Wholly Owned Subsidiary Vs Merger in India

Wholly-owned subsidiary Vs Merger in India: Definition and Meaning

A wholly-owned subsidiary company means an entity in which the entire share capital is owned by a foreign company called as a parent or holding company. The Companies Act, 2013 doesn’t define the term wholly-owned subsidiary properly, but various provisions related to a foreign company and its registration provide a background of what this type of company registration means. There are many modes in which a wholly-owned subsidiary company can be set-up in India. These are as follows-

  1. Private Company
  2. Company limited by share
  3. Unlimited Liability Company
  4. Company limited by guarantee

A merger in India is a tool which companies uses for expanding their business operations. This is usually taken up by a company for increasing the profitability level for long terms. In commercial terms, a merger in India means to combine two or more industries or firms together. In simple term, it means to be absorbed by something else and lose individual identity. The Companies Act doesn’t provide a legal definition of merger. However, the schemes of merger in India are dealt through the provisions given in it i.e. Section 390 to Section 394A, Section 395, Section 396 and 396A.

Wholly Owned Subsidiary Vs Merger in India
Wholly Owned Subsidiary Vs Merger in India

Registration: Wholly-owned subsidiary Vs merger in India

Registration of a Wholly-owned subsidiary:

Following steps are involved in registering a wholly-owned subsidiary company of a foreign company in India:

  1. Applying for Digital Signature Certificate (DSC): The Indian subsidiary company is required to apply for a digital signature for all the directors. The form for the DSC is to be attested by a practicing Chartered Accountant or a Company Secretary in India.
  2. The applicant company is required to file Form 1A with the Registrar of Companies (ROC) for the incorporation of foreign company and naming the company. A new approval must be filed by the applicant that must be attested by a Chartered Accountant or a Company Secretary. Once the name is approved, the next step for incorporation is to be taken.
  3. Applying for a Director Identification Number (DIN): Apply for a DIN through Form DIN-1 by providing the following documents:
  1. Passport
  2. Two passport size photographs
  3. Affidavit in the format as prescribed by the statutes
  4. Present occupation or business of the directors of the company
  5. Educational qualification of the directors
  6. Documents posted from the home country, in case the director is from a foreign country

Form DIN-1 must be attested properly by a Company Secretary or Chartered Accountant practicing in India.

  1. Registering the wholly-owned company: The Company to be incorporated must submit all the required documents along with the Memorandum of Associations (MOA) and Articles of Associations (AOA). The Memorandum of Association of the proposed company must be stamped properly by paying the stamp fees which is 15% of the authorized capital of the company to be incorporated. Once the stamp duty as well as ROC fees is paid, the Registrar thoroughly verifies the filed documents. the following are to be approved by the ROC-
  1. Form DIR-12 that must be approved through a straightforward procedure.
  2. Form INC-7 must be verified in a detailed manner.
  3. Form INC-22 must be approved through straight process as well.
  1. If in any case the Registrar of Companies proposes any changes to be made in the application, the company is required to do the same accordingly.
  2. Once the Registrar is satisfied with the application, an Incorporation or Registration Certificate is sent to the applicant through email.

Merger in India:

The process of merger in India is court driven which means it can be time constraining and can be bit of problematic. The merger in India includes the following steps-

  1. Authorization as per Memorandum of Associations (MOA): It must be thoroughly checked whether the memorandum authorizes the merger in India or not. If not, then an Object Clause must be added to the same.
  2. Drafting of the scheme of the merger in India: The transferor company and the transferee company must draft a scheme document for the merger. The scheme must contain the following details- 
    1. Details of the transferor company
    2. Details of the transferee company
    3. Main objects of a memorandum of both companies
    4. Brief description regarding the reasons of the merger in India
    5. Definition clause
    6. Nature of business
    7. Shareholdings related details of both the companies
    8. Date of appointment or transfer of the company into the merger
    9. Issues and allotment of shares
    10. Transfer of assets, liabilities, debts, workmen, employees etc.
  1. Obtaining approval from the company’s Board of Directors: The merger in India requires approval from all the involved directors in both the company. The company must pass a resolution for the same and authorize a director or CS or other officers to make an application to the National Company Law Tribunal (NCLT).
  2. Obtaining approval from stock exchanges for the listed companies: In case a listed company is involved as one of the parties in the merger in India, then the draft must be filed with the stock exchanges it is registered with for obtaining approval.
  3. Filing application with NCLT for convening the meeting of the members and creditors: This is an important step in the process of merger in India. The companies must file an application in Form NCLT-1. A notice of admission must be filed in Form NCLT-2. Also, an affidavit is to be submitted in Form NCLT-6.
  1. Convening a meeting with the members and creditors of the company: The companies in the merger in India must convene a meeting for all the creditors and members for approving the merger scheme as per the directions of the NCLT.
  1. Approval of the scheme from Regional Director and Official Liquidator: The companies are required to get approval for the scheme from the Regional Director, Official Liquidator, Reserve Bank of India, Competition Commission of India and other concerned institutions.
  1. Filing a final petition for the merger in India with NCLT: The companies are required to file Form CAA-5 for finalization of the merger scheme.
  1. Order of approval from NCLT: In the last step of merger in India, the companies are required to obtain an order of approval from the NCLT. The same is to be informed to the Registrar of Companies (ROC) in Form INC-28.

If the NCLT does not sanction an order then the companies can file an appeal for the process of merger in India to the National Company Law Appellate Tribunal.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.