A highly lengthy and time-consuming court-based process for corporate restructuring in India was established under the previous Companies Act, 1956 (1956 Act). To make corporate restructuring in India seamless and effective, realistic adjustments in the Arrangements process were required. In light of this, in the Companies Act of 2013 (2013 Act) the provisions pertaining to Fast Track Demergers (‘FTD’) were brought into force on 15 December 2016. Section 233 under the Companies Act, 2013 lays down the Fast Track Demerger process.
Eligibility for Fast Track Demergers under Companies Act, 2013
As per Section 233 of the Companies Act, 2013, the eligibility for FTD in India applies to below types of companies:
- Small enterprises
- Holding companies and their fully owned subsidiaries
- Startup companies
- Startups and small businesses.
Advantages of Fast Track Demergers
A FTD has obvious benefits for business restructuring, most prominent ones are as under:
- Faster approval- The first and most essential benefit is that a FTD procedure makes approval quicker, simpler and easier as compared to Tribunals / Courts.
- Suitable for small sized businesses- FTD helps small and medium-sized businesses and group firms with corporate reorganization.
- Reduced Burden- Since no NCLT involvement is there, the burden is less an account of following:
- There is no need for public advertising.
- Consents from the creditors is not required in the form of an affidavit accompanied with a Board Resolution. For Indian residents, consent on their letterhead received over an email or through post will suffice. While for foreign residents, the consent may be required to be apostilled and received over email or through post.
- Administrative burden is less in terms of not having to file separate first motion and second motion petitions and obtaining consents from the Income Tax department.
- This method provides for speedier resolution of issues and eliminates the need for separate RBI / IT approval
- Cost effective- In comparison to a traditional Demerger procedure, it is rather inexpensive.
Fast Track Demerger vs. NCLT Route: Key Procedural Differences
Key procedural differences between the corporate restructuring undertaken under FTD and NCLT route are as under:
| Particulars | Fast Track Demerger | Demerger through NCLT route |
|---|---|---|
|
NCLT Approval |
No Mandatory approval of NCLT is required |
Mandatory approval of NCLT is required |
|
Public Advertisement |
No Need of Issuing Public Advertisement |
Need of Issuing Public Advertisement |
|
Court Convened Meeting |
No Court Convened Meeting |
Court Convened Meeting having expenditure between 5 to 7 Lakhs. |
|
Administrative Burden |
Less Administrative Burden |
More Administrative Burden |
|
Series of Hearing |
Series of Hearing be avoided |
Series of Hearing can’t be avoided |
|
Cost |
Costs for convening creditors meetings will be minimal |
Costs for convening creditors meetings and advertisements will be approx. INR 5-7 lacs per meeting |
|
Time |
4 to 5 Months |
11-12 Months |
The Bigger Question- Is it worth to choose FTD over the NCLT route?
The Select Committee on Income-Tax Bill, 2025 in its report to Lok Sabha against the suggestion of FTD’s being granted an explicit tax neutrality in the Income Tax Bill, has submitted Ministry’s response as under:
- There is no omission per se. The provisions are in line with the present IT Act, 1961.
- Fast track mergers are non-court monitored and therefore the valuations thereof can result in tax implications or avoidance.
- Hence tax neutrality was never provided to such demergers.
- Section 233 of the Companies Act is therefore not included in the definition of demerger.
Though the above response seems to be completely at odds with the legislative intent expressed by the Finance Minister in the Budget speech, which emphasized simplifying and widening the scope of fast-track mergers, few points that emanate from the above response:
- There could be increased litigation, particularly with the FTD’s that have already happened or those that are ongoing, as the Ministry’s response states that the provisions are in line with the present IT Act, 1961.
- The response could make the FTD’s unattractive and defeat the very intent of introducing fast track process in Companies Act, 2013 as tax neutrality in FTD seems to have been diluted.
- Will a Fast-Track merger (as opposed to a demerger) would still continue to enjoy exemption given that the current IT Act, 1961 only refers to Section 230 to 232 of Companies Act, 2013 for demerger and not for ‘amalgamation’.
- Capital gains arising on transfer from HoldCo to WOS and vice versa are non-taxable subject to certain conditions. Will this hold good for transfers happening between HoldCo and WOS under the FTD’s?
- There could be increased litigation, particularly with the FTD’s that have already happened or those that are ongoing, as the Ministry’s response states that the provisions are in line with the present IT Act, 1961.
- The response could make the FTD’s unattractive and defeat the very intent of introducing fast track process in Companies Act, 2013 as tax neutrality in FTD seems to have been diluted.
- Will a Fast-Track merger (as opposed to a demerger) would still continue to enjoy exemption given that the current IT Act, 1961 only refers to Section 230 to 232 of Companies Act, 2013 for demerger and not for ‘amalgamation’.
- Capital gains arising on transfer from HoldCo to WOS and vice versa are non-taxable subject to certain conditions. Will this hold good for transfers happening between HoldCo and WOS under the FTD’s?
Strategic Consideration
While the FTD route aligns with efficiency and cost-saving goals, it currently lacks tax clarity, which:
- Undermines confidence in its long-term viability;
- Exposes companies to post-transaction tax risk;
- Could potentially nullify the economic benefit of choosing the FTD.
Until the Income-tax Bill, 2025 includes specific tax neutrality provisions for FTDs, the NCLT route remains the safer, though more cumbersome, option—especially for high-stakes transactions or when investor comfort in mergers is essential.
Recommendations for Using Fast Track Demergers
Companies may:
- Use FTDs for low-value internal transfers / restructures or when tax impact is nil / minimal.
- Opt for NCLT route for high value / complex deals, or when tax exemption is essential (e.g., spin-offs, high-valuation mergers).
- While amalgamations might still qualify if the substance of the transaction matches the legal requirements (e.g., 100% shareholding continuity, etc.), the lack of NCLT monitoring may weaken the case in assessment or appellate forums.
- Engage early with tax advisors and possibly seek tax rulings where ambiguity is high.
Shrey Aggarwal
A Chartered Account by profession with over 12 years of experience and demonstrated history of working in transaction advisory and serving MNC's Currently Additional Director in the Tax And Regulatory Services practice at Coinmen Consultants LLP
