Petition by Frugal Industries Limited (19.12.2019), under a scheme of arrangement under Section 230-234 of the Companies Act, 2013 [in the nature of demerger] was filed before National Company Law Tribunal ("NCLT "), Mum

To XXXXX Frugal Industries Limited Dear Sir, This is to advice that under scheme of arrangement, either in the nature of merger or demerger the Frugal Industries demerged company has to comply with Section 230 to 234 of Companies Act, 2013, international laws applicable to company, such as Swedish Laws, USA laws, RBI, FEMA, Income Tax Act, Compliance with Sectoral Regulations as applicable to the company alongwith SEBI Compliances etc. While going through the provisions of Section 234 it is evident that same applies to cross border mergers of Indian companies with foreign companies and vice versa and the provisions mention only about the words "Merger" and/ or "Amalgamation" so the Section 234 do not provide for or rather restrict the demerger of the Indian Companies with foreign company. In addition to the above, Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is silent on 'Demergers' and mentions only 'Mergers' and 'Amalgamations'. Moreover, Foreign Exchange Management (Cross Border Merger) Regulations, 2018 are applicable to the mergers and amalgamations of the Indian companies with the foreign companies only. For obtention of Prior approval of RBI for undertaking any cross-border merger, the transferee entity to ensure valuation by a valuer and a declaration is required to be submitted by the transferee company along with the application to RBI for obtaining its approval for the merger. Procedure as specified in Section 230-232 of the Act are to be undertaken (like as applicable to a domestic merger. In case of outbound merger, foreign entity involved should be from a permitted jurisdiction. In the Sun Pharma's Scheme of Arrangement NCLT Ahmedabad stated that the Rule 25A is silent on "demergers". The Procedure mentioned in Rule 25A is for Inbound as well as Outbound merger. In absence of clarity over the permissibility of a foreign company demerging its business undertaking to an Indian company or vice versa under the Act, one should not follow the same procedure for cross border demergers. RBI Foreign Exchange Management (Cross Border Merger) Regulations, 2018 defines Cross Border Merger as: 'Cross border merger' means any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013; Interestingly, the notified FEMA Regulations, 2018 has not included word "Demerger" in the definition of Cross Border Merger. Thus, the NCLT rejected the scheme. Section 2(19AA) of the Income Tax Act defines the term demerger as "the transfer of one or more undertakings by a demerged company to another company." One of the conditions of section 2(19AA) is the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger. This section is violated as demerger scheme was approved by majority of equity shareholders. Therefore, taxation benefits available to demerged companies under the Income Tax Act will not be available in this case. Yours Sincerely XXKKXXXXX Company Secretary