By : Shishank Shaw
INTRODUCTION :
The Ministry of Corporate Affairs (“MCA”) vide its notification dated September 09, 2024, has issued the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2024 (“Amendment Rules”) aimed at simplifying the regulations for ‘reverse flipping’ in India. The Amendment Rules are effective from September 17, 2024. This move comes as an increasing number of Indian startups, are urging the government to simplify reverse flipping rules and facilitate their return to India. The process of redomiciling to India has been challenging, with multiple obstacles like long and cumbersome procedures, a complex tax system and substantial tax liabilities.[i]
Meaning of reverse flipping
“Reverse flip” or “re-domiciliation” refers to the corporate restructuring process, where a company shifts its country of domicile or legal registration from one jurisdiction to another. Recent notable examples of reverse flipping include companies such as PhonePe and Groww flipping back to India. Other Indian companies, including Razorpay and Flipkart, are also evaluating similar moves and stand to benefit from recent regulatory changes.[ii] A crucial aspect of this process is selecting a structure that aligns with the legal, regulatory, and tax requirements of the jurisdictions involved[iii].
There are two main methods for undertaking reverse flipping:
- Inbound Merger: In an inbound merger, a foreign company merges into an Indian company, transferring its assets and operations to the Indian company. As part of this process, shareholders of the foreign company receive shares of the Indian company as consideration. In India, mergers follow a court-driven process, requiring approval from the National Company Law Tribunal (“NCLT”). Under Section 234, read with Section 230 of the Companies Act, 2013, (“Companies Act”) companies proposing a merger must approach the NCLT and submit a ‘scheme’ that includes all relevant details of the merger or amalgamation.During the review of the scheme, NCLT may call meetings of shareholders, members and creditors, and may issue notices to regulators, including the Registrar of Companies and the Regional Director. After considering any objections or representations from these bodies, the NCLT evaluates and ultimately approves the scheme. In India, securing such approvals can be a prolonged process, typically taking between six to nine months.
- Share Swap Arrangement: In a share swap arrangement, shareholders of a foreign company exchange their shares in the foreign company for shares in the Indian company. Essentially, this corporate mechanism allows two or more companies to exchange equity assets, often through a share or stock-for-stock exchange, thereby classifying the transaction as a “share swap.” Companies are increasingly favouring this method to conserve cash or provide added value to shareholders of the acquired company. This approach often requires detailed structuring within the definitive agreements between the parties involved in such acquisitions.
Regulatory framework of reverse flipping in India
In India, reverse flipping is primarily governed by Section 234 of the Companies Act read with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (“CAA Rules”). These provisions allow mergers and amalgamations between Indian companies and companies incorporated in foreign jurisdictions. Under Rule 25A, foreign companies are permitted to merge with Indian entities, provided they first obtain approval from the Reserve Bank of India (“RBI”) and the NCLT.
The Amendment Rules has introduced a new provision to the CAA Rules i.e., Rule 25A (5) which has simplified the scheme of arrangement, (whether merger or amalgamation) between a foreign holding company and an Indian subsidiary, under the fast-track merger route specified in Section 233 of the Companies Act, 2013. This amendment permits companies to bypass NCLT approval, thereby streamlining the process and significantly reducing both time and costs involved.[iv]
Eligibility for fast-track reverse flipping
To be eligible for the aforementioned fast-track reverse flipping, the following condition must be met:
- The transferor and transferee entities are required to secure prior approval from the RBI.[v]
- The Indian transferee company must comply with the conditions laid down in Section 233 of the Companies Act.[vi]
- The Indian transferee company must submit an application for approval from the Central Government in accordance with Section 233 of the Companies Act, as well as Rule 25 of the CAA Rules.[vii]
- If the foreign company is incorporated in a country that shares a land border with India, a declaration regarding the approvals obtained under the foreign exchange laws must be submitted to the Central Government, along with a copy of any relevant approvals.[viii]
CONCLUSION :
The Amendment Rules is a positive development aligned with the Central Government’s efforts to reduce regulatory barriers and foster a more business-friendly environment. It aims to streamline reverse flipping transactions by bringing them under the fast-track route, thereby simplifying the approval process. The Amendment Rules further allows these transactions to proceed without the lengthy requirement of obtaining approval from the NCLT, making the process more efficient and less time-consuming.
[i] Inc42 T, “MCA Exempts Startups Looking To Reverse Flip From NCLT Nod” Inc42 Media (September 12, 2024) <https://inc42.com/buzz/mca-floats-new-rules-exempts-startups-looking-to-reverse-flip-from-nclt-nod/> accessed October 29, 2024
[ii] “Government Fast-Tracks Reverse Flipping for Overseas-Domiciled Indian Companies” CNBCTV18 (September 11, 2024) <https://www.cnbctv18.com/business/startup/government-simplifies-reverse-flipping-new-compliance-rules-startups-19474816.htm> accessed October 29, 2024
[iii]Saravanan P, “Decoding Reverse Flipping” (BusinessLine, October 31, 2023) <https://www.thehindubusinessline.com/opinion/decoding-reverse-flipping/article67481452.ece> accessed October 29, 2024
[iv] Rule 5 of the Amendment Rule
[v] Rule 5(i) of the Amendment Rules
[vi] Rule 5(ii) of the Amendment Rules
[vii] Rule 5(iii) of the Amendment Rules
[viii] Rule 5(iv) of the Amendment Rules
