Swiss lessons in simplified mergers

Having completed a simplified takeover in seven working days under the 2003 Swiss merger act, Yashasvini Kumar, Pooja Gondalia and Bhakti Sampat look at how the approval process could be made quicker in India, where even fast-track mergers take an average of eight months

In the corporate world, mergers are big news and everyone loves them – financial journalists, investment bankers and perhaps corporate lawyers most of all. Takeovers make headlines on the basis of their size – in particular, where a very large business absorbs another to make a bigger entity.

However, the majority of mergers happen for less glamorous reasons. They are a very effective medium for transferring assets, achieving balance sheet synergies and simplifying organisational charts, and are widely used for internal restructuring of group companies.

In light of the popularity of mergers and the corresponding growth in the number of merger petitions being placed before the National Company Law Tribunal (NCLT), India’s Companies Act, 2013, prescribes two kinds of merger processes, the ordinary (extended) merger process and a fast-track procedure.

Ordinary mergers

An ordinary merger typically occurs between unrelated parties and there are many stakeholders to consider. As a result, the prescribed process mandates that the object clause of the memorandum of association of the companies to be merged shall confer power on the company to undergo merger/amalgamation. Thereafter, the preparation of the merger scheme and approval of the same by the board of directors of both companies at a duly convened board meeting is carried out as per the act, followed by an application filed with the NCLT.

A meeting then needs to be called as per the order of the NCLT, and a notice of the meeting is to be sent to all the creditors, members and debenture holders. The publication of the notice of the meeting on the website also needs to be published in both an English-language and vernacular-language newspaper having wide circulation in the state in which the registered offices of the companies are situated.

A notice then shall be sent to the central government, the Registrar of Companies (RoC), the income tax department and other statutory regulators or authorities seeking representation/objections to be made to the NCLT within a period of 30 days from the date of receipt of the notice.

The scheme needs to be approved by a majority of people representing three-quarters in value of the creditors or class of creditors, or members or class of members. The report of the creditors’ or members’ meeting needs to be filed with the NCLT and, on approval of the scheme, the petition is filed with the NCLT for approving the merger.

The companies also need a certificate from the auditors confirming the accounting treatment with respect to the merger is compliant with applicable accounting standards. The order of the NCLT is then to be filed with the RoC.

Fast-track mechanism

For scenarios without significant complexity, or as many stakeholders, the act allows the fast-track merger mechanism. These are for:

• Small companies being private companies having paid-up share capital of less than INR40 million (USD490,000), and turnover which for the preceding financial year did not exceed INR400 million;
• Holding companies and their wholly owned subsidiaries; and
• Startups being private companies incorporated under the Companies Act, 2013, or Companies Act, 1956, and recognised by the Department for Promotion of Industry and Internal Trade as a startup.

In the fast-track process, the role of the NCLT is done away with and the draft merger scheme is filed with the RoC with a declaration of solvency. The process here includes convening of a board meeting to approve the merger scheme by each company, followed by the filing of a draft scheme proposing the merger with the RoC, official liquidator and persons affected by the scheme inviting objections and suggestions.

Then a meeting of the creditors and members is convened for approving the merger scheme, which must be approved by 90% of the members in writing. A copy of the approved scheme shall be filed with the regional director, the RoC and the official liquidator. The regional director reserves the discretion to refer the scheme to be approved through the NCLT. If the regional director has no objection, they shall issue an order confirming the merger, which is filed with the RoC.

According to estimates from the “Big Four” accounting firms, it takes seven to eight months for the completion of a fast-track merger. Pandemic-driven backlogs haven’t helped the procedures either. As a result, it is fair to question whether our provisions in relation to fast-track mergers go far enough.

About 21,000 cases are pending before the NCLT, with more than 60% being Insolvency and Bankruptcy Code (IBC) cases. With its hands full with such cases, it is essential that the Indian government simplifies the process for merger and acquisition schemes, which account for 6.5% of these cases, in order to promote the ease of doing business.

A possible model might be found in the Swiss Merger Act, 2003. Being part of a Swiss conglomerate, our team recently worked on a simplified merger under the act, which was completed within seven working days from the date of our application.

Swiss merger approvals

In Switzerland, a simplified merger is possible for companies within a group (whether of a holding company and its wholly owned subsidiary or those belonging to the same parent company, which controls 100% of the voting power in both merging companies) or where the acquiring company holds 90% or more of the voting rights in the other company.

In these cases, the boards and shareholders of the relevant companies approve the merger, and the company accountant prepares a merged balance sheet. Employees, if any, of the merging entities are informed of the merger, the merger agreement, and the resolutions and balance sheet are filed with the Swiss Commercial Registry. The registry then reviews the documents and either asks for further information or clarifications, or approves the merger.

This highly condensed process allows simplified mergers to be approved in a timeline of seven to 14 days from the date of filing.

In an Indian fast-track merger, the companies need to submit:

1. 1. The report of the result of shareholders and creditors meeting (in form no. CAA.11);
   2. Certified true copies of the scheme, the resolution passed by the board of the holding company and subsidiary approving the scheme, a declaration of solvency of the holding company and subsidiary;
   3. A statement of assets and liabilities and an auditors’ report of the holding company and subsidiary;
   4. The memorandum of association and articles of association of the holding company and subsidiary;
   5. Audited financials of the holding company and subsidiary for the past three years;
   6. Minutes of the shareholders’ meeting along with shorter notice consents (if applicable) of the holding company and subsidiary;
   7. A report of a scrutiniser for each of the meetings of the shareholders and creditors held for approval of the merger scheme;
   8. Written consent in the form of an affidavit obtained from the secured and unsecured creditors (if applicable);
   9. A copy of the notice served to any regulatory/statutory
      authority;
   10. Details of objections/suggestions received from the RoC and official liquidator;
   11. A list of members, creditors and directors;
   12. A copy of e-form MGT-6 declaring beneficial interest in respect of shares held by nominee shareholders, along with a copy of challan in respect of a filing made;
   13. A copy of e-form MGT-14 recording share transfers, if any filed, along with a copy of challan in respect of a filing made;
   14. A copy of e-form GNL-1 filed by the holding company and subsidiary, along with a copy of challan in respect of a filing made;
   15. A copy of e-form GNL-2 filed by holding company and subsidiary along with a copy of challan in respect of a filing made;
   16. A certificate from the statutory auditor of the respective companies confirming that the accounting treatment contemplated under the scheme meets with the applicable accounting standards;
   17. Certificate from the auditors confirming the relationship
       between the holding company and its subsidiary; and
   18. A memorandum of appearance/power of attorney of the authorised representative to appear before the regional director/RoC or other authority.

A review of the list set out above, and the clear repetitions in processes, should make it possible to reduce the paperwork and complexity of the fast-track merger process in India.

In order to reduce the burden on our corporate regulators, and be in line with the Swiss simplified mergers, fast-track mergers could also be permitted for a wider set of group companies (and not just wholly owned subsidiaries). Similarly, we could also do away with the need for a scheme of merger/amalgamation, since a consolidated balance sheet prepared by a qualified accountant is adequate to demonstrate the effects of the merger. Simplifying these documents could also help speed up the internal processes at the regional director’s office to ensure quick approval and closure.

With the increased pressures on the NCLT infrastructure, allowing a broader set of mergers to be approved under a simplified fast-track process would be a significant step in enhancing the ease of doing business in India.

---

YASHASVINI KUMAR is the group general counsel, POOJA GONDALIA is the deputy manager of compliance and BHAKTI SAMPAT is the deputy general manager of compliance at Innoterra India.