ICA I -WIRC WIRC Presentation - Without... · Co - Reverse Merger. ... Difference between shares issued on merger and share capital of the merging entities ... Merger Post Demerger,

ICAI - WIRC

Speaker – Amrish Shah, Partner, Transaction Tax

19 November 2011

ICAI - WIRC

Case Study on Merger / Amalgamation -Taxation, Accounting and Company law

Contents

► Modes of M&A in India

► Legislative framework of M&A

► Tax & Regulatory aspects

► Case studies

Page 2 ICAI– Mergers & Amalgamation

Modes of M&A in India

M&A

Merger / DemergerAcquisitions

Business Share

Internal

Restructuring


Amalgamation Demerger

Business

Purchase

Share

Purchase

Slump

Sale /

Itemized Sale

Focus on core

business/ sell

non-core business

BuybackCapital

Reduction

Enhancing

stake/ capital

repatriation

Consolidation

of businesses/

entitiesFinancial restructuring/

Enhancing stake/

repatriation

Amalgamation / Merger / Slump Sale

Amalgamation / Merger – Concept

General

► Merger refers to consolidation of two or more entities

► Involves transfer of assets and liabilities from one or more transferor companies to a transferee

company

► In consideration, typically the transferee company issues shares to the shareholders of transferor

company

External

�Acquisitions

�Takeover of a sick

�Tax savings

�Eliminate multiple


Key Drivers

�Takeover of a sick

entity

Internal

�Consolidation of

Operations

�Consolidation of

Promoter holdings

layers of holdings

�Eliminate companies

who have outlived

their utility

�Balance sheet right

sizing

�Automatic Listing of

Co - Reverse

Merger

Slump Sale – Concept

► Involves transfer of identified business from one company to another

► In consideration, the buyer company can issue shares / pay cash to the seller company

► No Court interference - can be achieved through simple shareholder resolution

Slump sale: key aspects

► Useful for disinvestment of non-core

Transaction

Business

A

Business

B

Transferor Co

Transferee Co

Consideration

as shares/ cash

Sale of

business B


► Useful for disinvestment of non-core businesses

► Freedom of structuring consideration as cash/ shares unlike in a demerger

Post slump sale scenario

Transferor Co

(Company A)

Shareholders Shareholders

Transferee Co

(Company B)

Business A Business B

Every M&A action has a Regulatory Reaction

Key

1

25

Exchange control

Implications of cross border merger

Stamp duty

Indian stamp act vs. State stamp act

Valuation of Immovable property

Valuation of shares

SEBI & stock exchange

Listing of shares/ New Co.

Accounting

Indirect tax

Competition act

Other regulations


Key

regulations

34

Companies Act

Condition of section 391 to 394 / High court approval

Approval of shareholders and creditors

Post implementationprocedures

Income tax

Tax neutrality

Step up in tax basis

Transfer of credits, availability of tax exemptions etc.

Issue of shares to non resident on merger

FDI implications

Implications of cross border merger

Take over code implications

Stock exchange approvals

Listing of shares/ New Co.

Merger – Relevant Income Tax Provisions

► Tax neutral – subject to compliance with certain conditions as per Section 2(1B) of the Income-tax Act, 1961 (‘the Act’)

- Transfer of all property & liability of amalgamating company

- Issue of shares to shareholders holding not less than ¾ shares (in value)

► Exempt Transfer – If amalgamation is tax neutral, no capital gains implications under in the hands of:

- Amalgamating Company: Section 47(vi) and Section 47(via) of the Act

- Shareholders of Amalgamating Company: Section 47(vii) of the Act


► Continuation of Tax Benefits

- Undertakings eligible for Section 80(IA) deduction

- Merger during the year – undertaking eligible for Section 10A benefit

► Availability of business losses and unabsorbed depreciation

- Not available to non industrial undertakings

- Compliance with continuing conditions u/s. 72A of the Act

► Deduction of amalgamation expenses

- Available under Section 35DD of the Act

Merger – Relevant Company Law and SEBI RegulationsCompany Law

► Existing law# permits Indian as well as a foreign company to merge into Indian company subject to various approvals and procedures

► Carried out under section 391-394 of the Companies Act, 1956

► Approval by shareholders and creditors constituting majority in number representing 3/4th in value of those present and voting

► Court Approval

► In case of Government Co. – Central Government Approval


# Proposed Companies Bill permits Indian companies to merge into foreign company subject to compliance of prescribed conditions

SEBI

► Open offer is not triggered if shares of target company are directly or indirectlyacquired pursuant to scheme of merger. Indirect acquisition of shares of target company, pursuant to scheme of merger, is exempt if:

