India eases requirements for Reverse Flipping: Analysis of Companies (Compromises, Arrangements and Amalgamations) Rules 2024

On September 9, 2024, the Ministry of Corporate Affairs published the Companies (Compromises, Arrangements and Amalgamations) Rules, 2024 (the "Amendment Rules") vide notification (G.S.R. 555(E)). The Amendment Rules came into effect on September 17, 2024. The Amendment Rules added sub-rule (5) to Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 (the "Amalgamation Rules"). The Amendment Rules mark a critical step towards simplifying and expediting the process for foreign holding companies to merge with their wholly owned Indian subsidiaries. This article analyses the key changes introduced by the Amendment Rules.

The practice of 'reverse flipping' is a process whereby companies who have moved or incorporated their headquarters abroad to enjoy tax, regulatory or other benefits, choose to relocate to their home countries. Reverse flipping is common amongst Indian start-ups who choose to return to India in order to avail increased government incentives and access public investment opportunities. Under the Amendment Rules, foreign companies no longer need go through adjudication by the National Company Law Tribunal (the "NCLT") for any reverse flip.

The Amendment Rules outline four key requirements in the process of merging a foreign holding company with its wholly owned Indian Subsidiary.

1. RBI Approval

Rule 25A(5) stipulates that both the foreign holding company and the wholly owned Indian subsidiary company are required to obtain prior approval of the Reserve Bank of India (the "RBI"). This is a pre-existing condition that was introduced in Rule 25A(1), wherein a foreign company incorporated outside India may merge with an Indian company after obtaining prior approval of RBI and after complying with the provisions of Sections 230 to 232 of the Companies Act 2013 (the "Companies Act").  As a result, no enhanced regulatory burden has been placed on the merging companies.

2. Compliance with Section 233

The transferee Indian company would need to comply with the provisions of Section 233 of the Companies Act, which allows for fast track mergers. Under Section 233, a notice of the proposed scheme for amalgamation is required to be submitted to the regional Registrar of Companies and the Official Liquidator inviting objections and suggestions (if any) to the proposed scheme. Objections and suggestions, once received, would need to be considered by the transferee Indian company in its general meeting, and the amended scheme would need to be approved by a ninety percent majority of the members and the creditors. Additionally, the transferee Indian company would need to submit a declaration of solvency with the regional Registrar.

3. Application to the Central government

The transferee Indian company is required to submit an application to the Central government under Section 233 of the Companies Act and the provisions of Rule 25 of the Amalgamation Rules. Under these provisions, the Indian company is obligated to submit a copy of the approved scheme to the Central government in Form No. CAA 11, within seven days of the conclusion of the meeting outlined hereinabove.

4. Declaration

If the merger or amalgamation is between a wholly owned Indian subsidiary company and a foreign company incorporated in a country sharing a border with India, a declaration in Form No. CAA 16 would need to be filed along with the application made to the Central government under Section 233 of the Companies Act.  

Prior to the Amendment Rules, Section 233 was applicable only to domestic mergers between certain categories of companies which includes small companies, start-up companies and a merger between an Indian company and its wholly owned subsidiary. Any merger between a foreign company and its wholly owned Indian subsidiary, as contemplated by the Amendment Rules, would be governed by the provisions of Section 232 of the Companies Act.

Under Section 232, the companies would need to apply to the NCLT for the adjudication of any merger or amalgamation. This process required the companies to submit extensive documentation with the NCLT, which includes the submission of (a) a report by the directors of the merging companies outlining the effects of the merger on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties; (b) submission of the report of an expert on the valuation of the company; and (c) the submission accounts. By removing the application of Section 232 to instances of reverse flipping, the government has reduced the regulatory and procedural burden on companies.

While the Amendment Rules simplify the process and procedure of reverse flipping, it is important to note that under Section 233(5) in the event any objections are raised by the Official Liquidator or the regional Registrar of Companies and/or if the scheme is seen to be contrary to the public interest, the Central government may file an application with the NCLT stating their objections for the amalgamation. In this case, the merging companies face the risk of having to re-start the process of amalgamation, which can lead to significant delays.

The Amendment Rules represent a significant shift in the regulatory framework governing corporate restructuring in India. Through the applicability of Section 233, the companies significantly reduce the time necessary to effectuate any cross-border merger. These changes create a clear and efficient framework for companies looking to reverse flip, and will contribute to the growth of global entities in the Indian market. 

About the authors: Ashima Obhan is a Senior Partner and Head of Corporate Law, M&A, and TMT Practice at Obhan & Associates. Priyanka Narayanan is an Associate at the firm.

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