India Mandates RBI Approval for Foreign Holding Company Mergers with Domestic Subsidiaries

September 09, 2024, marks a significant shift in India’s corporate merger landscape. India’s Ministry of Corporate Affairs (“MCA”) recently introduced key amendments to the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. Officially called the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2024, these changes streamline the process of merging foreign holding companies with their wholly-owned Indian subsidiaries. This development, effective from September 17, 2024, signals India’s commitment to simplifying cross-border mergers while maintaining regulatory oversight.

Key Amendments: Simplified Fast-Track Mergers

Under the new rules, Rule 25A has been amended to add a significant provision, Rule 25A(5). This sub-rule is a game-changer for companies looking to streamline their cross-border merger processes. It outlines the following requirements for mergers between foreign holding companies (transferor) and their wholly-owned Indian subsidiaries (transferee):

1. RBI Approval is Mandatory: Both the foreign holding company and the Indian subsidiary must obtain prior approval from the Reserve Bank of India (RBI) before proceeding with the merger.
2. Compliance with Section 233: The Indian subsidiary must comply with Section 233 of the Companies Act, which governs fast-track mergers and amalgamations, further expediting the process by avoiding National Company Law Tribunal (“NCLT”) intervention.
3. Application to the Central Government: The Indian company must apply to the Central Government under Section 233, with the provisions of Rule 25 being applicable to the application.
4. Declaration of Solvency: The declaration of solvency, as required under sub-rule (4), must be filed when submitting the merger application under Section 233.

Expedited Process: Reducing Time and Complexity

Before the amendment, cross-border mergers required approvals under Section 230-232 of the Companies Act, often involving a time-consuming NCLT process. This procedure typically stretched over 8 to 12 months, requiring extensive regulatory clearances, creditor approvals, and potential legal challenges. By utilizing the fast-track route under Section 233, the new rules significantly shorten this timeline for qualifying mergers, reducing regulatory hurdles and delays.

In particular, mergers between a foreign holding company and its wholly-owned Indian subsidiary can now benefit from a streamlined process. The fast-track merger process will now only require approvals from the Reserve Bank of India and the Central Government (via the Regional Director), bypassing the NCLT for these specific cases.

Cross-Border Mergers: Important Implications for Businesses

This amendment represents a major step towards simplifying cross-border mergers involving Indian companies. It not only enhances the ease of doing business but also reflects India’s focus on creating a more investment-friendly environment.

The new rules also introduce an important compliance step for mergers involving companies incorporated in countries that share a land border with India. For example, in the case of a merger with a company incorporated in China, a declaration in Form No. CAA 16 must be submitted to the Central Government through the jurisdictional Regional Director.

Section 233: The Legal Framework

Section 233 of the Companies Act provides a simplified process for mergers involving a holding company and its wholly-owned subsidiary or between small companies and start-ups. By integrating foreign holding companies into this framework, the Indian government aims to accelerate mergers that otherwise require lengthy approvals. Companies seeking to utilize this fast-track merger route will still need to ensure compliance with applicable regulatory requirements, including filing declarations of solvency and securing shareholder approvals (holding at least 90% of shares).

Potential Challenges: Clarification Needed on RBI Approvals

While the amendment simplifies the merger process, some ambiguity remains regarding the scope of RBI’s role. Previously, under Rule 25A, foreign companies merging into Indian entities had “Deemed Approval” from the RBI if they complied with Sections 230-232 of the Companies Act. However, it remains unclear whether the new fast-track route under Section 233 also benefits from this Deemed Approval, or if companies will need to seek a separate, explicit approval from the RBI.

This question could affect the timeline and efficiency of fast-track mergers. A clarification from the RBI regarding the applicability of Deemed Approval to these mergers would further streamline the process and provide certainty to businesses.

Key Takeaways

The Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2024, pave the way for a new era in cross-border mergers and acquisitions, especially for foreign companies looking to consolidate their operations in India. By reducing reliance on the NCLT and providing a fast-track route for mergers between foreign holding companies and Indian subsidiaries, the Indian government is signaling a more business-friendly environment.

However, the requirement for RBI approval—whether deemed or explicit—remains a critical step. The need for compliance with Section 233 ensures that the process, while expedited, still maintains essential regulatory oversight.

These amendments are likely to catalyze corporate restructuring, particularly among foreign-held companies seeking to bring their operations more firmly under Indian jurisdiction, making India an increasingly attractive destination for foreign investment.

Conclusion: A Promising Future for Cross-Border Mergers

India’s regulatory framework continues to evolve, demonstrating the country’s commitment to enhancing the ease of doing business while ensuring that crucial oversight mechanisms remain in place. The new amendments to the Companies Rules are expected to reduce the burden on companies seeking to merge across borders, encouraging investment and fostering corporate growth. Although some uncertainties remain—particularly around RBI approvals—the overall trend is clear: India is positioning itself as a hub for cross-border corporate activity, offering a more efficient and investor-friendly merger process.

For further guidance on these updates or assistance with compliance, feel free to reach out to us.

Contributed by – Hariom Shran Bajpai and Krishnan Sreekumar

King Stubb & Kasiva,
Advocates & Attorneys

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