► cash and cash equivalents < 25% of the consideration paid and

► Persons holding >= 33% of the voting rights in the combined entity should be same as the persons who held the entire voting rights before the scheme

Merger – Relevant Accounting Provisions

Accounting for merger

Pooling of interest method

► Assets and liabilities of the merging entities

incorporated at book values

► Identity of reserves/ losses of the merging

entities preserved

► Difference between shares issued on merger

and share capital of the merging entities

adjusted by way of increase / decrease in

reserves

Purchase method

► Assets and liabilities of the merging entities could

be incorporated at their book values / fair values

► Identity of reserves/ losses of the merging entities

is not preserved

► Difference between shares issued on merger and

net assets of the merging entities adjusted in

goodwill / capital reserve


Indian GAAP permits above accounting methods for a merger; it also provides that court approved scheme

could prescribe the accounting treatment for reserves (unlisted companies)

However, any deviation would need to be disclosed in the financial statements in the current and the

following year of the merger

Creation /

restating of

reserves

Restating asset

values

Writing off debit

balances

A merger

can be

used for -

Merger - Competition Regulations

► Combination” as per the Competition Act

► Any acquisition of – control, shares, voting rights or assets of an enterprise(s)

► Acquiring of control by a person over an enterprise, where such a person already has direct / indirect

control over another enterprise engaged in a similar business

► Any merger or amalgamation of enterprises

► The provisions of the Competition Act are applicable to “combinations” that meet the minimum

threshold criteria of asset value and/or turnover amount

Competition Act – M&A related regulations came into force from 1 June 2011


threshold criteria of asset value and/or turnover amount

Exemption Provisions

► Combination by way of acquisition of control or shares of voting rights or assets by one person or

enterprise of another person or enterprise within the same group is exempt

► Further exemption available for 5 years in case of acquisitions of target companies having assets

upto INR 250 Cr or turnover upto INR 750 Cr in India

► Are these exemptions also applicable to merger?

In the ensuing slides we have given a flow chart depicting the point at which an entity would need to file a notice with the CCI

Competition Regulations- flowchart explaining applicability

Need to file notice with CCI?

Need not file notice with CCI

Yes

Yes

No

Covered by Schedule 1 exemption

Assets of Target <= Rs 250 cr

Assets of Parties >

Rs 1500 cr?

Turnover of Parties > Rs 4500

cr? Need to file notice with CCI

Yes

Yes

No

No

A India Test


notice with CCI

No

A

Rs 250 cr?

Yes

No

Turnover of Target <=

Rs 750 cr ?

Assets of the Group > Rs 6000

cr?

Yes

No

No

B

YesTurnover

of Group > Rs18000

cr?

• Assets are determined by taking the book value of assets as shown, in the audited books of account of the enterprise, in the FY immediately preceding the FY in which the date of proposed merger falls

• Turnover includes value of goods or services

Regulation of Combinations- flowchart explaining applicability

Assets of Parties > $750 mn

?

Turnover of Parties > $2250

mn ?

Yes

Yes

No

B

Assets of Parties >= Rs

750 cr ?

Turnover of Parties

>= Rs 2250 cr ?

Yes

Yes

No

No

Worldwide Test


Assets of the

Group >= $ 3 bn ?

Turnover of the

Group > $ 9 bn ?

Need to file notice with CCIYes

Yes

No

No

Assets of the Group >= Rs 750

cr ?

Yes

Yes

No

No

Turnover of Group

>= Rs 2250 cr ?

Need not file notice with CCI

NoNo

India

World wide

Merger - Stamp Duty implications

Merger

► Scheme needs approval of the High Court having jurisdiction over registered office of transferor &

transferee company

► Duty payable in the States –

►where order approving the scheme is passed; and

►where the properties of transferor company are located

► Specific entry in the Schedule levying duty on High Court order sanctioning amalgamation -

Maharashtra, Gujarat, Rajasthan, Karnataka, Madhya Pradesh, Uttar Pradesh and Andhra Pradesh

► Applicability of 1937 Notification (Exemption of stamp duty on transfer of properties between parent


► Applicability of 1937 Notification (Exemption of stamp duty on transfer of properties between parent

and subsidiary company) – vary from state to state

► No specific entry in case of states other than the above

► Depending on the state, possibility of mitigation of stamp duty could be explored through appropriate transfer

mechanism

Slump Sale – Relevant Income Tax and Company Law Provisions

► For determining the nature of capital gain period of holding of undertaking will

be taken into consideration (capital gain will be long term if undertaking is

held for more than 36 months)

