Significance of appointed date in case of Merger and Amalgamation of Companies in light of the recent circular issued by MCA
Section 232(6) of Companies Act, 2013 specifies that the scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.
The language of Section 232(6) of Companies Act, 2013 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' is not mentioned as a specific calendar date in the Scheme.
For instance, in the matter of Equitas Housing Finance Limited and Equitas Micro Finance Limited (“Transferor Company)with Equitas Finance Limited (Transferee Company) in C.P. Nos. 119 to 121 of 2016, the Hon'ble Madras High court has rejected the argument and advised in its order to mention the appointed date in the scheme as a specific calendar date. To comply with the order of Hon'ble Madras High court the petitioners (Transferor and Transferee Company) had to modify the scheme of Amalgamation 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,2013, the Ministry of Corporate Affairs (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 vs. 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.
The Ministry of Corporate Affairs ("MCA") provided clarification on the interpretation of Section 232(6) of Companies Act, 2013 ("Companies Act") by way of a circular. The circular has cleared the air on whether
- the 'appointed date' in schemes of amalgamation/arrangement ("Scheme") has to mandatorily indicate a specific calendar date or not; and
- the 'acquisition date' for Ind-AS 103 (Business Combination) would be the 'appointed date' as referred under Section 232(6) of Companies Act.
Meaning of Appointed date and Effective date:
The appointed date is understood as the date from which the scheme comes into force (and is usually specified in the scheme of arrangement), and the effective date is the date when the amalgamation/merger is completed in all respects after having gone through the formalities involved and the transferor company having been liquidated by the Registrar of Companies, which is, generally on the approval of the NCLT and filing the necessary documents thereof with the Registrar of Companies.
Meaning of Acquisition date:
In pursuant to Indian Accounting Standard 103 (“Ind AS 103”) dealing with “Business Combinations” the acquisition date is the date on which the acquirer obtains control of the acquiree. As per Para 9 of IND AS 103 provides that the date when the acquirer obtains control of the acquiree is generally the date when the acquirer legally transfers the consideration and acquires and assumes the assets and liabilities of the acquiree, which is the closing date.
Difference between appointed date and effective date:
Every merger has and has to have a specific date called 'Appointed Date' or 'Transfer Date'. Likewise, every merger also has an 'Effective Date'. 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 Income- Tax Act,1961.
The difference between both the dates are mentioned below:
|Sl. No.||Appointed date||Effective date|
|1.||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)||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")|
|2.||is the date on which the transfer of the undertaking of the transferor-company to the transferee-company is stated to take place||is generally a date on which a copy of the High Court's order sanctioning the amalgamation would be filed with RoC. With that, the process of amalgamation is completed and transferor-company is dissolved|
Summary of clarifications issued by MCA vide its General Circular No. 09/2019 on 21st August 2019 under Section 232(6) of the Companies Act,2013:
- 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, the fulfillment of conditions precedent, etc. (prospective date).
- If the 'appointed date' is a calendar date, it may precede the date of applying for the Scheme before the NCLT.
- If the 'appointed date' is predated by a year or more from the date of applying with NCLT, justification should be provided for the same in the Scheme and it should not be against the public interest.
- If 'appointed date' is based on the 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 after 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.
- The 'appointed date' shall also be the 'acquisition date' and date of transfer of control to confirm to Indian Accounting Standards 103.
The Ministry has vide the aforesaid Circular dated 21st August 2019 provided requisite clarifications on the issues surrounding the concept of 'appointed date' and the clarification from the Ministry will surely benefit the Industry and the Professionals at large.
This clarification would lead to the harmonization of practices in ascertaining the "appointed date" of merger/amalgamation and provide due clarity on the accounting treatment, thereby allowing stakeholders to align the "appointed date" of merger/amalgamation by following their business considerations or legal requirements. This would also contribute significantly to the ease of doing business.
Disclaimer: The entire contents of this document have been developed based on relevant provisions and are purely the views of the authors. Though the author has made utmost efforts to provide authentic information, however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.