National Company Law Tribunal (NCLT), Mumbai Bench, has approved the amalgamation of Elegare Beauty Private Limited and IDAM Natural Wellness Private Limited in accordance with Sections 230 to 232 of the Companies Act, 2013. The approval enables the two companies to unify their operations in skincare, personal care, beauty and wellness products into one entity.
The NCLT observed that the proposed scheme is reasonable, not unreasonable or against any law and policy of the country. In addition to this, it also recorded that the observations made by the Regional Director, Registrar of Companies and Official Liquidator have been addressed sufficiently by the applicant companies.
Nevertheless, the approval of the NCLT will not bar the Income Tax Department from investigating and acting upon the tax liabilities in case it is found that the scheme of amalgamation leads to tax avoidance. The appointed date in the scheme is 1 January 2024.
About Elegare Beauty and IDAM Natural Wellness
Elegare Beauty Private Limited is a company dealing in the skin care and body-care products industry. IDAM Natural Wellness Private Limited are involved in a wider spectrum of products such as toiletries, perfumery, skin care and wellness products.
The companies suggested amalgamation to boost its market strength and operational efficiency. The logic behind the scheme was that consolidation would allow them to make more effective use of their resources and capital in the future as well as cutting down on the administrative burden of having separate corporate bodies.
The intention of the merger is to combine the businesses under one corporate roof. This can help to facilitate cross-functional cooperation within operations, optimise resources and provide potential for addressing overlapping customer bases with a broader product mix.
The commercial argument for the amalgamation was that these benefits would be offered by the applicant companies. The Tribunal’s job was to look at the scheme within the legal framework and not ensure that there would be a specific business outcome.
Why Was the Merger Proposed?
The companies listed a number of predicted advantages of the merger.
Improved Operational Efficiency
There may be some duplication of administration and support functions which can be minimised through the combination of the businesses. It is also more convenient to co-ordinate business activities, manage resources and plan business strategies under one corporate structure.
Increased efficiency of capital and resources used.
The companies said that the merger would enable them to utilise the capital more effectively for their business development and growth. It could be that the fusion of resources could enable the merged business to run its activities in a more coordinated way.
Stronger Market Presence
The companies sought the newly formed company to have a larger market area, to expand its market share, and to provide a range of products to customers in comparable market segments. Skincare, body care, perfumery and wellness products can also be combined for opportunities to expand products.
Reduce administrative and compliance expenses
It requires corporate paperwork, statutory compliance, and other administrative tasks to keep separate legal entities. The plan was to make the costs of several entities lower and the corporate structure simpler.
Employee and Stakeholder Benefits
The companies presented that it would be helpful to employees to be integrated into a common organisational structure in order to provide opportunities for collaboration and professional development.
They also said that the combination would not harm the interests of shareholders, creditors and employees. The regulatory observations made during the Proceedings are provided below. The regulatory observations made during the Proceedings are as follows.
Regulatory Observations Raised During the Proceedings
The companies responded with clarifications and undertakings to these concerns.
Authorised Share Capital Fees
The authorities brought to the notice of the companies that for adjusting any fees paid on the authorised share capital of the transferor company, the requirements of Section 232(3)(i) of the Companies Act, 2013, are applicable against such fees payable by the transferee company after amalgamation.
The companies agreed to follow the provisions and said that if there was any difference in fees because of a change in their authorised share capital, they would pay the difference where applicable.
Accounting Standards
The Regional Director also inquired about conformance with the relevant accounting standards. IDAM Natural Wellness was put on the job of making the required accounting entries in respect of the scheme and meeting those accounting requirements. The accounting treatment is crucial for ensuring the financial effects of the amalgamation are accurately represented in the company’s financial records.
Statutory Notices and Regulatory Compliance
The companies stated that they had issued notices to the relevant authorities as per Section 230(5) of the Companies Act, 2013. They also agreed to follow directions issued by regulatory authorities that are applicable. The Tribunal noted that the explanations/clarifications were acceptable and the observations made by the authorities were responded to.
Protection of Creditors and Employees
An important factor in a merger is that the employees and creditors are not unfairly prejudiced as a result of the restructuring. Under the scheme, the creditors and employees of Elegare Beauty would become creditors and employees of IDAM Natural Wellness, the companies said.
IDAM Natural Wellness assumed the obligations and assumed the liabilities under the relevant section in accordance with the custom of business. It further said that the amalgamation would not lead to the reduction of the rights and claims of creditors.
These undertakings were taken into account by the Tribunal in considering the scheme. The approval was granted following the Tribunal’s finding that the relevant observations were satisfactorily responded to. By approving the scheme, the companies do not waive any responsibility to fulfil their obligations or any requirements relating to employment and creditors.
Income Tax Implications of the Amalgamation
A corporate amalgamation’s tax treatment is a key component of the approval process. The applicant companies submitted that the scheme is in compliance with Section 2(1B) of the Income-tax Act, 1961 and they will adhere to the relevant provisions and rules of tax.
The NCLT, however, has spared the Income Tax Department from looking into any tax payable under the scheme. In the event the tax authorities deem that the amalgamation ultimately leads to tax avoidance under the Income-tax Act, the tax authorities have the right to take appropriate measures in accordance with the law.
This clarification is important as it clarifies that an NCLT sanction does not per se resolve all the tax issues that may arise due to corporate restructuring. Companies are required to continue to meet any applicable tax laws, to keep supporting documentation and to respond to any valid tax assessment or inquiry. The Tribunal’s decision, therefore, cannot be taken as a general permission not to pay tax.
Appointed Date and Compliance Requirements
The appointed date for the scheme is 1 January 2024. It is the date mentioned in the scheme as the date upon which the amalgamation will become effective for all purposes under the pertinent legal regime. Direction for filing of documents following approval was issued by the Tribunal.
The applicant companies have been directed to file a certified copy of the NCLT order together with the scheme before the Registrar of Companies electronically through Form INC-28 along with a physical copy within 30 days from the receipt of the order.
They have also been directed to file the certified copy of the order and scheme before the Superintendent of Stamps concerned for determination of stamp duty within 60 days from the receipt of the certified order. The companies need to adhere to the above direction and perform all other statutory acts necessary for implementation of the scheme.