In schemes of arrangement, whether by way of a merger, demerger or other form of corporate restructuring, the timing of when the transaction takes effect becomes important. It is from such a date that the financial statements of the companies involved will reflect the effect of the transaction. Given that the transaction may be completed anytime during the course of a financial year, parties have historically structured transactions in such a way that they take effect on a date that is either predetermined or one that is capable of being determined objectively. For practical purposes, the date so created by a legal (documentary) fiction could the first or last day of a financial year. Such a date is referred to as the “appointed date”, while the date on which the transaction is actually completed is referred to as the “effective date”. While the effective date is a matter of fact, the appointed date is created by a deeming fiction.
The practice surrounding the appointed date and effective date has developed over the past few decades. In its landmark decision in Marshall Sons & Co. India Ltd. v. ITO, 223 ITR 809, the Supreme Court accepted the concept of appointed date (although it did not specifically use that terminology), and noted:
Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide viz., January 1, 1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it – as has happened in this case – it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as “the transfer date”. It cannot be otherwise.
Based on the Supreme Court’s ruling, parties were emboldened to expressly set out the appointed date. It was also well understood that if parties failed to prescribe an appointed date, the scheme would take effect from the effective date (i.e., the date on which all formalities are completed).
Nevertheless, certain nuances remained unaddressed. First, questions arose whether the appointed date must necessarily be a retrospective date (i.e., a date prior to the effective date when all formalities are completed) or whether it could be prospective (i.e., occur following the effective date). Second, there was some level of confusion on whether the appointed date had to be a predetermined calendar date or whether it could be defined with reference to the occurrence of an event (such as the receipt of all necessary approvals for implementing the transaction). Market practice varied considerably, and some courts generally accepted the flexibility rendered by Marshall Sons.
While the appointed date was a matter developed by the parties through explicit judicial recognition, matters took on a different tone when the concept of the appointed date received statutory recognition for the first time in the form of section 232(6) of the Companies Act, 2013. The statute provides as follows: “The scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.” Under this dispensation, it appears that different benches of the National Company Law Tribunal (NCLT) began adopting a more restrictive view, including that the appointed date has to be a predetermined calendar date and not connected with the occurrence of a prospective event.
In order to address this, the Ministry of Corporate Affairs (MCA) issued a clarification on 21 August 2019, which seek to put matters to rest by interpreting section 232(6) in a wide manner, which grants flexibility to parties devising schemes of arrangement. Some of the key matters of clarification and their impact are as follows:
Determination of Appointed Date: Relying upon the Supreme Court ruling in Marshall Sons and that of the Madras High Court in relation to the amalgamation of Equitas Housing Finance Limited and Equitas Micro Finance Limited with Equitas Finance Limited, the MCA stated that the appointed date “may be a specific calendar date or may be tied to the occurrence of an event”. In relation to such an event, the MCA referred to matters such as obtaining licences and the fulfillment of other conditions precedent to the transaction. It did not accept the notion that appointed date can only be a calendar date.
In case of an event-based appointed date, the parties have to indicate the same in the scheme. Moreover, where the event is likely to occur after the scheme is filed with the Registrar of Companies under section 232(5) of the Companies Act, 2013, the company must file the information with the Registrar within 30 days of the scheme taking effect.
Prospective or Retrospective? The MCA has not specifically addressed the question of whether the appointed date can be prospective or retrospective. However, given that an event-based appointed date is likely to be prospective, it has implicitly blessed such a date. At the same time, it has sought to impose some mild limitations on the ability of companies to fix retrospective appointed dates that extend substantially into the past. The clarification states that “if the ‘appointed date’ is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should be against public interest”. While the justification for the one-year period is understandable, drawing a connection to “public interest” will likely introduce a great deal of discretion with the NCLT. It remains to be seen whether the certainty that the MCA has introduced through the clarification will be undermined through the accompanying subjectivity that might creep in.
“Acquisition Date” under Ind-AS 103: Given some confusion surrounding this issue, the MCA also clarified that the appointed date so identified under a scheme shall also constitute the “acquisition date” for the purpose of the relevant accounting standards, including Ind-AS 103 (Business Combinations).
In all, the MCA clarification brings relief to parties entering into M&A transactions through schemes and their advisors. On matters such as the appointed date, the authorities would do well to grant wide flexibility. While such flexibility was inherent in the Companies Act, 1956 and the jurisprudence surrounding it, some level of rigidity came in through the Companies Act, 2013 and its implementation through the NCLT process. The MCA clarification now restores the flexibility.