The Ahmedabad bench of the National Company Law Tribunal ("NCLT"), in its recent ruling in the matter of Sun Pharmaceuticals Industries Limited, has introduced a rather contentious interpretation of Section 234 of the Companies Act, 2013 ("Act") and the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 ("FEMA Regulations"). In a nutshell, the NCLT has held that in the absence of an express provision, the Act and the FEMA Regulations do not envisage (and in fact restrict) demergers of an Indian company into a foreign company.

Considering that the current Government has remained keen on taking measures to facilitate the ease of doing business in India, it becomes imperative to assess whether the absence of an express provision in the Act and the FEMA Regulations, contradicts the Government's intention to facilitate cross border transactions. Until now, and more importantly, on account of the Act having specifically allowed outbound cross border mergers, permissibility of cross border demerges were never considered to be in the realms of uncertainty.

Factual Matrix

Sun Pharmaceutical Industries Limited ("Sun Pharma") had filed a petition under Sections 230, 232 and 234 of the Act with the NCLT to seek sanction of the scheme of arrangement passed by its board of directors to demerge two of its specified investment undertakings, on a going concern basis, to its two overseas direct / indirect wholly owned subsidiaries (collectively, "Transferee Companies" and the demerger being "Proposed Demerger"). The Proposed Demerger sought to consolidate the holding structure of the overseas direct and indirect wholly owned subsidiaries of Sun Pharma.

Being a listed entity, Sun Pharma had obtained prior approval of the SEBI before filing the scheme for the Proposed Demerger with the NCLT. Given that the Transferee Companies were foreign companies, Sun Pharma had also provided an undertaking to the RBI that it would undertake the Proposed Demerger in compliance with all applicable foreign exchange laws. As such, the construct of RBI's deemed approval under the FEMA Regulations was squarely applicable to the Proposed Demerger.

Considering that the Transferee Companies were Sun Pharma's wholly owned subsidiaries, neither did the Proposed Demerger involve any fresh issuance of shares nor did it contemplate payment of any consideration by either of the Transferee Companies to Sun Pharma.

NCLT's View

Surprisingly, the NCLT adopted a rather regressive approach, inconsistent with the rationale espoused in its previous ruling where it permitted inbound cross border demergers1, while examining the applicability of Section 234 of the Act to the Proposed Demerger and noted the following:

(i) Section 234 of the Act uses the terms 'merger' and/or 'amalgamation' but it does not incorporate the terms 'compromise' and/or 'arrangement';

(ii) the term 'demerger' was eventually removed from the definition of 'Cross Border Merger' from the draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017; and

(iii) Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 only specify the procedure and the requirements in relation to cross border mergers, but it does not spell out the procedure for demergers and refers only to mergers and amalgamations.

Accordingly, the NCLT held that the absence of an express provision permitting cross border demergers would mean that neither the Act nor the FEMA Regulations permit demerger of an Indian company into a foreign company. Further, the exclusion of the term 'demerger' from the FEMA Regulations, was seen by the NCLT as an affirmative action by the legislators to remove cross border demergers from the ambit of the FEMA Regulations.


Until now (and even as per the erstwhile regime under the Companies Act, 1956), inbound cross border demergers were allowed pursuant to Section 394(1)(b) of the Companies Act, 1956 (which corresponds to Section 232(1)(b) of the Act). However, the NCLT literally interpreted the Act and the FEMA Regulations to preclude inbound as well as outbound cross border demergers.

Given that the enactment of the Act has been regarded as a progressive step, a literal interpretation to preclude arrangements which were previously permitted is an unwelcome move by the NCLT.

Further, the argument regarding deletion of the term 'demerger' from the FEMA Regulations to hold that the intention was to preclude demergers from the scope of the FEMA Regulations is inherently inconsistent with the previous rulings of the NCLT as it fails to recognise that that the definition of 'cross border merger' under the FEMA Regulations provide for an all-inclusive term 'arrangement'. As such, any interpretation to suggest that demergers do not fall within the purview of Section 234 of the Act can only be considered as being a hair-split argument and atomistic in approach.

It would be safe to say that the view adopted by the NCLT in the instant case has kindled a debate which until now was considered non-existent and thus, can only be regarded as a departure from the intent of the law. NCLT's view seeks to delimit the scope of an otherwise liberal legislation which was specifically enacted to bring the Indian corporate law up to speed in the wake of globalization.

Needless to mention that the regressive stance adopted by the NCLT on this case may also lead to several unwarranted ambiguities while interpreting the otherwise enabling framework on amalgamations and arrangements under the Act.

That said, it appears that companies will have no choice but to resort to alternative methods of restructuring unless cross-border demergers are permitted by an appellate forum (or an unnecessary amendment to the Act is made). It is yet to be seen whether another bench of the NCLT will take a different view, especially given that a company could demerge the business into another Indian company and then merge the matter with a foreign company under Section 234 of the Act, which would be allowed given the reasoning of the NCLT.


1 The order passed by the Ahmedabad bench of the NCLT on 31 October 2018 wherein it approved demerger of a specified undertaking of Sun Pharma Global FZE, incorporated under the provisions of United Arab Emirates, with Sun Pharma.

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