In today’s era, as the landscape of corporate mergers and acquisitions evolves, the concept of reverse flipping has emerged as a significant strategy. The introduction of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (or Merger Rules, 2024) marks an important shift in this respect. This move aims to simplify and expedite the process of re-domiciling for Indian businesses headquartered abroad, particularly in the case of startups looking to return home for regulatory and tax benefits.
Understanding Reverse Flipping
The term “reverse flipping” describes the trend of foreign companies, especially startups, returning to India after initially operating abroad due to better valuation in the IPO market. Notable examples of recent reverse flipping include PhonePe and Groww.
Historically, under Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Merger Rules), the merger process for foreign companies returning to India has been complicated and lengthy requiring multiple approvals from regulatory bodies like the Reserve Bank of India (RBI) and the National Company Law Tribunal (NCLT).
Legal Amendments
The Ministry of Corporate Affairs has now introduced a new sub-rule (5) to Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2024, under which both the foreign transferor holding company and its wholly-owned Indian arm would have to obtain only RBI approval for mergers and amalgamations. However, a question arises as to whether the regulations regarding deemed approval from RBI will be applicable in case of a merger involving a foreign holding company under the fast track route as well, if compliant as per the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.
The amendment through Rule 25A(5)(ii) and (iii) also states that the Indian transferee company will have to file an application with the government under Section 233 of the Companies Act, 2013, and Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, for seeking approval on such India-inbound mergers.
Analysis
The Amendment is a welcome change and is in line with the government’s attempts to combat regulatory hurdles and create a more business-friendly environment. It seeks to bring reverse flipping transactions under the fast-track route and ease the approval process by permitting such transactions to be undertaken without the time-consuming process of obtaining approval from the NCLT. This may facilitate the completion of transactions in time for the ongoing IPO wave in India and will, therefore, further incentivise several other start-ups and companies.
While the amendment appears to mandate the fast-track merger route, Rule 25A(5)(iii) contradicts Section 233(14) of the Companies Act, 2013. The use of the word ‘shall’ in the Rule raises a presumption that the particular provision is imperative and a company must now mandatorily apply for the fast-track merger route while, on the other hand, the use of the word ‘may’ under Section 233(14) of the act gives companies an option to either opt for Section 232 or apply for fast- track rule for the approval of any scheme for merger or amalgamation. The same has been upheld in Mega Corporation Ltd. v Nil, wherein NCLAT observed that “ any company preferring to resort to Section 232, after duly following the procedure as u/s 232, cannot be faulted with.”
Conclusion
In today’s era of increasing globalisation, these amendments, by streamlining the approval process and reducing regulatory burdens, are set to enhance foreign investment and bolster economic growth in the country. Looking ahead, these reforms not only position India as an attractive destination for global businesses but also pave the way for increased innovation and collaboration in the South Asian market.
