By: Manisha and Sreenitya Tirumalasetty
Introduction
Mergers and amalgamations are a common means of corporate restructuring, enabling businesses to consolidate operations, expand market presence and achieve operational efficiencies. While the commercial objectives of an amalgamation are often straightforward, its legal consequences can be far more nuanced, particularly where the transferor company has ongoing contractual or regulatory relationships with Public Sector Undertakings (“PSUs”).
One such issue arises when a company that is empanelled with one or more PSUs merges into another entity pursuant to a scheme of amalgamation sanctioned by the National Company Law Tribunal (“NCLT”). Upon the scheme becoming effective, the transferor company ceases to exist, and all its assets, liabilities, rights and obligations vest in the transferee company. The immediate question that follows is whether the transferee company automatically succeeds to the existing PSU empanelments, or whether it must seek fresh empanelment or execute a novation agreement with each PSU.
The answer is not expressly addressed in either the Companies Act, 2013 or the Indian Contract Act, 1872. Instead, it requires a careful examination of the legal consequences of amalgamation, the nature of an empanelment, and the contractual framework governing the relationship between the parties.
The Legal Effect of an Amalgamation
An amalgamation approved under Sections 230 to 232 of the Companies Act, 2013 is not merely a commercial arrangement between two companies. It is a statutory process that culminates in a judicial order sanctioning the scheme. Once the scheme becomes effective, the transferor company stands dissolved without winding up, and its entire undertaking—including its assets, liabilities, contracts, licences, rights and obligations vests in the transferee company in accordance with the sanctioned scheme.
This statutory vesting is significant because it distinguishes an amalgamation from a conventional transfer of contractual rights. The transferee company does not acquire rights through a separate assignment or transfer instrument; rather, it succeeds to them by operation of law.
The Supreme Court has recognised this principle in Marshall Sons & Co. (India) Ltd. v. ITO [1996] 2 SCC 302, observing that once a scheme of amalgamation takes effect, the transferor company ceases to exist and the transferee company assumes its legal position in terms of the sanctioned scheme. Consequently, unless restricted by statute or by the nature of the rights involved, existing contractual relationships ordinarily continue in favour of the successor entity.
Understanding the Nature of a PSU Empanelment
The legal position becomes more nuanced because an empanelment is not identical to an ordinary commercial contract.
Typically, a PSU empanels vendors, consultants, law firms or service providers after evaluating their technical capabilities, financial standing, experience and compliance with prescribed eligibility criteria. Empanelment places the entity on an approved panel from which future assignments may be awarded, either directly or through limited competitive processes.
An empanelment, therefore, has a dual character. On one hand, it reflects an administrative decision by the PSU that the entity satisfies the eligibility criteria prescribed under its procurement policy. On the other hand, it is frequently accompanied by contractual terms governing the rights and obligations of the parties, confidentiality obligations, service standards, duration, termination and other operational matters.
Whether an empanelment automatically survives an amalgamation therefore depends upon which aspect assumes greater significance in the particular case.
If the empanelment primarily recognises the eligibility of the entity and remains subject to continuing compliance with procurement requirements, the PSU may legitimately seek confirmation that the amalgamated entity continues to satisfy those requirements. Conversely, where the empanelment is embodied in a contractual framework without any restriction on corporate restructuring, there is a strong argument that the rights under such arrangement vest in the transferee company as part of the statutory succession.
Statutory Succession Versus Novation
A common misconception is that every change in the identity of a contracting party necessarily requires novation.
Section 62 of the Indian Contract Act, 1872 provides that if the parties agree to substitute a new contract or substitute one party for another, the original contract need not be performed. Novation is therefore founded upon mutual consent.
An amalgamation, however, operates differently. The substitution of the transferor company is not brought about through negotiations between contracting parties but through a statutory process culminating in an order of the NCLT. The transferee company succeeds to the rights and obligations of the transferor company because the law mandates such succession.
Accordingly, amalgamation is more accurately characterised as statutory succession rather than contractual substitution. The requirement of novation, which presupposes a consensual replacement of parties, does not ordinarily arise where the change occurs by operation of law.
This distinction is particularly important because treating every amalgamation as requiring novation would undermine one of the principal objectives of statutory restructuring, namely, ensuring business continuity without disrupting existing legal relationships.
