ICAI - WIRC. Case Study on Merger / Amalgamation - Taxation, Accounting and Company law. Speaker Amrish Shah, Partner, Transaction Tax

Transcription

1 ICAI - WIRC Case Study on Merger / Amalgamation - Taxation, Accounting and Company law Speaker Amrish Shah, Partner, Transaction Tax 19 November 2011

2 Contents Modes of M&A in India Legislative framework of M&A Tax & Regulatory aspects Case studies Page 2

3 Modes of M&A in India M&A Merger / Demerger Acquisitions Internal Restructuring Business Purchase Share Purchase Amalgamation Demerger Slump Sale / Itemized Sale Buyback Capital Reduction Consolidation of businesses/ entities Focus on core business/ sell non-core business Enhancing stake/ capital repatriation Financial restructuring/ Enhancing stake/ repatriation Page 3

4 Amalgamation / Merger / Slump Sale

5 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 Key Drivers External Acquisitions Takeover of a sick entity Internal Consolidation of Operations Consolidation of Promoter holdings Tax savings Eliminate multiple layers of holdings Eliminate companies who have outlived their utility Balance sheet right sizing Automatic Listing of Co - Reverse Merger Page 5

6 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 Transferor Co Business Business A B Transaction Consideration as shares/ cash Sale of business B Transferee Co Slump sale: key aspects Useful for disinvestment of non-core businesses Post slump sale scenario Freedom of structuring consideration as cash/ shares unlike in a demerger Shareholders Shareholders Transferor Co (Company A) Transferee Co (Company B) Business A Business B Page 6

7 Every M&A action has a Regulatory Reaction Other regulations Competition act Indirect tax Accounting Stamp duty Valuation of shares Indian stamp act vs. State stamp act Valuation of Immovable property 1 SEBI & stock exchange Listing of shares/ New Co. Stock exchange approvals Take over code implications 5 Key regulations 2 Exchange control Implications of cross border merger FDI implications Issue of shares to non resident on merger 4 3 Income tax Transfer of credits, availability of tax exemptions etc. Step up in tax basis Tax neutrality Companies Act Condition of section 391 to 394 / High court approval Approval of shareholders and creditors Post implementation procedures Page 7

8 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 Page 8

9 Merger Relevant Company Law and SEBI Regulations Company 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 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 indirectly acquired 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 Page 9

10 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 A merger can be used for - Creation / restating of reserves Restating asset values Writing off debit balances Page 10

11 Merger - Competition Regulations Combination as per the Competition Act Competition Act M&A related regulations came into force from 1 June 2011 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 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 Page 11

12 Competition Regulations - flowchart explaining applicability Need to file notice with CCI? A India Test Covered by Schedule 1 exemption Yes Assets of Parties > Rs 1500 cr? No Yes No Assets of Target <= Rs 250 cr? No Turnover of Target <= Rs 750 cr? No Yes Yes Need not file notice with CCI Turnover of Parties > Rs 4500 cr? No Assets of the Group > Rs 6000 cr? Turnover of Group > Rs18000 cr? No Yes Yes Yes Need to file notice with CCI A B 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 Page 12

13 Regulation of Combinations - flowchart explaining applicability B Worldwide Test Assets of Parties > $750 mn? No Yes No Assets of Parties >= Rs 750 cr? Yes Turnover of Parties > $2250 mn? No Yes No Turnover of Parties >= Rs 2250 cr? Yes Assets of the Group >= $ 3 bn? No Yes Assets of the Group >= Rs 750 cr? No Yes Need to file notice with CCI Turnover of the Group > $ 9 bn? No Yes Need not file notice with CCI Turnover of Group >= Rs 2250 cr? No Yes World wide India Page 13

14 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 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 Page 14

15 Slump Sale Relevant Income Tax and Company Law Provisions 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 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) 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 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 * Revaluation to be ignored while computing the Net Worth Page 15

16 Slump Sale Relevant Stamp Duty and Accounting Provisions Slump 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 transferred by way of delivery Accounting Governed by accepted principles of accounting No specific accounting standard for slump sale accounting (unlike mergers) Page 16