Income Tax

► As per section 2(42C) slump sale means:

► Transfer of one or more undertaking as a result of sale

► For a lump sum consideration

► Without assigning values to individual assets and liabilities


held for more than 36 months)

► Cost of acquisition = net worth of the undertaking *

► Net Worth is aggregate value of assets less the book value of liabilities

► Aggregate value of assets is written down value of depreciable assets and book

value of other assets

* Revaluation to be ignored while computing the Net Worth* Revaluation to be ignored while computing the Net Worth

Company Law - Section 293(1)(a) of the Companies Act, 1956

► The board of directors of a public company to obtain consent of public shareholders in a general meeting before disposing the undertaking

Slump Sale – Relevant Stamp Duty and Accounting ProvisionsSlump Sale

► Business is an asset and therefore subject to stamp duty

► Stamp Duty payable on Business transfer agreement in the state

where it is executed movable and immovable.

► Stamp Duty is also payable on immovable properties and in respect of

movable properties stamp duty may not be payable if the same is


Accounting

► Governed by accepted principles of accounting

► No specific accounting standard for slump sale accounting (unlike mergers)

transferred by way of delivery

Case Studies

Case Study 1 – Increase in Promoter Holding

► Demerger of Consumer Product

Division (CPD) from A Co to B Co, Promoter

C Co

A Co

Public

100%

72%28%

Promoter

A Co

Public

74%26%

Pre Structure Post Structure

and

► Merger of C Co into A Co


A Co

B Co (CPD Business)

Pharma Public

62% 38%

A Co

B Co

Pharma Public

71% 29%

CPD

Actual Stake of Promoter increased

in A Co and of A Co in B Co;

however effective interest remain same

CPD

CPD

Demerger

Case Study 2 – Consolidation of Cement Business and Increase Stake

C Co

Shareholders

A Co

Shareholders

A Co

CementOthers

Structure


C Co B Co45%

55% 100%**

► Scheme proposed to demerge the Cement division of A Co into its WOS B Co

Demerger

► B Co to issue 1 equity share for every equity shares held in A Co

► A Co’s stake to be diluted to 65%

► B Co to be listed pursuant to demerger

** To be diluted to 65% and balance 35% to be held by shareholders of A Co

Cement

Case Study 2 – Consolidation of Cement Business and Increase Stake (contd…)

A Co

Shareholders

A Co

CementOthers

C Co

Shareholders

35%

Post Demerger Structure

A Co

Shareholders

A Co

C Co

Shareholders

Proposed Structure


B Co C Co45%

65% 55%

C Co

A%(55%<A<65%)

B% (1-A-B)%

Merger

► Post Demerger, B Co to be merged with C Co

► A Co to hold stake between 55% - 65%, post merger

► Maintaining adequate control in C Co – Reason for a two stage consolidation

► Stamp Duty payable twice – 1st on demerger and 2nd on merger

Case Study 3 – Foreign company acquisitionthrough merger without payment

► A Co is a company listed on BSE, NSE,Madras

Stock Exchange and Ahmedabad Stock

Exchange and is engaged in IT sector

► B Co was a Delaware based holding /

investment company which held investment in

operating companies engaged in IT / ITES in

US and other jurisdictions

Shareholders

B Co (Foreign Co) A Co

Merger of B Co into A Co

Issue

of

Shares

► A Co wanted to acquire B Co and hence as a


► A Co wanted to acquire B Co and hence as a

part of restructuring B Co was merged with A

Co

- Merger of Delaware company with Indiancompany permitted as per Delaware laws and Indian laws

- A Co issued shares to the shareholders of B Co as consideration for merger

Case Study 4 – Merger of subsidiaries into Parent

A Co

T Co M Co

100%

C Co

50% 100%

50%B Co

100%

Facts

► A Co is an Indian listed company and is into the business of broadcasting TV channel in India

► B Co is a subsidiary of A Co and holds the Indian cricket broadcasting rights

Objective


Z Co

Z Co 1 Z Co 2

95% 100%

100%

Objective

► To hold Indian cricket broadcasting rights under A Co

Holding Indian

cricket

broadcasting

rights

Merger of B Co and C Co with A

Co

► B Co to be merged with A Co

► No issue of shares since B Co is a WOS of A Co

► Pursuant to the merger, all the India cricket broadcasting rights shall transfer and vest in A Co

Case Study 4 – Merger of subsidiaries into Parent(Contd…)

