In the matter of Sun Pharmaceuticals Industries Limited, the Ahmedabad bench of the NCLT has ruled that Section 234 of the Companies Act, 2013 and the FEMA Cross Border Merger Regulations, 2018, do not permit cross-border demergers. Sun Pharma sought to demerge two of its investment undertakings in India into two overseas resulting companies, based in the Netherlands and the US. Being a listed entity, it obtained prior approval of SEBI through the relevant stock exchanges and the requisite corporate consents of its shareholders and creditors. The RBI granted its implied deemed approval by stating that the demerged company is required to abide by the applicable rules and regulations, which it had undertaken that it would. None of the other stakeholders to whom notices were issued by the tribunal, including the Registrar of Companies (ROC), objected to the demerger on the ground that it was not permitted by law.

The rationale of the Tribunal, as outlined in its decision, is as follows – (a) Section 234 of the Companies Act, which deals with merger or amalgamation of a company with a foreign company does not contain the words compromise, arrangement and/ or demerger and hence it may be construed that it does not permit demerger of Indian companies with a foreign company and vice versa; (b) Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is also silent on demergers; and (c) the FEMA Cross Border Regulations, which in its draft form included demergers, does not include demergers in its final form thereby intentionally removing cross-border demergers from its ambit.

To further analyse the rationale outlined by the Tribunal, it is necessary to examine the scheme of Section 230–234 of the Companies Act. Section 230 of the Act deals with compromises and arrangements between a company and its creditors/ shareholders. Section 231 of the Act deals with enforcements of compromise/ arrangement orders by the tribunal. Section 232 of the Act deals with compromises and arrangements that involve two or more companies in connection with reconstruction, merger, amalgamation or demerger (pursuant to division or transfer of whole or part of undertakings). Section 233 deals with fast track merger or amalgamation between certain specified companies. Section 233(12) specifically states that Section 233 shall mutatis mutandis apply to the specified companies in respect of a scheme of compromise or arrangement referred to in Section 230 or division or transfer of a company as referred to in Section 232(1)(b). Section 234 (compared to the foregoing sections), is fairly brief; and states – the provisions of this Chapter (i.e. Chapter XV of the Act which deals with Compromises, Arrangements and Amalgamations), unless provided in any other law, shall apply mutatis mutandis to the schemes of mergers and amalgamations between Indian companies and foreign companies registered in specified jurisdictions.

The FEMA Cross Border Regulations defines cross-border mergers to mean any merger, amalgamation or arrangement in accordance with the Companies (Compromises, Arrangements and Amalgamations) Rules. The Regulations permit inbound mergers and outbound mergers. Any transaction in accordance with these Regulations is deemed to have prior approval of the RBI. There is no mention of demergers in the said Regulations.

The tribunal appears to have taken a strict interpretation of the Companies Act and the FEMA Regulations and has, therefore, disallowed cross-border demergers. However, the progressive nature of Section 234 in enabling cross-border transactions gets hampered if cross-border demergers are not permitted. It appears that companies will have no choice but to resort to alternative methods of restructuring, until cross-border demergers are permitted by an appellate forum or amendment to the Companies Act.