According to the latest data, India’s M&A activity in 2024 dropped to a four-year low in deal value, totalling $80.5 billion—a decline of 11.4% from the previous year—as more transactions occurred in the small-to-mid market range.
In backdrop of this, more and more companies are longing for a revamp in the M&A procedure in India. Recently, as per the media reports, the Ministry of Corporate Affairs (“MCA”) is considering amendments to the Companies Act 2013 (“Act”), to speed up the M&A process. Among other proposals, one of the proposals is that the listed companies can skip NCLT approval, if the financial sector regulators approve the merger scheme. Experts share a positive outlook for this proposal of the MCA, as this would further ease doing business in the country.
The MCA is considering expanding fast fast-track merger route to the public listed companies which at present is only available to small companies, startup companies, and mergers between parent and subsidiary companies. The MCA has not released any official consultation paper yet and therefore the authors are confined to the press statements. This article aims to analyse the feasibility of the proposal to extend the fast-track route of mergers to public listed companies.
While the M&A process certainly needs a revamp, but the proposal is problematic on the following two grounds:
First, as per the proposal, the merger would not be required to go through NCLT if regulators like Securities and Exchange Board of India (“SEBI”), Competition Commission of India (“CCI”), and the Reserve Bank of India (“RBI”) have given their nod. Instead of resolving the problem, the proposal would create an excessive burden for regulators like SEBI which is already burdened with matters relating to capital markets. Second, NCLTis not merely a rubber stamp, it plays a critical role in safeguarding the interests of various stakeholders involved in the M&A process.
OVERVIEW OF THE MERGER PROCESS
To initiate the merger process, an application to the NCLT is made under Section 230-232 of the Act. Along with the application, the draft scheme, the valuation report, and the report of the effect of such merger on each class of member(s) or creditor(s) needs to be filed. The NCLT after admitting the application, calls for a meeting of the members and creditors of the company to ascertain the favourability of the draft scheme.
While all of this seems to be very technical, and it may leave an impression that the NCLT is merely a supervisor to ensure compliance with the Companies Act, it is just one way to look at the role of the NCLT. The Supreme Court clarified that while the NCLT has significant powers under the CA 2013, it is not to be treated as a mere formality. The role of the NCLT extends beyond administrative functions, as it is tasked with critical assessment of the merger process and its implications on stakeholders. Thus, it would not be incorrect to say that NCLT is vested with the power to apply its judicial mind, consider the scheme, and then decide its fate.
In case of mergers relating to listed companies, the draft scheme and the material information has to be shared with the Stock Exchange, which in turn consults SEBI. SEBI considers this scheme only from the perspective of retail investors, further, the role of SEBI is very mechanical. SEBI has to verify that the draft scheme is not in contravention of provisions of SEBI (Listing Obligation and Disclosure) Regulations. The listed companies operate in a far more interconnected financial ecosystem, often involving public funds, mutual funds, and pension investments. Mergers of such entities can have systemic effects, influencing stock prices, investor wealth, and market dynamics. Therefore, it is pivotal to have a dedicated regulator to facilitate the overall process in contrast to a sectoral regulator whose role is very limited
Another sectoral regulator that comes into the picture is the Competition Commission of India, whose role is highly restricted to considering the impact of mergers on the competitive fabric of the economy or whether such mergers would lead to any Appreciable Adverse Effect on Competition. Neither SEBI nor CCI is empowered to meddle between shareholders’ concerns or members of the listed company desirous of merger.
ANALYSIS
NCLT vs Sectoral Regulators
The MCA is assuming that the financial sector regulators and the NCLT are at par, but this assumption is flawed. NCLT is a full-time tribunal and it performs adjudicatory functions, while SEBI and CCI are ‘part time’ adjudicators whose primary role is to ensure integrity in the capital markets and a competitive economy. In the landmark case of Miheer H Mafat Lal, the apex court has ruled that the NCLT ‘s role isn’t merely procedural, but supervisory to ensure fairness to all the stakeholders. Furthermore, the Rule 11 of NCLT Rules 2016 confer inherent jurisdiction over the NCLT to pass orders for meeting the ends of justice, which is neither applicable in the cases of SEBI or the CCI.
While NCLT plays a vital role in facilitating rights of various stakeholders during merger process, it may commit an error of considering some aspect of the scheme that may be prejudicial to some. But then the aggrieved stakeholder(s) has the right to approach the NCLAT to protect its interests. For example, in the matter of Rama Investment Company Pvt Ltd v Ankit Mittal, A minority shareholder with less than 10% shares opposed the amalgamation but, under CA 2013, lacked standing to object. The NCLT refused intervention due to this disqualification. On appeal, the NCLAT found the valuation method unfair and rejected the scheme.
SEBI has no inherent powers in the first place, it has been held that SEBI has a limited jurisdiction and possesses no inherent powers of its own. Section 24 of the CA 2013 has defined the jurisdiction of SEBI to the matters pertaining to issue of securities. Under the erstwhile Companies Act, 1956 the corresponding provision was Section 55A which was interpreted by the apex court. It was held that SEBI has the power to administer matters relating to the issue and transfer of securities for listed companies and those intending to get listed.
Under the Competition Act, 2002 the CCI is required to grant approval for combinations (mergers or acquisitions) as per the Competition Act. However, it also clarifies that the CCI’s approval is not a substitute for the NCLT’s authority. It is also the settled position of law that CCI’s role does not extend to adjudicating corporate matters that fall under the purview of the NCLT.
Thus, NCLT cannot be replaced by either SEBI or CCI because of its exclusive powers and the function it exercises while supervising the M&A process.
Where is the Delay?
As per the media reports, NCLT takes around 3-4 months between filing and admission of a merger application. As per the procedure as described under the Act, Shareholders and creditors, meetings must be held between the initial application admission and the petition admission stage unless exempted by the NCLT. Apart from the above, in the case of a merger concerning a listed company, the scheme has to be sent to the stock exchange which in turn consults the SEBI, and that consumes some more time. But, as per Section 232, the stock exchange/SEBI has to raise objections within 30 days or otherwise it is deemed that there are no objections from the regulator.
Australia takes the least time for the completion of M&A transactions, and it is imperative to note that it also follows a similar process that requires court approval for the conclusion of mergers. The problem is not the supervision of the tribunal, but rather the lack of supervision over the tribunal, the need of the hour is to introduce a time-bound mechanism for the conclusion of mergers.
CONCLUSION AND WAY FORWARD
The intent behind the proposal is laudable and it is in the best interest of the M&A sector to streamline the M&A process and reduce the time taken. However, as argued by the authors above, the fast-track model cannot be expanded to public listed companies due to the diverse stakeholders involved.
Although the skeleton procedure of mergers is provided under the Companies Act, of 2013, the actual process along with factors such as the maximum time to be taken to admit the application and defined parameters over which sectoral regulators should look needs to be codified so that there is uniformity and certainty in the actual process.