Tax clearance necessary for restructuring/ M&A schemes

The Ministry of Corporate Affairs (“MCA”) vide circular dated January 15, 2014^[1] (“Circular”) has mandated all Regional Directors to seek inputs/ comments in all cases of arrangement/ compromise or reconstruction/ amalgamation undertaken in accordance with Section 391-394 of the Companies Act, 1956 (“1956 Act”) from Income Tax Department and other sectoral regulators.  We have, in this alert, summarized the key changes introduced by MCA vide the Circular and the related impact. 

Inputs from Income Tax Department and other sectoral regulators

Prior to the Circular, any scheme of restructuring used to be approved on behalf of the Government by the relevant Regional Director, Department of Company Affairs.  As a matter of practice, the Regional Directors used to only call for reports from the Registrar of Companies, in order to ascertain the compliance with the provisions of the 1956 Act and thereafter, submitted their report to the jurisdictional High Court.  Of course, any party affected by scheme of restructuring undertaken under Section 391‑394 of the 1956 Act had an option to file objections/ make representations to the jurisdictional High Court in response to the general notice given by the company.  However, it was uncommon for the tax department or other regulators to suo motoapproach Courts in such matters.

The Circular issued now requires Regional Directors to issue notice, within 15 days of receipt of notice from the jurisdictional High Court under Section 394A of the 1956 Act, to the Income Tax Department seeking specific comments/ inputs.  In case the Income Tax Department is not forthcoming in its response to the notice issued by the Regional Directors, the Circular provides that it may be presumed that the Income Tax Department does not have any objection to the scheme of restructuring proposed under Section 391-394 of the 1956 Act. 

In case the Regional Directors deems necessary, they may seek feedback from other applicable sectoral regulator(s).  Notices to such other applicable sectoral regulators would also be issued within the aforesaid time limit.  It should also be noted that the Circular does not apply to capital reduction undertaken pursuant to Section 100 of the 1956 Act.  

Reporting by Regional Directors to jurisdictional High Courts

The Circular further states that Regional Directors are not required to decide the correctness or otherwise of the objections/ views of the Income Tax Department or other sectoral regulators.  Regional Directors, as part of their representation, will submit the views of the Income Tax Department/ other sectoral regulators to the jurisdictional High Court.  The Circular further states that in case the Regional Directors have compelling reasons for doubting the correctness of the views of the Income Tax Department/ other sectoral regulators, they must make a reference of the matter to the MCA requesting them to discuss the matter with concerned ministry before filing the representation with the jurisdictional High Court.