process under Section 232, and uses the word “may”. When read together, it gives rise to ambiguities. However, if we are to go by the intention of the legislature behind this rule then the word “shall” should be construed as “may”. This is clear from the case of Mega Corporation Limited v. Nil, where NCLAT has stated, “6. We find that Section 233 referred to initially by NCLT has a speedier process but if appellant keeping in view sub-section (14), preferred to resort to Section 232 the applicants cannot be faulted with. Only thing is that, then they have to go through the procedure as u/s 232 of the Act. Section 232 gives powers to NCLT to consider & decide calling of meeting of creditors etc. Appellant cannot claim “dispensing” meetings as a right.”

Another conundrum is in regard to the concept of deemed approval granted by the RBI. Cross-border mergers that meet the requirements given under Regulation 9(1) of the Foreign Exchange Management (Cross Border Merger) Regulations 2018 (Exchange Regulations 2018) are considered to have received deemed RBI approval, as stated by Rule 25A of CAA 2016. However, the availability of such deemed approval for inbound cross-border mergers conducted under the fast-track mechanism has not been elucidated. NCLT-based inbound mergers are specifically included in the present Exchange Regulations 2018, while fast-track mergers are not. It is unclear if the RBI would propose related changes to the Exchange Regulations 2018 or if Regional Directors will approve such applications pursuant to deemed approval. Since the principal purpose of this amendment is to streamline and speed up reverse flip mergers, it could be argued that both transferor and transferee corporations under the fast-track merger mechanism should still be covered by the deemed approval provision.

Conclusion

The reform substantially reduces the time frame, which is in line with India's larger strategic goals to improve the ease of doing business and facilitate international mergers and acquisitions, thus promoting constructive economic reforms. The robust corporate ecosystem and flourishing capital market in India where there is easy availability of funds due to a growing number of investors, has resulted in startups including Meesho, Zepto, Groww, PhonPe, etc. seeking to move back to India. Yet, procedural inconsistencies and discrepancies in regulatory requirements persist and pose difficulties. To guarantee that the anticipated advantages of the changes are properly realised, regulatory bodies must do away with such uncertainties while also harmonising them with current regulations.