Reverse Flip Merger

Nivedita Guliani and Avneesh Bahuguna

Introduction

?The Ministry of Corporate Affairs (“MCA”) recently introduced crucial amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Merger Rules”), which now permit fast-track mergers between foreign holding companies and their Indian wholly-owned subsidiaries.

Cross-border Mergers?

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018, (“FEMA Regulations”), defines a ‘cross-border merger’ as any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with the Merger Rules. Cross-border mergers are governed under Section 234 of the Companies Act, 2013 (“CA13”), which provides for the basic framework for mergers between Indian companies and foreign companies, allowing mergers where a foreign company merges into an Indian company (“Inbound Merger”) and mergers where an Indian company merges into a foreign company (“Outbound Merger”). Rule 25A of the Merger Rules lays down the detailed process of a cross border merger which provides for taking prior approval from the Reserve Bank of India (“RBI”).

Further, the FEMA Regulations compliments Section 234 by providing detailed guidelines for handling foreign exchange aspects of cross-border mergers thereby ensuring that cross-border mergers comply with India's foreign exchange laws. Under the FEMA Regulations, all assets and liabilities transferred pursuant to such cross-border merger must comply with the FEMA Regulations, the Foreign Direct Investment Policy, and other relevant foreign exchange laws.

For a cross-border merger to take place, the Indian company is required to take approval from RBI. Additionally, the Indian company must obtain a valuation report from a registered valuer, which shall be in accordance with internationally accepted principles of valuation. Thereafter, the Indian company must file an application for the approval of the National Company Law Tribunal (“NCLT”). The issuance of securities by the Indian company to the shareholders of the foreign company, incase of an Inbound Merger, shall be subject to pricing guidelines, entry routes, sectoral caps and other attendant conditionalities as provided under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Fast-track Merger

Section 233 of the CA13, allows for mergers and amalgamations to be undertaken without the need for NCLT approval, through a fast-track route. A scheme of merger or amalgamation may be implemented by taking due approval from the Regional Director having jurisdiction over the registered offices of the merging companies instead of the NCLT. Prior to the amendment to the Merger Rules, the fast-track process was only available for domestic mergers between certain categories of companies i.e., small companies, start-up companies and between an Indian company and its wholly owned subsidiary in India.

Recent Amendment

The new amendment, through the insertion of sub-rule (5) in Rule 25A of the Merger Rules, establishes a comprehensive framework for situations where a foreign company, acting as a holding company, seeks to merge with its wholly-owned subsidiary incorporated in India. This change addresses a crucial aspect of cross-border corporate restructuring that was previously not regulated. The Companies involved in such a merger must now adhere to the fast-track process under Section 233 of the CA13 read with Rule 25 of the Merger Rules, with only RBI approval required and allows the merger between such companies to be undertaken by the fast-track process doing away with the need of approval of NCLT. The merger process shall still be subject to the following conditions which are as follows:

?1.????? Both the foreign transferor company and the Indian transferee company shall have to obtain prior approval from the RBI.

?2.???? Indian transferee company shall have to comply with the provisions of Section 233 of CA13 and file a copy of the scheme with the regional director.

3.???? The Indian transferee company shall have to submit a declaration to the Central Government through the Regional Director confirming whether the Foreign Transferor Company is incorporated in a country that shares a land border with India and if so, has prior government approval been obtained in this regard.

?Impact of the Amendment

The amendment to the Merger Rules will pave the way for companies to reverse flip and relocate their headquarters back to India. Lexology reported that One of the key factors influencing the decision by these companies to reverse flip is India’s growing IPO market, making it attractive for companies to list domestically and simplify their structuring both from a legal and tax perspective.[1]

The amendment is particularly significant in the context of startups and technology companies that had previously established holding companies in foreign jurisdictions for funding or strategic purposes. By mandating RBI approval and compliance with Section 233, the amendment creates a structured pathway for these companies to streamline their operations through their Indian entities. Further, permitting the fast-track process for Inbound Mergers will facilitate the ease of doing business in India and boost the Indian markets.

?Case Studies ?

Many startups are considering reverse flipping their headquarters back to India due to the country's economic policies, expanding local market, rising valuations and growing investor confidence in its startup ecosystem.

Reverse flips involve foreign entities consolidating into their Indian subsidiaries, effectively "reversing" their corporate structure back to India. In the process, the foreign entity moves its assets, operations, and intellectual property rights to the Indian subsidiaries. This includes moving both tangible and intangible assets like trademarks, patents, and exclusive technology licenses/rights to the Indian subsidiary. Reverse flipping offers the opportunity to companies to list on Indian stock exchanges, attracting retail investors eager to invest in startup shares.

CNBCTV18 reported notable examples of recent reverse flipping include companies like PhonePe and Groww, both of which successfully relocated back to India. PineLabs is currently in the process of doing so, with its application under consideration at the NCLT.[2]

Economic times has reported that wealth management startup Groww has moved its domicile to India from the United States of America.[3]? Groww applied to NCLT to initiate the process of shifting its domicile from the United States of America to India. Groww filed for a scheme of merger of the parent company in United States of America with its Indian subsidiary company. While PhonePe relocated its domicile through a share swap arrangement. In a share swap arrangement, shareholders of the foreign entity exchange their shares for shares in the Indian entity.

Further, it has been widely reported in the Economic times and CNBCTV18 that various major companies like Pine Labs, Razorpay, Meesho, Zepto and Flipkart are also considering the reverse flip and are likely to benefit from the changes brought about by the amendment to the Merger Rules.

Conclusion

The amendment to the Merger Rules marks a significant milestone in India's corporate regulatory landscape, particularly for companies contemplating reverse flip mergers. Examples like PhonePe and Groww, demonstrate the practical implications and growing relevance of this regulatory change. The introduction of a fast-track process for cross-border mergers between foreign holding companies and their Indian wholly-owned subsidiaries simplifies corporate restructuring while maintaining necessary regulatory oversight. The amendment streamlines the process of a cross-border merger while ensuring compliance with both foreign exchange regulations and corporate law requirements and at the same time effectively balances regulatory control with business efficiency. The coming months are likely to witness more companies engaging in restructuring their operations to capitalize on India's growing economic opportunities.?

[1] https://www.lexology.com/library/detail.aspx?g=6296f137-0522-4983-b8d8-371645345a7b

[2] https://www.cnbctv18.com/business/startup/government-simplifies-reverse-flipping-new-compliance-rules-startups-19474816.htm

[3] https://economictimes.indiatimes.com/tech/startups/groww-moves-domicile-to-india-from-the-us/articleshow/109986924.cms?from=mdr