Govt Revises Companies Law: RBI Approval Needed for Certain Mergers

The government has revised rules related to mergers under the companies law. Now, amalgamations involving a foreign holding company and its wholly-owned Indian subsidiary will need prior approval from the Reserve Bank of India (RBI). The corporate affairs ministry has updated the Companies Compromises, Arrangements and Amalgamations Rules, 2016.

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New Requirements for Foreign Holding Companies

The amendments focus on scenarios where a foreign company, incorporated outside India, is the holding company, and the Indian company is its wholly-owned subsidiary. In such cases, both companies must obtain prior RBI approval before proceeding with a merger. Additionally, the Indian subsidiary must comply with Section 233 of the Companies Act.

Section 233 broadly deals with mergers and amalgamations of certain companies. The ministry stated that these changes aim to streamline the process and ensure regulatory compliance. Sandeep Jhunjhunwala, Partner at Nangia Andersen LLP, noted that reverse flipping has become common among new-age startups recently.

Compliance with Section 233

Jhunjhunwala explained that the resilience and growth of India's IPO market offer investors a viable exit strategy for realising returns. In this context, he said, "The ministry has introduced a new sub-rule whereby both the foreign transferor holding company and its wholly-owned Indian subsidiary would have to now obtain a prior RBI approval in cases of merger or amalgamation."

Furthermore, the Indian transferee company must file an application with the Central Government under Section 233 of the Companies Act 2013 and Rule 25 of the Companies Compromises, Arrangements and Amalgamations Rules, 2016. This step is necessary for seeking approval for such India inbound mergers.

The changes are expected to impact many companies looking to merge or amalgamate under these specific conditions. By requiring prior RBI approval and adherence to Section 233, the government aims to ensure that all regulatory aspects are thoroughly addressed before any merger or amalgamation is finalised.

These amendments reflect the government's ongoing efforts to regulate corporate mergers more effectively. They also highlight the importance of compliance with existing laws to facilitate smoother business operations in India.

The updated rules will likely influence how foreign holding companies approach mergers with their Indian subsidiaries. Companies must now navigate additional regulatory steps to complete their mergers successfully.

This development underscores the need for businesses to stay informed about regulatory changes. It also emphasises the importance of seeking expert advice to ensure compliance with all legal requirements during mergers and amalgamations.

Overall, these amendments aim to create a more structured framework for corporate mergers involving foreign holding companies and their wholly-owned Indian subsidiaries. The requirement for prior RBI approval ensures that all financial and regulatory aspects are considered before any merger is approved.

By implementing these changes, the government seeks to enhance transparency and accountability in corporate mergers. This move is expected to benefit both investors and companies by providing a clear regulatory pathway for mergers and amalgamations.

The new rules are part of broader efforts to strengthen India's corporate governance framework. They aim to foster a more robust regulatory environment that supports sustainable business growth while protecting investor interests.

In conclusion, these amendments mark a significant step towards improving the regulatory landscape for corporate mergers in India. They highlight the government's commitment to ensuring that all mergers comply with existing laws and regulations, thereby promoting a fair and transparent business environment.