A Co

T Co

100% 100%

B CoC Co

100%

50%

Merge with A CoMerge with A Co


in A Co

► C Co to be merged with A Co

► No issue of shares since C Co is a WOS of A Co

M Co

Z Co

Z Co 1 Z Co 2

95% 100%

100%

50%

Case Study 5 – CCI decision in case of AlstomMerger of two Indian Cos in distinct business

Alstom

Holdings

(France)

Lorelac

(France)

100%

100%100% 1.98%

Facts

► Alstom Holdings India Ltd (‘AHIL’)is a company incorporated in India and into business of holding and acquiring shares in Alstom Group companies

► Alstom Projects India Limited (‘APIL’) is a company incorporated in India

► APIL is listed on Indian stock exchange

► APIL is into business of power and transport


Alstom Projects

India LtdAlstom Finance BV

(Netherlands)

Alstom Holdings

India Ltd

58.55%7.93%

► APIL is into business of power and transport

Restructuring objectives

► Merger of AHIL and APIL to consolidate share holding, rationalize investment, reduce administrative and management costs

CCI Order

Since both entities are into different businesses and after the merger would continue to remain under same management, the combination would not have any adverse consequences on competition in India

Case Study 6 – Transaction Cost Mitigation

P Co

Q Co R Co

100% 100%

Facts

► Q Co to merger with R Co

► Q Co and R Co have substantial immovable property

► Issue of shares mandatory – to qualify as tax neutral merger

► Stamp Duty – linked to value of property transferred / share issue


► Can preference shares (nominal value) be issued – a compromise arrangement?

► Stamp Duty cost mitigated

Case Study 7 – Cross Holdings

A Co

B Co D Co

Facts

► B Co, C Co and D Co are proposed to be merged into A Co

► C Co is an operating company

► B Co and D Co are investment companies

► A Co needs to issue shares

► Fund raising


► Voting Rights

► Transfer shares of C Co held by B Co and D Co into a trust

► A Co will issue shares to the Trust on merger C Co

Case Study 8 – Issue of shares to subsidiary

X Co

Y Co Z Co

Facts

► Y Co is a subsidiary of X Co

► Y Co holds shares in Z Co

► Z Co to merge with X Co

Question

► Can X Co issue shares to Y Co its

>51%


► Can X Co issue shares to Y Co its subsidiary on the merger?

Points to be considered

► Section 42 of the Companies Act, 1956

► Court has vide powers under Section 391-394 of the Companies Act, 1956

XYZ Inc

Overseas

India

ABC Co

(acquirer)

Acquisition by

ABC Co

Case Study 9 – Merger of XYZ Inc into ABC Co

Facts

► XYZ Inc, a foreign company, carries out operations

globally (including in India through a branch).

► ABC Co, another foreign company is contemplating

acquiring XYZ Inc’s business to achieve inorganic

growth, access to new markets and technology.

► XYZ Inc.’s Indian business is valued at USD X mn,

comprising tangible assets of USD Y mn and

intangible assets of USD Z mn.


India branch

intangible assets of USD Z mn.

Key Issues

► Acquisition of XYZ Co by ABC Co in a tax efficient

manner from an Indian and overseas perspective.

Points to be considered

► Tax implications of overseas merger in India

► Availability of tax treaty benefits

XYZ Inc

Overseas

ABC Co

(acquirer)

Merger

Shareholders

Issue of shares

on merger

Case Study 9 - Merger of XYZ Inc into ABC Co – Key ImplicationsOverseas (presumed)

► Merger is tax neutral in overseas country

► On encashment by shareholders of XYZ, there would be

capital gains tax

Indian tax laws

► Transfer of Indian branch assets - taxable in India?

► Section 47(via) exemption available only in respect of transfer

of Indian co shares on foreign mergers

► Would the transfer be taxable? Is there any consideration


India branch

Overseas

India

Risk of dual taxes

(first to XYZ Inc & then to

shareholders on encashment)

► Would the transfer be taxable? Is there any consideration

received by/accruing to XYZ Inc?

► View 1 – Not taxable

► View 2 – Taxable

► If taxable, then, computation of capital gains?

► Is it “slump sale” or “slump transfer” or “itemised sale”?

Tax treaty

► Treaty country – If taxable in India no credit may be available

in Foreign Co as merger is exempt there. Eg USA

► Non-treaty country – If taxable in India, availability of tax credit

to be examined in relevant overseas jurisdiction

Thank You For further information / clarifications, please contact:

Amrish Shah

Partner & Transaction Tax Leader Email : [email protected] : +91 98201 28084Phone : +91 22 6192 0680

Documents

ICA I -WIRC WIRC Presentation - Without... · Co - Reverse Merger. ... Difference between shares issued on merger and share capital of the merging entities ... Merger Post Demerger,