COMPANIES (COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS) AMENDMENT RULES, 2021

The Ministry of Corporate Affairs (“MCA”) vide MCA Notification No. G.S.R. 93(E) dated February 01, 2021 (“Notification”), has notified an amendment to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 by way of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021, which facilitate the mergers and amalgamation of the startup companies.

• Existing Position –
  

  In line with the Central Government’s Start Up India plan, various regulatory bodies such as Reserve Bank of India, MCA etc., from time to time brought up many changes to boost the growth of the star up initiatives and to build a level playing field for them. As per the MCA notification bearing no. G.S.R. 127(E) dated February 19, 2019 an entity shall be considered to be a start-up company if:

  1. it is incorporated as a private limited company under the Companies Act, 2013 (“Act”) registered partnership firm under Section 59 of the Partnership Act, 1932 or a limited liability partnership under the Limited Liability Partnership Act, 2008 in India, up to a period of 10 (ten) years from the date of incorporation or registration;
  2. turnover of the entity has not exceeded an amount of INR 100,00,00,000 (Rupees One Hundred Crores) in any of the financial years since its incorporation or registration;
  3. Such entity should be working towards the innovation, development or improvement of products, processes or services or shall be based upon a scalable business model wherein there exists a high potential of wealth creation and employment generation;

  However, an entity shall not be considered as a start-up if it is an outcome of the restructuring or splitting up of an existing business.

• Change introduced by the Amendment –
  

  The MCA by way of this Notification, a new sub-rule (1A) has been inserted under Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 which provides that a scheme of merger or amalgamation, as specified for under Section 233 of the Act, may be entered into any of the following class of companies:

  1. between two or more start-up companies; or
  2. between one or more start-up company(ies) and one or more small company(ies).

  Pursuant to the said amendment, start-up companies have also been made eligible to adopt the “fast-track procedure” for mergers and amalgamations under Section 233 of the Act read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2021. The fast-track procedure for mergers and amalgamations of certain companies under the Act offers a relatively simplified and facilitative process. The erstwhile legal framework in relation to mergers and acquisitions involved the intervention and requirement of the approvals of courts, thereby, making the process highly time-consuming, cumbersome and long-drawn. However, with a time-bound mechanism being prescribed under the fast-track procedure for mergers along with the requirement for only certain specific set of largely internal approvals to be obtained, companies, especially organisations such as start-ups with a small-scale management would be highly benefitted in terms of compliance management and initiation of the business.

  Under the fast-track procedure for mergers and acquisitions, there is no requirement for the filing of the scheme before the National Company Law Tribunal (NCLT) as opposed to the regular procedure. Further, the estimated time period for the completion of the process is around 90-100 (ninety to hundred) days. Moreover, the companies eligible for adopting the fast-track procedure for mergers would also be required to obtain the approval of only 03 (three) regulatory authorities, that is, the Registrar of Companies, regional director and the official liquidator, in addition to the approval from the shareholders and creditors of the concerned company. A 30 (thirty) days’ time limit would also be imposed upon the regulatory authorities for provision of their objections/suggestions in respect of the scheme.

The introduction of the abovementioned amendment may be, therefore, viewed as a progressive step towards the introduction of a fast-track process for mergers and acquisitions for start-up companies facilitating the ease in carrying on their business and significant reduction in compliance burden.