Merger through NCLT: Procedure and Overview

Anushka Saxena

02 Aug, 2023

The term “Merger” can be referred to as combining two or more companies into one. In general, it is a form of arrangement whereby two or more entities decide to merge their identity with another company to form a new entity or company. The company usually undertakes the merger arrangement to support its outstanding liabilities by merging with another who has surplus funds to pay off the debt. It is also done to avail tax benefits, reduce costs, and gain a competitive advantage over other markets. Hence, the merger process requires due diligence so that a detailed plan can be structured for assessing the company’s liability.

The merger is a legal process and hence requires the intervention of NCLT. Accordingly, Section 230, 231, and 232 of the Companies Act 2013¹ provides for the merger or amalgamation through NCLT. The current article will discuss in detail the process of the merger through NCLT.

Legislative Framework for Merger

The legislative framework for the merger is carried out under the Companies Act 2013 and the Companies (compromises, Arrangements, and Amalgamations) Rules 2016. According to Section 230 of the Companies Act 2013, the company that is proposing the compromise or arrangement must make an application to the tribunal. Further, a meeting is to be held in the manner and on the dates as directed by the tribunal. The rules in the latter part provide for the manner and the documents to be submitted by the company at the time of making the application and during the process of proceedings for a merger.

Checklist before Initiating Merger through NCLT

• Power in the object clause of MOA and AOA: Before proceeding with the merger through NCLT, it is required that the company shall have a clause for merger or amalgamation under its MOA or AOA. Further, the company must amend its object clause to include it in the MOA or AOA.
• Scheme of merger: The Company shall prepare a draft scheme for a merger which will act as a binding agreement between the Transferor Company and the Transferee Company. The draft scheme of the merger act as an important instrument under proceedings of the merger through NCLT. It shall include details of the company, registered office, transfer of assets, debts and liabilities, licenses, approvals of the schemes etc.
• Notice to a Board meeting: The Company needs to hold a board meeting before initiating any merger through NCLT, and the notice of the meeting shall be sent at least 7 days before the meeting date under Section 173(3) of the act.
• Resolution to Amalgamate: It is pertinent to mention that there shall be a consensus from both companies on approving the draft merger scheme, as, without any approval, the proceedings for merger through NCLT will not be initiated. Hence, a resolution shall be achieved during the board meeting.

Procedure for Merger through NCLT

• Filing of Application: The Company shall apply for a merger through NCLT by submitting an application in Form No. NCLT-1. Further, according to Rule 3(1) of the Companies (compromises, Arrangements, and Amalgamations) Rules 2016, the said application shall be accompanied by necessary documents, including:
  • Notice of admission in Form No. NCLT-2
  • An affidavit in Form No. NCLT-6
  • Copy of Draft scheme of merger
  • Such other fees.

Further, Section 230 (1) of the act states that certain other disclosures shall be made while submitting the affidavit in Form No. NCLT-6.

1. Latest financial statements
2. Last auditor’s report
3. Information regarding the pendency of any proceedings or investigation.
4. Information on the reduction of capital
5. Scheme of corporate debt restructuring consented by not less than 75% of the secured creditors.

• Call of Meeting by the tribunal: Upon hearing the application, if the tribunal thinks that the scheme of arrangements is appropriate, then it may order by way of direction to hold a meeting according to Rule 5 of the Companies (compromises, Arrangements, and Amalgamations) Rules 2016. Further, under the proceedings of the merger through NCLT, the tribunal can order such other directions as mentioned below:
  • Determine the classes of creditors or members who shall be considered for the meeting.
  • Fixing the time and place of the meeting
  • Appoint a chairperson for the meeting and fix the term
  • Fix the quorum and procedure to be followed at the meeting
  • Determines the way of voting, namely, in person, by proxy or by ballot
  • Notice of the board meeting and the advertisement
  • Notice to sectoral regulators, if any.
  • The time period within which the chairperson shares result with the tribunal
  • Any other matter

• Notice of Meeting: During the proceedings of the merger through NCLT, the notice of the meeting shall be sent to all the creditors, members and debenture holders of the company along with a copy of the scheme of merger and a statement disclosing details of such compromise or arrangement in Form no. CAA 2. Further, the notice shall be sent to all the concerned individuals through registered post, courier, e-mail, hand delivery or any other mode as may be prescribed by the tribunal.

• Advertisement of Notice: The merger proceedings through NCLT further require that the meeting notice shall be advertised in Form No. CAA 2 in one English newspaper and one vernacular newspaper having wide circulation around the company’s registered place. Moreover, the notice of the meeting shall be placed on the company’s website at least 30 days before the meeting date.
• Notice to Statutory Authorities and Sectoral Regulators: The notice, accompanied by a copy of the draft merger scheme, shall be sent to the Central government, ROC, Income tax authorities, RBI, EBI, CCI and sectoral regulators in Form no. CAA-3. Further, if the authorities decide to make any representation to the tribunal, then such representation shall be made within 30 days from the date of receiving the notice of the meeting.
• Affidavit of Service by Chairperson: Moreover, the procedure of merger through NCLT requires that the chairperson appointed by the tribunal shall file an affidavit with the tribunal not less than 7 days before the date fixed for the meeting. The affidavit of service shall mean that the tribunal’s directions in relation to the issue of notices and advertisements have been complied with.
• Sanction of Scheme at the Meeting: The accord to sanction the merger scheme shall be accompanied by the majority of 3/4^th of the members and creditors who are present and voting in person, by postal ballot or proxy. Further, the same shall become binding on the creditors and members after the sanction of the scheme by the tribunal. 
• Report of the Result by Chairperson: The procedure of merger through NCLT shall further require that the result of the meeting be communicated by the chairperson to the tribunal in Form no. CAA 4 within the time fixed by the tribunal, and if no time is given, then within 3 days after the meeting is concluded.
• Petition to the tribunal: After submission of the report by the chairperson under the procedure of merger through NCLT, the company shall, within 7 days of filing a report by the chairperson, file a petition to the tribunal in Form No. CAA 5 for the sanction of the scheme of merger. If the company does not file the petition, the creditors are competent enough to present the petition provided they have obtained the leave of the tribunal.
• Date of notice to tribunal: After receiving the petition for sanction of the scheme of merger under the proceedings of the merger through NCLT, the date of hearing shall be fixed, and an order for the advertisement of such notice of hearing will be published in the same newspaper where the notice of the meeting was advertised. Further, the notice shall be advertised not less than 10 days before the date fixed for the hearing.

• Sanction of the Scheme: After examining all the documents, the tribunal may sanction the merger scheme by order in Form No. CAA 6 and may also further order for the modifications of the scheme.

• Filing of order with ROC: In the final stage of the procedure of merger through NCLT, a certified copy of the order of sanction shall be filed with the ROC (Registrar of Companies) within 30 days from the order of the tribunal.

Conclusion

The company willing to merge with the company shall prepare a draft scheme of the merger, which shall be approved through a resolution of the board meeting. A merger through a tribunal protects the rights of the creditors or its members, as the judicial intervention will provide scrutiny over the whole merger process. Moreover, the tribunal will modify the draft scheme of the merger to ensure that the procedure remains transparent at every level. Henceforth, any company willing to enter into an arrangement shall apply to the tribunal.

FAQs

Read Our Article: Merger and Acquisition Process in India

1. https://www.mca.gov.in/content/mca/global/en/acts-rules/companies-act/companies-act-2013.html