Flipping and reverse flipping – Flipping refers to shifting ownership to foreign holding entity, making the Indian firm a wholly owned subsidiary. Reverse flipping, as the name suggests, refers to the merger of foreign company that was originally incorporated overseas and has its major operating subsidiary  in India, also known as “Internalization.”

Due to various benefits such as easy access to capital through IPO, better valuation in Indian market and India’s flourishing economy, the trend of reverse flipping has been fuelled whereby several companies are shifting their domiciles back to India from overseas jurisdictions. Consequently, there has been a significant increase in the occurrence of inbound mergers.

Prominent cases of successful reverse flipping include companies like Pine Labs, PhonePe, Groww, etc. Further, Zepto has recently secured the order from National Company Law Tribunal (“NCLT”) for its Inbound merger.

Legal framework prior to the amendment :

Section 233 of the Companies Act, 2013 (“CA, 2013”) read with Rule 25 of CAA Rules, 2016 (effected from 15 December, 2016) provides alternate route of merger or amalgamation i.e. Fast track merger (without the intervention and approval of NCLT) of certain companies which inter alia includes merger of holding company and its Wholly Owned Subsidiary (“WOS”), two or more small companies, and other class(es) of companies.

Subsequently, on 13 April, 2017 Section 234 of CA, 2013 read with Rule 25A of CAA Rules, 2016 has been introduced to enable cross border mergers i.e. merger of a foreign company into an Indian Company (Inbound merger) or merger of an Indian company into a foreign Company (Outbound merger) subject to fulfilment of certain requirements [including requirement of prior approval of Reserve Bank of India (“RBI”)] of CA, 2013 and CAA Rules, 2016.

Further, RBI has notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, as amended (“FEMA Cross Border Merger Regulations”), on March 20, 2018, to address the gaps in the existing framework from a foreign exchange control perspective. As per the Regulation 9(1) of the said Regulations, merger transactions in compliance with these regulations shall be deemed to have been approved by RBI, and hence, no separate approval should be required. In other cases, merger transactions should require prior RBI approval.

Rule 25A of CAA Rules, 2016, was further amended on 30 May, 2022 where Sub-rule (4) was added requiring filling of a declaration in Form CAA-16, in case of merger or demerger between an Indian company and foreign company situated in a country which shares land border with India.

Regulatory Regime – Amendment :

The Ministry of Corporate Affairs (“MCA”) vide its Notification dated September 09, 2024 (effective from September 17, 2024) has amended the CAA Rules, 2016. New sub-rule (5) has been incorporated in Rule 25A of CAA Rules, 2016.

In case of merger of transferor foreign company incorporated outside India being a holding company and the transferee Indian company being a WOS incorporated in India (herein after referred as (“Reverse Flipping”), the following provisions need to be complied :

1. Both the companies (i.e., foreign holding company and Indian WOS Company) shall obtain the prior approval of RBI;

2. The transferee Indian company shall comply with the provisions of section 233 of the CA, 2013 (provisions of fast track merger);

3. The application shall be made by the transferee company i.e., Indian WOS to the Regional Director (“RD”) under section 233 of the CA, 2013; and

4. The declaration in Form CAA-16 (for countries sharing land border with India) shall be made at the stage of making application under section 233 of the CA, 2013.

Analysis :

1. Is Fast-Track merger route becoming mandatory especially in case of inbound merger of foreign holding company and Indian WOS Company? :

The language used in newly introduced sub-rule 5 of Rule 25A of CAA Rules, 2016 denotes that reverse flipping through inbound merger (i.e., merger of foreign holding company and Indian WOS Company) can only be undertaken through fast-track merger route and not through NCLT route. The word used “Shall” indicates that companies doing reverse flipping must apply under fast track merger route to undertake inbound merger.

However, section 233(14) of CA, 2013 states that “A company covered under this section may use the provisions of Section 232 for the approval of any scheme for merger or amalgamation.”. Accordingly, a joint reading of section 233(14) of CA, 2013 read with Rule 25A(iii) of CAA Rules, 2016 give rise to a contradiction. Literal interpretation of Rule 25A(iii) states that Fast-track merger route is mandatory while Section 233(14) of CA, 2013 itself provides an option for NCLT route.

It is a well-established legal principle that rules are formulated on matters permitted by the act, to supplement it and not supplant it, cannot be inconsistent with the act. Further, when a rule is in conflict with a statute, the provisions of the statute shall prevail.

Accordingly. It may be said that CAA Rules being delegated legislation cannot supersede the principal legislation and therefore Reverse Flipping i.e., merger of foreign holding company into Indian WOS can be undertaken through NCLT route as well.

While the interpretation of word ”shall” and “may” may allow companies the option to choose route of merger i.e., fast-track merger or traditional NCLT route, MCA should provide appropriate clarification in this regard.

2. Requirements of RBI Approval :

The newly introduced sub-rule (5) of Rule 25A of CAA, 2016 provides that transferor entity being foreign holding company and transferee entity being Indian WOS shall obtain prior approval from RBI to undertake inbound merger. The use of the word “Shall” denotes mandatory requirement of prior RBI approval in case of reverse flipping through inbound merger under fast track route.

However, Regulation 9(1) of FEMA Cross Border Merger Regulations states that “Any transaction on account of a cross border merger undertaken in accordance with these Regulations shall be deemed to have prior approval of the Reserve Bank as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016.”.

In view of the above, It is evident that Regulation 9(1) of FEMA Cross Border Merger Regulations provides that mergers that meet the requirements of the said Regulations are automatically deemed approved by the RBI and no separate prior RBI approval is required under Rule 25A of CAA Rules, 2016.

Therefore, it may be reasonably said that separate prior RBI approval may not be required even in case of fast-track inbound mergers in case of reverse flipping as mentioned in Rule 25A(5) of the CAA, 2016, provided they comply with the requirements of FEMA Cross Border Merger Regulations.

One must wait and see whether applications to be filed for Reverse Flipping will be sanctioned based on deemed RBI approval as stipulated under Regulation 9(1) of FEMA Cross Border Merger Regulations going forward, or any corresponding amendments that may be introduced under exchange control regulations.

Implications of Amendment in case of cross border Inbound mergers :

Scenario Number	Transferor Entity	Transferee Entity	Available Route for merger process	Deemed RBI approval as per Regulation 9(1) of FEMA Cross Border Merger Regulations
1	Foreign subsidiary	Indian holding company	NCLT (Section 230-232 read with section 234 of CA, 2013 and read with Rule 25A of CAA, 2016)  [Fast-track merger route is not  available]	Available
2	Foreign WOS	Indian holding company
3	Foreign holding company	Indian subsidiary
4	Foreign holding company	Indian WOS	Fast-track merger route (Section 233 read with section 234 of CA, 2013 and read with Rule 25A(5) of CAA, 2016) [Arguably, traditional NCLT route option is available - Section 233(14) read with Rule 25A(5) of CAA Rules (as discussed above)]	Arguably, available (as discussed above)

Conclusion :

While the amendment made to the Rule 25A of the CAA Rules, 2016 (vide MCA notification dated September 09, 2024) opens the door for fast track merger of foreign holding company into Indian WOS thereby providing ease of reverse flipping for companies (specifically incorporated holding company in overseas jurisdictions) contemplating to shift their bases back to India from overseas jurisdictions, the same may attract controversy on certain legal and regulatory aspects such as requirement of prior RBI approval and availability of traditional NCLT route for such mergers, etc.