India: The Appointed Date Conundrum Resolved!

Ministry of Corporate Affairs ("MCA") provided clarification on the interpretation of Section 232(6)[1] of Companies Act, 2013 ("Companies Act") by way of a circular[2].

The circular has cleared air on whether (i) the 'appointed date' in schemes of amalgamation/arrangement ("Scheme") has to mandatorily indicate a specific calendar date or not; and (ii) the 'acquisition date' for the purpose of Ind-AS 103 (Business Combination)[3] would be the 'appointed date' as referred under Section 232(6) of Companies Act.

Every merger has and has to have a specific date called 'Appointed Date' or 'Transfer Date'. Likewise, every merger also has 'Effective Date'. Whereas the former denotes the date on which the amalgamation takes place or, in other words, the property, assets and liabilities of the merging company (the transferor-company) vest in and are transferred to the merged company (the transferee-company), the latter denotes the date on which the merger is completed in all respects after having gone through the formalities involved, and the merging company is dissolved by the Registrar of Companies ("RoC"). Both these dates are crucial in many respects, including, for purposes of the Income-Tax Act, 1961 and in particular the assessment of income of the two companies under that Act.[4]

The former date is usually anterior to the date of presentation of the scheme of amalgamation to the court, mostly the one on which the current financial year of the two or one of the two companies has begun. This is the date on which the transfer of the undertaking of the transferor-company to the transferee-company is stated to take place. The latter is a future date and is generally a date on which a copy of the High Court's[5] order sanctioning the amalgamation would be filed with RoC. With that the process of amalgamation is completed and transferor-company is dissolved.[6]

Some illustrations of how the term 'Appointed Date' is defined under Schemes are as under:

'Appointed Date' means the 'Effective Date'; or

'Appointed Date' means 'dd/mm/yyyy'.

This circular gives clarity on what can be specified as the 'appointed date' in the Scheme.

Background

The language of Section 232(6) of Companies Act created a confusion wherein the Regional Director and the National Company Law Tribunal ("NCLT") would occasionally flag objections in the event if the term 'appointed date' did not mention a specific calendar date in the Scheme.

For instance, recently in the matter of the scheme of demerger amongst Century Textiles and Industries Limited and Ultratech Cement Limited, the Regional Director[7] made an objection in its report regarding the appointed date not being specifically specified in the scheme of demerger. To overcome this objection, the petitioners had to modify the scheme of demerger by providing a specific calendar date as the appointed date.

Due to such an interpretation being given to Section 232(6) of the Companies Act, the MCA received several queries which it has addressed by way of the circular. It has relied on the rulings of the Hon'ble Apex Court in Marshall Sons & Co. India Limited v. ITO (223 ITR 809) and the Hon'ble Madras High Court in Equitas Housing Finance Limited and Equitas Micro Finance Limited with Equitas Finance Limited in C.P. Nos. 119 to 121 of 2016 as the basis for its clarification.

Summary of the clarification

1. The 'appointed date' can be a specific calendar date or be tied to the occurrence of an event e.g.: grant or transfer of licenses, fulfilment of conditions precedent etc. (prospective date).

2. If the 'appointed date' is a calendar date, it may precede the date of filing the application for the Scheme before the NCLT.

3. If the 'appointed date' is predated by a year or more from the date of filing the application with NCLT, justification should be provided for the same in the Scheme and it should not be against public interest.

4. If 'appointed date' is based on occurrence of an event, the said event should be specifically identified in the Scheme upon the occurrence of which the scheme would become effective. If the event based date is a date subsequent to the date of filing the order with the concerned RoC under Section 232(5) of the Companies Act, the concerned company shall file an intimation of the same with the RoC within 30 days of such Scheme coming into force.

5. The 'appointed date' shall also be the 'acquisition date' and date of transfer of control for the purpose of confirming to Indian Accounting Standards 103.

Implications

1. Greater flexibility has been given to the applicant companies to devise their Scheme and manage their business considerations and legal requirements.

2. The circular does not take into account a situation where the 'appointed date' is a date after the date of filing the application with the NCLT. The circular states as under:

'Where the 'appointed date' is chosen as a specific calendar date, it may precede the date of filing the application for the scheme of merger/amalgamation in the NCLT.' (emphasis supplied)

Although the word "may" has been used, there is an apprehension that the concerned authorities would take a narrow view and object the applicants from electing a specific calendar date which is after the date of filing the application with the NCLT. One may counter this by drawing an analogy with event based dates which are prospective in nature and post filing of applications.

3. If the appointed date is an event based date and where such an event occurs post the date of filing the order with the concerned RoC, the circular also does not clarify which e-form needs to be filed by the applicant companies for intimating the RoC that the Scheme has come into force.