Business Restructuring: Media & Entertainment Industry

Transcription

1 Business Restructuring: Media & Entertainment Industry - Anup P. Shah Chartered Accountant 2 nd June, 2012 National Workshop on M & E Committee for Members in Industry

2 M & A in M & E Restructuring Sale Acquisition Funding Demerger Merger PE Slump / Asset Sale Takeover FDI PRAVIN P. SHAH & CO. 2

3 3

4 Slump / Asset Sale 4

5 Slump / Itemised Sale Seller Slump / Asset Sale of Bus. Buyer 5

6 Sale of Business Slump Sales or Asset Sales No Court process Quick Shareholders Resolution Ordinary Postal Ballot if Listed 6

7 Tax Consequences Slump Sale Lump sum consideration No itemised break-up Excess of SC over Networth = LTCG / STCG Gains Taxable u/s. 45 r.w. s.50b Itemised Sale Itemised Break-up over A&L Gains Taxable: 7

8 Tax Exemption Exemption for Slump / Itemised Sale to firm: S.47(xiii) Conditions All A / L of Firm / AOP become that of Co. All Partners become SHs in same proportion Partners do not receive any other consideration SH of all Partners is at least 50% of Voting Power 50% SH of Partners continues for 5 years Exemption N.A. if Sale to LLP 8

9 Tax Exemption Analysis of s. 47(xiii): Can it be a New Co.? Firm can trf 2 Businesses to 2 Cos.? Only Business A/L to be trd? Can RPS be issued to partners? Shares can be issued at a Premium? Transfer inter se Partners permissible in 5 years? If conditions violated 9

10 GAAR Any transaction / restructuring would have to meet GAAR Stress Test Applicable from FY onwards Weapon to IT Department to attack all Tax Planning whether legitimate or not Wide spread, far reaching powers to AO Covers Domestic and International Transactions 10

11 GAAR Main Test: Main Purpose is to obtain a Tax Benefit 1-by-4 Tests: Creates Rights & Obligations not on arms-length Misuse / Abuse of Tax Laws Lacks or deemed to lack Commercial Substance Carried out in a manner normally not employed for bona fide purpose Final Shape & Rules eagerly awaited 11

12 Assignment of Copyrights Require a Written Agr. Terms ~ 5 years unless agreed otherwise Extends only to India unless agreed otherwise SD on value assigned 0.25% for Agr. up to Rs. 10 lakhs 0.5% if Agr. in excess of Rs. 10 lakhs Difference between Assignment & Licence No Service Tax on Copyrights 12

13 Transfer of Actionable Claims Actionable Claims : Claim to any debt which is not secured or Beneficial Interest in movable property E.g., : Loans, Right under a Contract S.130 of TP Act : Actionable Claims can be transferred only by written document Stamp Duty? 13

14 Transfer of Permission Permission for Downlinking of Channels Cos. allowed to Transfer the Permission Requires prior written approval of MIB Only by way of Merger or Demerger Slump / Itemised Sale not permitted as a Mode of Transfer 14

15 Stamp Duty Slump Sale / Assets Sale Conveyance under BSA & ISA Bifurcate assets into Immovable & Movable Bifurcation for SD purposes does not negate IT Benefit Expln. 2 to s.2(42c) of IT Act Under BSA - SD on 3% Under BSA - SD on 5% 15

16 Stamp Duty Slump Sale Sale of Undertaking as a Going Concern SD only on Net Market Value of Undertaking not on Gross Value of Assets Li Taka Pharmaceuticals (Bom) 16

17 Slump Sale / Asset Sale Stamp Duty Under ISA : No SD if transfer: between Transferor Co. owning at least 90% of Transferee Co. or between Parent Co. & min. 90% Subsidiary or Two 90% Subsidiaries of one Parent Co. Applicable in Mumbai? 17

18 Indirect Taxes Slump Sale VAT Not applicable Coromandal Fertilisers (AP) / Sri Ram Sahai (All) / K. Behanan Thomas (Mad) Sale of Bus. Undertaking not Movable Goods Lump sum consideration w/o break-up to A/L Not a sale in course of Business Sale of business cannot constitute Turnover 18

19 Indirect Taxes Slump Sale If Itemised Sale VAT applicable Goodwill, Copyrights, etc. would attract VAT VAT on rates prescribed Service Tax / Customs Trf. of CENVAT Credit available to Buyer Co. No Service Tax on Sale Licences under Customs Scheme to be trfd. 19

20 Issue of Shares Articles of Association 0.2% of Share Capital Max. Rs. 50 lakhs At every increase in Authorised Capital Issue of Share Certificate: 0.1% of the Value of the Share 20

21 Corporatisation of Firms 21

22 Corporatisation by Conversion Shareholders / Partners Firm Converted by Statute Co. / LLP 22

23 Part IX Conversion Firm Co. u/s. 565 of Cos. Act ( Part IX ) No Transfer of Undertaking from Firm to Co. No sale of Property Statutory provision ROC must Incorporate Co. Conveyance reqd.? Statutory vesting of property Capital gains? Is it a Transfer u/s. 45(4)? Stamp Duty? 23

