The NCLT Chandigarh approved a Scheme of Arrangement[1] involving the demerger of the CRM business of Convergys India Services Pvt. Ltd. (Demerged Company) into Concentrix Technologies (India) Pvt. Ltd. (Resulting Company 1), wherein the consideration for the demerger was issued not by the transferee company but by its foreign parent, Concentrix Services (Netherlands) B.V. (Resulting Company 2), to the foreign shareholder of the demerged company.
During the pendency of the scheme approval, one of the key issue raised was whether this structure complied with Section 232 of the Companies Act, 2013, given that Resulting Company 2, a foreign entity, issued the consideration. The Regional Director and Registrar of Companies had expressed concerns over the validity of this arrangement.
The Petitioner Companies clarified that Section 232 does not mandate that the transferee company itself must issue shares as consideration.
the Tribunal upheld that a parent company of the transferee may legally discharge the consideration, if it aligns with the commercial wisdom of shareholders. Reliance was placed on precedents such as Thomas Cook Insurance Services (India) Ltd[2] and GlobeOp Financial Services (India) Private Limited[3], whereby it was held that,
- It is not that in every case that the consideration for the transfer of an undertaking as part of a scheme of arrangement must come in the form of an allotment of shares of a transferee company or for that matter the scheme must involve allotment of shares. The consideration for such transfer can be any legitimate consideration, which the transferor is entitled to accept for contract of transfer.
- The Scheme may thus not provide for any allotment of shares at all of provide any other appropriate consideration including allotment of shares of a holding company of the transferee company.
- Acceptance of any particular consideration is part of the commercial wisdom to be exercised by the shareholders of the transferor company.
- As long as such consideration is not against public interest or in any other manner illegal or inappropriate, it is not for the company court to accept or reject such consideration
Further, an important aspect was the interpretation of the term “Resulting Company” under Section 2(41A) of the Income-tax Act, 1961, which was essential to assess whether the demerger was tax neutral under Section 2(19AA). The Tribunal observed that the Income-tax Act recognizes more than one resulting company, including a wholly owned subsidiary of a foreign parent. It was noted that Resulting Company No. 1 and Resulting Company No. 2 share a parent-subsidiary relationship, and the scheme’s structure, where Resulting Company No. 1 received the assets and Resulting Company No. 2 issued shares to the shareholder of the Demerged Company, satisfies the definition of a “resulting company.”
Further, as the issuance of shares took place outside India between two foreign entities, the Tribunal held that FEMA/RBI compliance was not triggered, and hence Section 234 of the Companies Act, 2013 and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which deal with cross-border mergers and valuations, were not applicable.
The petition was allowed and disposed of accordingly.
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[1] National Company Law Tribunal, Chandigarh Bench,CP (CAA) 13/Chd/Hry of 2024
[2] Company petition no. 99 of 2015
[3] Company petition no. 641 of 2014
