CROSS-BORDER REORGANISATIONS STRUCTURES & MECHANICS ICAI-WIRC. CA Zulfiqar Shivji December 2012

Transcription

1 CROSS-BORDER REORGANISATIONS STRUCTURES & MECHANICS ICAI-WIRC CA Zulfiqar Shivji December 2012

2 Presentation Flow Background Regularity Brief Structures & Mechanisms (Case Studies)

3 Background

4 Corporate Reorganisation Not Defined term. Neither has a clear and precise meaning. Literally it means rebuild / rearrange. In Cross border, two or more countries are involved Justice Chandrachud corporate reorganization if one of the means that can be employed to meet challenges which confront business Aims at re-allocation of the corporate resources to optimize it s value either by adding the related or divesting the unrelated businesses The ultimate aim of all these exercises is to optimize corporate value With proposed DTC and GAAR, corporate restructuring will witness a sea change with focus on resolution of commercial issues

5 Restructuring Scenarios Joint Ventures / Alliances Pantaloon Retail Aditya Birla Nuvo Limited Family Settlements Bajaj Corp / Reliance Group Improving the valuations and focusing on core Wipro to hive off FMCG Tax Efficiency Marico / Unichem Meeting Regulatory Requirements Zee Tele films MIB Regulations Balance Sheet Right-Sizing Titan, Sintex, UTV

6 Consolidation/Hive off Exits / Dilution Balance Sheet related Others Forms of Restructuring Amalgamations Buy Back Write-offs Gifts Demerger Slump Sale Itemized Sale Share acquisition Capital Reduction Listing - Overseas/dome stic Conversion of loans to equity Revaluation Dropping of Loan Change in holding company jurisdictions Shareholding related

7 Restructuring Framework Planning Exits/Repatr iations Type of business vehicle Tax Regime and Treaties Cost Effective Business & Commercial dynamics Accounting Treatments Time is the essence Legal &Regulatory Framework

8 Cross-border activity Increased cross border activities will require focus on cross border structuring & restructuring 50.0 FDI Financial Year wise Inflows in USD Bn Outbound Investment Financial Year wise outflows in USD Mn FDI Financial Year wise Inflows in USD Bn Total Inflow

9 Regulatory Brief

10 Important Legislations Exchange Control (FEMA) Companies Act, 1956 (New Company Bill, 2012) Income Tax Regulations DTAA / Bilateral Investment Agreements Securities Contract and SEBI Competition Act Accounting Implications Indirect Tax Sector specific regulations, like TRAI, etc.

11 Overview of relevant Exchange Control Regulations General permission for merger of two Indian companies pursuant to which shares are issued to nonresident shareholders Filing FC-GPR In case of foreign company merging into Indian company If no shares issued then no approval be required, else FIPB approval required In case foreign company has loans or property, then specific RBI approval for ECB or holding immovable properties outside India required Sectoral Cap / restrictions to be observed Swap ratio No pricing guidelines prescribed for the issue of shares to non-resident pursuant to merger, in spirit DCF should be looked upon In case of restructuring of the balance sheet requiring write off of receivables/capital from/in overseas subsidiary/jv, Public Companies upto 25% of equity investment under automatic route Private Companies upto 25% of equity investment under approval route

12 Overview of relevant Company Act, 1956 provisions Merger-Demerger Section High Court Process Involved sanctions from ROC, RD and OL Transferee can be only a Company under the Companies Act, 1956 Section 394(4)(b) Transferor Company includes any body corporate within the meaning of this Act or not Merger where foreign company is transferee is not possible Need to comply with the local/overseas jurisdictions Section 77A Buy Back/Reduction Section 100 to 104 Other Corporate Actions Check MOA/AOA for: Gifts Valuations Transferability

13 Overview of relevant Companies Bill, 2012 provisions Provision for cross border amalgamations between Indian companies and foreign companies (jurisdictions of such countries to be notified from time to time by central government) Fast track procedures to facilitate mergers between 2 small companies or between a holding company and WOS by allowing them to proceed with approval from ROC, OL and 90% of shareholders and creditors Treasury shares not permitted In case of merger of listed company with an unlisted company, Tribunal can order the unlisted transferee company to continue to be unlisted; exit opportunity to be offered to shareholders All companies to procure certificate from Company s Statutory Auditor that the accounting treatment proposed in the scheme is in conformity with applicable Accounting Standards Objection to a Scheme only by shareholders / creditors representing minimum 10% / 5% Not more than 2 layers of investment companies

14 Overview of relevant Income Tax provisions Income Tax : Section 47 of the Income Tax Act, 1961 allows exemption on cross border restructuring Foreign Company s merger into Indian Company is also covered DTC : Benefits under corporate restructuring are continued to be provided under the provisions of the Direct Tax Code Transfer Pricing: Finance Act, 2012 has inserted an explanation to section 92B which specifically includes transactions of business re-organisation even if it does not affect profits/incomes/losses/assets

