Mergers and acquisitions are critical processes, but they are often difficult. Following the tribunal’s decision under Sections 230-232 of the Companies Act 2013, the transferor or transferee Company, or both, must follow specific measures. We covered the key post-merger compliances in this article.
Non-Banking Financial Company (NBFC) is one of India’s most well-known types of financial organisations. The NBFC sector contributes significantly to the GDP of the country’s economy. The RBI and other associated agencies establish rules and regulations, which are subject to change as a result of changing requirements and circumstances. It is critical for NBFC management to understand what to do and how to do it, and there is a strong requirement to stay current. It is also critical for NBFC owners to follow up with the NBFC yearly compliance checklist. If any NBFC is found to be in violation, they will face severe fines. It might potentially result in the termination of the NBFC license and the company’s liquidation. As you may have observed, on November 16, 2018, the RBI cancelled the registration of 65 NBFCs owing to non-compliance.
As financial institutions, NBFCs relate to a system of laws and regulations that are always evolving in response to shifting demands and circumstances. It is critical for NBFC management to understand what to do and how to accomplish it, and there is an urgent need to stay up with the current dynamic times.”
What is Merger?
A merger is a corporate strategy in which two or more firms join to form a single legal entity. Typically, firms that decide to join are of comparable size and scale of activities.
A merger unites two existing firms into one new company. There are several types of mergers, and organisations may opt to combine for a variety of reasons. Mergers are done to increase the size of a company, expand into new areas, or acquire market share.
Let’s take a look at the post-merger compliances.
What are post-merger compliances?
The following are concise descriptions of the key compliances that must be completed following the merger:
1. ROC Compliances (e-forms INC-28, SH-7, PAS-3)
- Both the transferor and the transferee firms must file the INC-28 within 30 days of obtaining the certified copy.
- INC 28 should be accompanied by a copy of the order as well as a declaration of permitted capital.
- The transferor businesses will be dissolved after the form is authorised.
- SH-7 must be filed within 30 days of obtaining the certified copy.
- There is no need for a general meeting, and a copy of the order should be attached to SH 7 in place of the members’ resolution.
- Once the authorised capital has been increased, a board resolution must be approved to consider allocation.
2. Intimations to/ Compliances under Regulatory Authorities like RBI etc.
- Income tax: Transferor enterprises must notify the relevant officials of the mergers by submitting a copy of the order. They should request that the file be transferred to the officials of the transferee company by the appropriate officers. Furthermore, transferor firms should relinquish their PAN cards and notify the TDS officers, as well as apply for the deletion of the TAN number and the transfer of TDS.
The transferee company must notify the relevant officer of the merger by filing a copy of the order. If the amalgamating company has unabsorbed loss or cumulated business loss, the transferee company must meet the requirements set out in Sections 2(1)(b) and 72A of the Income Tax Act of 1961 in order to profit from it.
- GST: It should be emphasised that the transferor and transferee firms will continue to exist as distinct entities until the NCLT issues its ruling. In addition, transferor firms must apply for the surrender of their registration certificates as well as the transfer of the unutilized cenvat credit to the Transferee Company.
- RBI: If the Transferor Company, Transferee Company, or both are NBFCs, a copy of the order will be served.
- Treasury under the Stamp Act: In the case of the transfer of immovable property/ies from the Transferor Company to the Transferee Company, a stamp duty of 0.05 percent is levied.
3. Aspects related to Accounting
The following are examples of post-merger accounting compliances:
- Changing the immovable properties;
- Assets are transferred into the name of the Transferee Company.
- The transferor firms’ bank accounts should be transferred to the transferee company.
- Debtors must be informed of the merger.
- Changes to the arrangements entered into by the transferor firms, such as leases, rental agreements, and so on;
- Depositories must be informed when shares, securities, or mutual funds are transferred in the name of the Transferee Company.
- After contacting the government authorities, transfer any licenses to the Transferee Company.
- In terms of obligations, loan financiers and creditors should be notified of the merger. Maintain a record of any pending lawsuit, as well as any contingent obligations.
- Please keep in mind that the assets and liabilities of the Transferor Companies will be transferred in the books of accounts as of the designated date, necessitating a restatement of the Transferee Company’s financial statements. Adjustments will be made in the Transferee Company’s books to account for any differences in the accounting policies used by the Transferor Companies and the Transferee Company. It is recommended that the transferee corporation submit an amended Income Tax Return.
Post-merger compliance is critical in order to achieve the intended results following the merging of two firms. You should guarantee that such compliances are carried out on schedule and with sufficient care so that the combined business achieves the intended objectives. As stated at the outset of this article, firms may merge for a variety of reasons, including achieving economies of scale, increasing market share, gaining technological expertise, and so on. If the merger procedure and subsequent compliances are not carried out in a planned manner, the merger’s goal may be failed.
Since then, the RBI has used a stringent enough procedure to evaluate the financial stability of amalgamating/merging organisations like private banking firms, public-sector banks, and NBFCs (unlisted or listed). In light of the current cases and instances in the Indian financial sector, the RBI has already decided to operationalize ‘unified departments for supervision and regulation’ of commercial banks, urban co-operative banks (UCBs), and non-banking financial companies (NBFCs), which will take effect on November 1, 2019.