Can a PSU Nevertheless Require Fresh Empanelment?
While statutory succession provides a strong legal basis for continuation of contractual rights, PSU empanelments cannot be viewed in isolation from the principles governing public procurement.
Unlike private parties, PSUs are expected to act fairly, transparently and in accordance with their procurement policies. Empanelment is often granted after assessing specific eligibility criteria such as turnover, technical qualifications, sectoral experience, manpower, certifications and financial capability.
Following an amalgamation, the corporate identity of the empanelled entity changes. Although the business may continue seamlessly, the PSU may reasonably seek to verify whether the amalgamated entity continues to satisfy the eligibility requirements on the basis of which the empanelment was originally granted.
This does not necessarily imply that a fresh empanelment is legally mandatory. Rather, it reflects the PSU’s obligation to ensure that its procurement standards continue to be met. For example, if the amalgamated entity inherits the same business, personnel, technical capabilities and financial strength, there may be little justification for insisting upon an entirely fresh empanelment process. On the other hand, where the merger fundamentally alters the nature of the business or affects compliance with prescribed eligibility conditions, the PSU may be justified in requiring a fresh assessment.
Accordingly, the issue is not whether statutory succession ceases to operate, but whether the successor entity continues to fulfil the substantive requirements of the empanelment.
Importance of the Empanelment Agreement
The outcome will also depend upon the language of the empanelment agreement itself. Many PSU agreements contain restrictions on assignment or transfer without prior written consent. Whether such clauses extend to amalgamations depends on their wording.
A conventional anti-assignment clause generally seeks to prevent voluntary transfers by one contracting party. An amalgamation, however, is not a voluntary assignment in the ordinary contractual sense but a statutory vesting pursuant to an NCLT-approved scheme.
If the agreement expressly includes mergers, amalgamations, corporate restructuring or change in control within the scope of the restriction, the PSU may legitimately insist upon prior approval or compliance with the prescribed procedure.
In the absence of such language, however, it may be difficult to equate statutory succession with contractual assignment.
For this reason, careful drafting assumes considerable importance. Both PSUs and empanelled entities should ensure that their agreements clearly address the consequences of mergers and other corporate restructuring events rather than leaving the issue to interpretation.
Practical Considerations for Companies
Although the legal position favours statutory succession, companies undergoing amalgamation should adopt a proactive approach.
Following the merger, the successor company should promptly notify the concerned PSUs, furnish the NCLT order approving the scheme, provide updated corporate records and explain that all rights and obligations of the transferor company have vested in the transferee company by operation of law.
Where the empanelment policy requires prior intimation or approval, the successor entity should comply with those procedural requirements. Such compliance should not necessarily be viewed as an admission that novation is legally required; rather, it demonstrates good governance and facilitates administrative continuity.
Early engagement with the PSU can significantly reduce uncertainty, avoid disruption in ongoing projects and minimise the risk of future disputes regarding eligibility or contractual authority.
Conclusion
The question of whether PSU empanelments survive an amalgamation cannot be answered by applying contract law principles alone. It requires harmonising the doctrine of statutory succession under the Companies Act with the procurement objectives that govern public sector contracting. An NCLT-approved amalgamation ordinarily results in the automatic vesting of the transferor company’s rights and obligations in the transferee company. Since this succession occurs by operation of law, it is conceptually distinct from contractual assignment or novation. In the absence of an express contractual restriction or a statutory prohibition, there is a strong legal basis for contending that existing PSU empanelments continue in favour of the amalgamated entity.
At the same time, PSUs are entitled to ensure that the successor entity continues to satisfy the eligibility criteria and procurement standards that formed the basis of the original empanelment. Where the merger materially affects those qualifications, a fresh assessment may be justified. However, such an assessment should not automatically translate into a requirement for novation or a complete re-empanelment exercise.
As mergers become increasingly common across industries, greater clarity in empanelment policies and contractual drafting will be essential. Express provisions dealing with amalgamations, statutory succession and change of control can reduce ambiguity, preserve commercial continuity and minimise disputes. Until then, the principle of statutory succession remains a compelling basis for recognising the continuity of PSU empanelments following an amalgamation, subject to the specific terms of the empanelment and the applicable procurement framework.
