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NCLT Ahmedabad held Cross Border Demergers are impermissible under the Companies Act 2013

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The NCLT Ahmedabad bench through an order declared the inapplicability of the provisions under the Companies Act over transitions pertaining to cross border demergers.


An application for sanctioning a Scheme of Arrangement (SOA) was made by The Sun Pharmaceutical Industries Ltd, before the National Company Law Tribunal (NCLT), Ahmedabad. The SOA involved an outbound cross border arrangement pertaining to the De-merger and transfer of two specified Investment Undertakings of the Sun Pharmaceutical Industries Limited (De-merged Company), to two overseas resulting wholly-owned subsidiaries, named Sun Pharma (Netherlands) B.V., and Sun Pharmaceutical Holdings USA Inc. The proposed subsidiaries are engaged in holding strategic investments in overseas operating companies and are also authorized to undertake financial activities, including advancing loans and advances.

In accordance with the procedure prescribed under Section 230 and Section 234 of the Companies Act 2013 (Act), meetings were convened for Equity Shareholders and Unsecured creditors. The meetings were conducted after the issuance of notice with an explanatory statement, and all other required disclosures. The notice convening the meeting was also published in the local newspapers. The Scheme was approved with a majority of 99.97% in value. Subsequently, permission from all other authorities like RBI, SEBI, Registrar of Companies (ROC), Income Tax authorities, and Central Government, through Regional Director (RD) was taken by the petitioner company.

The SOA got approval from all the authorities except the RD. The RD raised certain objections to vide Additional Affidavit dated 16th August 2019.

Contentions raised before the NCLT

One of the major contentions raised by the RD was the non-applicability of Section 234 over demergers. According to the RD, Section 234 only provided Cross Border Mergers and Amalgamation, and that no reference is made to cross border De-mergers under it.  RD stated that Section 234 of the Act do not permit the ‘compromise’, ‘arrangement’, and/or ‘demerger’ of the Indian Companies with foreign company and vice versa.

To reason the argument, the RD stated that Section 230 and Section 232, which relate only to the Indian Companies contain inclusive terms such as ‘compromise’ and ‘arrangement’, and Section 234 which relate to the cross-border mergers of Indian Companies, only mention restrictive words such as ‘mergers’ and ‘amalgamation’.

As a reply to the contentions raised by the RD, the petitioners argued that Section 234 of the Companies Act, read with Section 230 provide for Scheme of ‘Arrangements’, which includes merger and de-merger. Subsequently, it assured the tribunal with its compliance to the applicable rules framed by the RBI vide notification No. FEMA 389/2018 -RB, dated 20th March 2018 for outbound merger.

Judgement and reasoning of the NCLT

The NCLT, while agreeing to the contentions raised by the RD, disallowed the petition to approve the SOA. Apart from the contentions raised by the RD, following was the reasoning of the NCLT:

Silence of Companies (Compromises, Arrangements and Amalgamations) Rules 2016 on the cross border ‘demergers’

Rule 25 A of the rules provide for the detailed procedure and requirements for cross border mergers. NCLT pointed out the use of the exhaustive phrases like ‘mergers’, and ‘amalgamations’, instead of the inclusive terms like ‘arrangements’ in it. This made them believe about the silence of Rules on the cross-border mergers.

Restricted application of FEMA (Cross Border Merger) Regulations, 2018

The NCLT mentioned that the FEMA regulations on cross border mergers have a restricted application over Only ‘mergers’ and ‘amalgamations’ between Foreign Companies and Indian Companies. Thus, according to the tribunal, even these rules do not provide for a regulatory mechanism for cross border de-mergers.

Discrepancy in the definition of ‘Cross border merger’ between current FEMA regulations and the draft regulations on cross border mergers

NCLT broached that the draft regulations prepared in the month of April 2017 defined ‘Cross border merger’ to include any merger, demerger, amalgamation, or arrangement, between Indian company(ies) and foreign company(ies) in accordance the rules framed under the Companies Act 2013. However, the actual rules enacted in 2018 defined ‘Cross border merger’ as any merger. Amalgamation or arrangement between an Indian company and foreign company, in accordance with the rules framed under the Companies Act 2013. This, according to the NCLT indicated the specific intent of the Central Government behind excluding the ambit of the regulations over cross border demergers.

Cardinal rule of interpretation of statutes

The NCLT, while expounding Literal/cardinal rule of interpreting a statute, explained that once the meaning of a terminology under a statute is clear and plain, it is not the province of the court to san the wisdom of legislature. It mentioned that since the Act, and the rules framed thereunder, clearly exclude the term ‘demerger’ beyond all the ambiguities, it is the duty of the court to read those provisions in their plain and clear meaning.

Conclusion and Analysis

The NCLT’s order of rejecting applicability of section 234 over outbound merger is not inconsistent with the objectives of Companies Act, but is also in direct contradiction to the previously propounded order by the same NCLT on an inbound demerger of the same petitioner. As provided by the NCLT itself, that “once the meaning provided under the statute is clear and plain, statutory expression should be read in their primary and ordinary sense”. In this case, however, literally reading the provisions of the statue leads to absurdity, and inconsistency with the objectives of the Companies Act 2013.Thus by applying the literal rule of interpretation, the court has curtailed the progressive spirit of the Companies Act 2013.

Subsequently, in an order passed in 2018, the NCLT Ahmedabad bench, by harmoniously reading section 234 with Section 232 (b) held the provisions in the Companies Act with the Nomenclature ‘mergers and amalgamations’ can be applied to the scheme of demergers as well. This was further substantiated by the NCLT while citing Section 234(1) which provides that the provisions under the ‘Compromise, Arrangements and Amalgamation’ chapter of the CA 2013 apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under CA 2013 and foreign company. is now on Telegram. Follow us for regular legal updates and judgements from the court. Follow us on Google NewsInstagramLinkedInFacebook & Twitter. You can also subscribe for our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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