17 Case Studies

18 Case Study 1 Increase in Promoter Holding Demerger of Consumer Product Division (CPD) from A Co to B Co, and Merger of C Co into A Co Promoter 100% Pre Structure Post Structure Promoter C Co Public Public 72% 28% 74% 26% A Co A Co CPD Pharma Public Pharma Public Demerger Actual Stake of Promoter increased in A Co and of A Co in B Co; however effective interest remain same 62% 38% B Co (CPD Business) CPD 71% 29% B Co CPD Page 18

19 Case Study 2 Consolidation of Cement Business and Increase Stake Structure C Co Shareholders A Co Shareholders A Co Others Cement 55% 100%** Demerger 45% C Co B Co Cement Scheme proposed to demerge the Cement division of A Co into its WOS B Co 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 Page 19

20 Case Study 2 Consolidation of Cement Business and Increase Stake (contd ) Post Demerger Structure Proposed Structure A Co Shareholders C Co Shareholders A Co Shareholders C Co Shareholders 35% A Co A Co Others Cement 65% 55% A% (55%<A<65%) B% (1-A-B)% B Co C Co 45% C Co 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 1 st on demerger and 2 nd on merger Page 20

21 Case Study 3 Foreign company acquisition through 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 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 Indian company permitted as per Delaware laws and Indian laws Shareholders B Co (Foreign Co) A Co Merger of B Co into A Co Issue of Shares - A Co issued shares to the shareholders of B Co as consideration for merger Page 21

22 Case Study 4 Merger of subsidiaries into Parent Facts A Co is an Indian listed company and is into the business of broadcasting TV channel in India A Co B Co is a subsidiary of A Co and holds the Indian cricket broadcasting rights 100% 50% 100% 100% T Co M Co 50% C Co B Co Objective To hold Indian cricket broadcasting rights under A Co 100% Z Co Holding Indian cricket broadcasting rights 95% 100% Z Co 1 Z Co 2 Page 22

23 Case Study 4 Merger of subsidiaries into Parent(Contd ) Merger of B Co and C Co with A Co Merge with A Co A Co Merge with A Co B Co to be merged with A Co No issue of shares since B Co is a WOS of A Co 100% 100% 100% Pursuant to the merger, all the India cricket broadcasting rights shall transfer and vest in A Co C Co to be merged with A Co T Co C Co 50% 50% M Co B Co No issue of shares since C Co is a WOS of A Co Z Co 100% 95% 100% Z Co 1 Z Co 2 Page 23

24 Case Study 5 CCI decision in case of Alstom Merger of two Indian Cos in distinct business 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 Alstom Holdings (France) 100% Lorelac (France) APIL is listed on Indian stock exchange 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 Alstom Holdings India Ltd 100% 1.98% 7.93% Alstom Projects India Ltd 58.55% 100% Alstom Finance BV (Netherlands) Page 24

25 Case Study 6 Transaction Cost Mitigation 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 P Co 100% 100% Stamp Duty linked to value of property transferred / share issue Q Co R Co Can preference shares (nominal value) be issued a compromise arrangement? Stamp Duty cost mitigated Page 25

26 Case Study 7 Cross Holdings 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 A Co needs to issue shares Fund raising B Co D Co 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 Page 26

27 Case Study 8 Issue of shares to subsidiary Facts Y Co is a subsidiary of X Co Y Co holds shares in Z Co Z Co to merge with X Co X Co >51% Question Can X Co issue shares to Y Co its subsidiary on the merger? Y Co Z Co Points to be considered Section 42 of the Companies Act, 1956 Court has vide powers under Section of the Companies Act, 1956 Page 27

28 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. Key Issues Acquisition of XYZ Co by ABC Co in a tax efficient manner from an Indian and overseas perspective. XYZ Inc India branch Acquisition by ABC Co ABC Co (acquirer) Overseas India Points to be considered Tax implications of overseas merger in India Availability of tax treaty benefits Page 28

29 Case Study 9 - Merger of XYZ Inc into ABC Co Key Implications Overseas (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 received by/accruing to XYZ Inc? View 1 Not taxable View 2 Taxable If taxable, then, computation of capital gains? Tax treaty Is it slump sale or slump transfer or itemised sale? 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 Shareholders XYZ Inc India branch Merger Risk of dual taxes Issue of shares on merger ABC Co (acquirer) Overseas India (first to XYZ Inc & then to shareholders on encashment) Page 29

30 Thank You For further information / clarifications, please contact: Amrish Shah Partner & Transaction Tax Leader amrish.shah@in.ey.com Mobile : Phone :