An important question arose before the National Company Law Tribunal (NLCT), Ahmedabad bench. Are only cross-border mergers and amalgamations permitted under section 234 of the Companies Act, 2013 (the “Act”), or does the provision also encompass cross-border demergers and other similar transactions? The NCLT answered that the scope of section 234 is narrow, and covers only cross-border mergers and amalgamations.
In Sun Pharmacuetical Industries Limited (decided 19 December 2019), the demerged Indian company, Sun Pharmaceutical, whose securities are listed on the Indian stock exchanges, proposed to de-merge two specified investment undertakings to two of its wholly-owned subsidiaries, being the resulting companies, one of which is incorporated in the Netherlands and the other in the United States. The transaction is an outbound cross-border demerger. It received the approval of the shareholders as well as the requisite consents or no-objections from various regulatory authorities. However, at the stage of the final hearing, the NCLT was concerned with the existential question of whether a cross-border demerger was permissible at all under the Companies Act and the relevant rules and regulations.
Here, the NCLT found a discrepancy between the statutory provisions relating to domestic transactions (under sections 230 and 232 of the Act) and those relating to cross-border transactions (under section 234). Section 230 is wide as it refers to “compromise” and “arrangement”, which are broad enough to accommodate transactions such as demergers. Section 234, on the other hand, is very specific as it limits itself to “mergers and amalgamations” only and not to other types of transactions. Hence, it is clear that the Act does not recognize cross-border demergers.
Similarly, the relevant rule for the purposes of section 234, namely rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 also refers only to “mergers” and “amalgamations” and does not mention other transactions such as demergers. The NCLT thereafter also went on to analyze the evolution of the Reserve Bank of India’s Foreign Exchange Management (Cross Border Merger) Regulations, 2018, which reflects an interesting development. While a consultation draft of the regulations referred to “demerger”, this transaction structure did not find a placed in the final notified regulations, which expressly refer only to mergers and amalgamations.
Hamstrung by these statutory provisions and rules and regulations, the NLCT disallowed the transaction. In doing so, the NCLT observed that its function “is to administer the law and not to legislate it”.
It is hard to quarrel with the finding of the NCLT. When the legislative provisions are clear, the NCLT cannot step out of its boundaries through creative interpretation to permit cross-border demergers. The legislative evolution of section 234 seems strongly entrenched in the concept of mergers rather than other transactions such as demergers. This is evident (at least implicitly) from the JJ Irani Committee Report (2005) and the Parliamentary Standing Committee Report on the Companies Bill, 2011. Such an outcome is likely to limit the scope of cross-border transactions that Indian companies can undertake. But, the solution to the restrictive approach would lie in legislative reform rather than at the halls of the courts or tribunals.