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Merger and Acquisitions Services | June 16

In any scheme of merger and amalgamations, these two concepts play a very crucial role. “Appointed date” is the date which is determined by the Board of Directors of the concerned company or is directed by the High Court. It is the date on which it deems the scheme to be operative after sanction of the same by the High Court. Whereas, the “Effective Date” is a date which the concerned companies mutually agree. They mutually agree on a date on the last of the dates or post the last of the dates on which all the conditions and matters such as approvals from High Court and regulatory authority and a copy of High Court order being filed with the respective Registrar of Companies”. 


The effective date denotes the date when the scheme was/is sanctioned by the NCLT or relevant authority under the 1956 Companies Act. Also included the filing of relevant documents of the scheme with the Registrar of Companies. As per Section 232(6) of the Companies Act, 2013 which allowed the companies, party to such a scheme to choose an appointed date which was confused with an event-based date, the ‘effective date’ prevalent in other schemes of similar nature. 


However, an irony persisted as the ‘appointed date’ of the scheme could be a retrospective date on which the parties agreed to the scheme post-adjudication by relevant authorities.

The language of the section brewed confusion between directors and NCLT, as in marking objections if the appointed date did not specify a particular date on a calendar year. Betwixt such confusion there were several polarising views taken by courts in India. First, the Supreme court in 1996 in the case of Marshall & Sons v ITO [233 ITR 890], it opined that it was necessary to provide a date from which such a scheme shall be operative, and such date may precede the date of sanctioning of the scheme by the court and filings of necessary documents with RoC. The effect of such a scheme was to be shown from the transfer date itself (appointed date).


 In Equitas Finance Limited v. CIT (2016), Madras High Court provided flexibility to the companies in delaying the effect of such schemes by tying it to an event and its happening. In toto, the high court did not accept that it shall specify the appointed date within a calendar. This confusion reached its brim in the Pipeline case before NCLT Mumbai, where it stated that the appointed date shall be the date in which the valuation of the demerged business occurred (1 July 2018). NCLT Mumbai sanctioned the plan in December 2018, hence making the appointed date precede the sanctioned date. Following this weak precedent, several other schemes had their appointed dates either ahead or behind the sanctioned date, and parties faced backlash by the court and were told that fixing of such dates among themselves was arbitrary and lacked justifications.

In the wake of these ongoing confusions MCA in its General Circular 9/2019 clarifies this confusion, the confusion was settled via pointers which cleared the air in the following terms:

1.     The appointed date can be a date specified on a calendar or it may also be tied to the occurrence of a certain event. E.g. Grant of Licenses, Transfer of assets, etc. 

2.     If the appointed date is specifically mentioned it may precede the date of sanction of such a scheme by the Court/NCLT. In case the appointed date precedes the filing date before NCLT, for over a year, proper and reasonable justification is to be provided.

3.     If the Appointed date is based on an event, such an event shall be specified within the scheme pending approval by NCLT, And if such date is after the filing of the order with the RoC, intimation shall be given 30 days prior to it coming into force.

4.     The appointed date shall be the date of transfer of control to conform to Indian accounting standards, tax considerations, etc. 


Although the circular brought an air of respite for companies looking to merge, it also carries plenty of implications within. As there cannot be different appointed dates within a single scheme of M&A, now contracting companies shall be more careful in fixing a mutually workable date and need to weed out risks and potential blockades under various laws. E.g. Competition Act, Income Tax Act, etc. 

Also, flexibility in having appointed date as an event-based date, it means the scheme will now only be effective post the acceptance and sanction of plans by NCLT, filings with RoC. Hence, the operations and profits generated with the interim period between these two dates shall be because of the transferee company. In spite of knowing that the transferor company is carrying out business on behalf of the transferee in the interim period. As there would be no profits attributable to the transferor, the BoD of such a company may shy away from declaring dividends on shares during the interim period. There are also tax and accounting liabilities that would be incurred by the transferee company which could nullify the scheme of the arrangement entered on various grounds. 

These implications would need a fresh set of eyes to be looked upon and inspected with great care and caution. However, the MCA circular clarifying the same and providing flexibility to the companies to make the appointed date a specific date or an event-based date is surely appreciated.

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