15 Structures & Mechanism (Case Studies)

16 Vanilla Cash-less acquisitions Shareholders A Ltd was a Delaware based holding /investment company which held investment in operating companies engaged in IT / ITES in US and other jurisdictions Issue of Shares A Ltd Merger Delaware B Ltd is listed on Indian Stock Exchange B Ltd wanted to acquire A Ltd and hence as a part of restructuring A Ltd was merged with B Ltd Merger of Delaware company with Indian company permitted as per Delaware laws and Indian laws B Ltd India B Ltd. issued shares to the shareholders of A Ltd, as consideration for merger

17 Consolidation of overseas business in India Merger of all the companies with Star India Pvt Ltd A consolidation of the Transferor Companies and the Transferee Company would result in enhanced operational flexibility structural efficiency greater management effectiveness Ruling sought: The 3 Group companies sought a ruling from the AAR on whether the capital gains tax liability would arise from the proposed scheme? The Tax Authority sought to contest the exemption under the IT Act on the ground that the amalgamation was a colourable device, the whole objective of which was to avoid capital gains tax Reference was made to the Gujarat HC decision in Wood Polymer Ltd. which provided a typical illustration of a deliberate design, aimed to avoid tax, by taking the recourse to amalgamation AAR Ruling: The amalgamation scheme had a definite business purpose and could not be set aside by characterizing it as a mere device of avoiding tax

18 Profit Repatriation Indian Co to extract the accumulated profits from the intermediate Holdco in the form of dividends Indian Co will be liable to tax on such Onward distribution by the Indian Co would lead to On merger, accumulated profits shall stand transferred to the Indian Co thereby leading to tax efficiency The resulting structure will be confirming to CFC regulations Need to be tested in GAAR regime

19 Folding up the Indian branch of Overseas subsidiary The subsidiaries were carrying out their Indian operations through branch offices in India (called as Indian Undertaking) Bringing the three corporate entities under one roof would portray an integrated set up with one face to the customers The issue was whether merger of such Indian Undertaking classified as a Body Corporate under Section 2(17) of the Companies Act is permissible under Sections 391 to 394? The Hon ble High Court held that the Body Corporate has a wider connotation and is used in several sections not only to companies incorporated in India but also foreign companies

20 Providing liquidity to overseas investor UTV-Mauritius, was set up as a WOS of UTV- India, for engaging in exploitation of overseas rights Subsequently, UTV-Mauritius acquired the movie portfolio (library of existing movies) of UTV- India and ventured into co-production of movies Funding requirement for the expansion UTV-India incorporated a company in Isle of Man i.e. UTV Motion Pictures, IOM and diluted its stake through AIM listing UTV Motion Pictures infused funds in UTV- Mauritius

21 Reducing cost of funds To take the benefit of low cost of debt abroad, following steps can be taken Amalgamation/transfer of X and Z to Y In consideration A Ltd to receive shares (equity/pref) of Y Ltd. Y Ltd to borrow overseas and redeem pref shares to A Ltd A Ltd to retire high cost debt in India

22 Possible structure to meet ODI requirements Indian Co In terms of the Overseas Direct Investment Guidelines, Indian Companies can invest upto 400% of their net worth i Merger India Overseas For the purpose of net worth calculation investments are considered at cost Consequently, the accumulated profits of the subsidiaries cannot be captured Intermediate Holdco Operating Co Accumulated Profits Overseas subsidiary can be amalgamated into the Indian Co to improve the net worth and facilitate future overseas investments

23 Family Settlements In order to segregate Opco 1 to Mr. A and OpCo 2 to Mr. B, following steps can be taken: Consolidation of HoldCo 1 & 2 into HoldCo Demerger of the merged HoldCo Shares of HoldCo and Demerged HoldCo can be then gifted by Mr. A and Mr. B, respectively, to each other

24 Value Consolidation Value Capture By way of consolidation of SPVs Fund raising Leveraging the merged Holdco fund raising

25 LBO structure Target Co based in USA Set up a SPV through an International Holdco International Holdco to be strategically located Infusion of debt at SPV level to acquire shares of Target Tax compliant merger of SPV with Target Service debt through operating income of Target

26 Externalization (A) Issue of Equity Shares of Rs. 450 crs and Non- Convertible Debentures of Rs. 1,500 crs (B) Transfer of equity shares and debentures of BGPL to BPH for cash consideration BILT is listed on BSE and NSE and is engaged in manufacture and sale of paper Pursuant to a Scheme of arrangement and reorganization, 3 undertakings of BILT were transferred to BGPL in exchange of equity shares of Rs. 450crs and debentures of Rs. 1500crs of BGPL Scheme also provided for buy back of 40% of the post-split equity shares of BILT Option to shareholders holding 1,000 equity shares or less to sell their entire holdings in List Co BILT transferred the shares and debentures received above to BPH Funds received from BPH to be utilised for retirement of debts and to fund buyback of its shares

27 Thank You