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The Institute of Chartered Accountants of India (ICAI) has issued new guidelines governing merger and demerger of CA firms. These replace all prior Council rules, and are applicable to firms as defined in Section 2(ca) of the Chartered Accountants Act, 1949.
Gap in law: Partnership Act, 1932 doesn’t cover mergers/demergers; LLP Act, 2008 covers LLPs but not cross-entity situations.
Objective: To promote consolidation, scale and competencies within CA practice, while preserving seniority and name rights.
Practical impact: Pre-2024 rules cannot be relied upon (unless grandfathering clause applies).
Sole proprietorship → can merge with sole/partnership/LLP.
Partnership firm → can merge with partnership/LLP.
LLP → can merge only with LLP (not with sole prop or partnership).
Risk: LLP → non-LLP mergers are invalid.
1. Merger
Form MDG-1: File within 30 days of merger.
Also file: Reconstitution deed with Registrar of Firms/ROC.
Name freezing: ICAI freezes old firm names (s.20B). No professional activity under frozen names/FRN. UDINs for past work must be generated.
Consent planning: 75% of surviving partners must later consent to unfreeze names; retiring/resigning partners must give NOCs.
Authentication: Managing Partner + co-authorized partner authenticate via SSP (OTP).
2. Demerger
Who can demerge? Only firms that previously merged.
When? After 1 year and within 10 years of merger.
Threshold: ≥75% of continuing partners of any one erstwhile firm.
Form MDG-2: Notice to other partners + ICAI.
Effects:
Demerging firm revives; can reclaim old name (frozen) if within 1–10 years.
Seniority = original establishment date + merged years.
Filings: Both merged and demerged firms must file Form 18 under CA Regulations, 1988.
3. Unfreezing Old Name
Form MDG-3: Filed after demerger.
Consent: ≥75% surviving partners + NOCs from retirees/resignees.
Window: Must act within 10 years, otherwise name right is lost.
Disclose s.144 Companies Act restrictions (audit independence).
No audit rotation within merged firms.
Maintain custody of core documents (deeds, staff records, tax/bank files).
UDINs for pre-merger work must be completed.
Merged firm → seniority = oldest establishment date among merging firms.
Demerger → seniority = original establishment + years merged.
Old name use → only after 1 year and within 10 years of merger.
Simple name change (not a merger) → establishment date unchanged; old name frozen for 3 years (with “formerly known as …”).
Verify entity compatibility (LLP→LLP only).
Draft MDG-1 with demerger terms, ≥75% rule, ethics caveats.
File MDG-1 + deed with ICAI/RoF/ROC within 30 days.
Identify Managing Partner + co-authorized partner for OTP.
No professional work under frozen names/FRNs.
Generate all pending UDINs.
Update constitution changes via SSP OTP.
Check 1–10 year window.
File MDG-2 (≥75% continuing partners).
File Form 18 under CA Regulations.
After demerger, file MDG-3 to unfreeze old name.
These guidelines create a formal legal-regulatory pathway for mergers and demergers of CA firms, protect seniority continuity, and regulate firm name freezing/unfreezing. Missed filings, wrong entity pairings, or ignoring the 1–10 year rule can permanently cost seniority or old name rights.
| Form | Purpose | Timing | Key Requirement |
|---|---|---|---|
| MDG-1 | Merger Agreement | Within 30 days | Oldest establishment date, freeze request, demerger terms, OTP authentication |
| MDG-2 | Demerger Notice | After 1 yr, within 10 yrs | ≥75% partners of erstwhile firm, OTP authentication |
| MDG-3 | Name Unfreeze | After demerger | ≥75% surviving partners + NOCs from retirees/resignees |
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