24 Part IX Conversion Conditions Registered Firm 7 or more Members of Co. On Conversion Co. only has Partners as Members Do conditions of s.47(xiii) need to be satisfied? 24

25 LLP Act Conversion Firm LLP u/s. 55 of LLP Act No Transfer of Undertaking from Firm to LLP Statutory provision ROC must Incorporate LLP Conveyance reqd.? Statutory vesting of property Capital gains? Is it a Transfer u/s. 45(4)? Stamp Duty? 25

26 Demerger 26

27 Demerger by M&E Cos. Increasing trend to demerge unrelated business in Media & Ent. Sector Reasons: Different Regulations Different FDI Policies Strategic / Financial Partners Value Creation Different P/E Multiples Different Risk Profiles 27

28 Demerger Key issues Vertical Split Tax Neutral Transfer at Book Values Trf. of Bus. Undertaking on Going Concern Basis At least 3/4 th SH should become SH A/c : Whether Capital & reserves to be split? Stamp Duty 28

29 Demerger for Value Creation SHAREHOLDERS GEC News Cable TV Regional Language Zee Telefilms 29

30 Demerger for Value Creation Shareholders ❶ ❷ ❸ ❹ Zee News News & Regional Language WWIL Cable & Related Businesses Zee Telefilms GEC Dish TV India Direct Consumer + Dish TV 30

31 Demerger of News & Ent. Network 18 & TV18 Consolidation of all TV Broadcasting into TV18 Merger of ibn18 into TV18 Demerger/ Merger of all TV Channels Bus. Into TV18 CNN IBN, CNBC, MTV, Colors, VH1 Consolidation of all Other Bus. into Network 18 Merger of Business of Web, ecommerce, Internet, NBFC, Event Mgmt, etc. into Network 18 Network 18 to own majority stake in TV18 31

32 Other Demergers Company Reliance Mediaworks Business Unit Demerged Radio Business Remaining Bus. Multiplexes Mid-day Print Bus. to Dainik Jagran Radio & Outdoor Advertising Zee News Regional GEC to ZEEL News Business. Regional GEC were earlier demerged from ZEEL 32

33 Acquisition 33

34 Mergers 34

35 Mergers Key Issues Appointed Date Retrospective? Now GAAR? Rationale? Tax Planning only? Now GAAR? Share Exchange Ratio Fairness Ratio in case of Listed Cos. Accounting Treatment Auditor s Certificate for Listed Cos. Reduction of Capital of Transferee Co. St. Ex. Permission 3/4 th SH Majority + Court 35

36 Mergers Key Issues Tax Losses & MAT Credit Stamp Duty FEMA in case of Cross-Border Mergers / Foreign SH Listing Requirements 36

37 Reverse Merger X Ltd. UNLISTED MERGER A Ltd. LISTED Unlisted Co. Loss Making Low activity Listed Media Co. Profitable In Business Q. Listing of X Ltd. possible? 37

38 Reverse Merger Listing possible? SEBI s approval required Justification Under a Court Scheme of Merger / Demerger Procedural matters 38

39 Forward v. Reverse Merger - Comparison C/f Bus. Loss C/f Unabs. Dep MAT Credit of Loss making Co. Listing Capital Reduction Forward Merger Available? Available? Available? Continues? Required? Reverse Merger Available? Available? Remains with it Unlisted can be listed? Advisable? 39

40 Merger SD on Merger is an evergreen issue BSA Conveyance defn. s.2(g) Includes Every Instrument, Every Decree / Order of Civil Court Every HC Order u/s. 394 of Cos Act or RBI Order under Banking Act for the amalgamation or reconstruction of Cos. 40

41 Specific Entry for SD Entries for Merger / Demerger under Sch. I Maharashtra M / D Gujarat M / D Karnataka M / D Rajasthan M No Entries for either under ISA 41

42 Art. 25 Conveyance Merger BSA Rates 10% of Market Value of shs issued + consideration But not exceeding higher of: 5% of Market Value of Immovable Property of Transferor located in Maharashtra; or 0.7% of Market Value of shares issued Upper limit if 5% of MV of IP > 10% of MV of shs For Market Value of Imm. Property Refer to Ready Reckoner Value 42

43 Merger ISA Hindustan Lever (SC) Under BSA did not deal with ISA expressly SD payable even if no amdt to BSA Madhu Intra Ltd. (Cal) Under ISA WB 2 Member Overrules Single Judge in Gemini Silk HLL (SC) not cited or considered No SD on Order unless express provision like under BSA Delhi Towers (Del) Decision under ISA ~ Delhi Considered all decisions Order u/s.394 is a conveyance Liable to stamp duty Hero Motors (All) Order u/s.394 a conveyance Liable to stamp duty Emami (Cal) Single Judge Considered all decisions Held Madhu did not consider HLL SD applicable even under ISA in West Bengal 43

44 Company Takeover 44

45 Company Takeover Key Considerations: Takeover Regulations for Listed Cos. FEMA Provisions if one party is a PROI Capital Gains on Seller Exempt if LTCG through St. Ex. MAT if Corporate Seller even if gain exempt Indexation or 10% in case of Listed LTCG Tax Clearance Certificate / TDS if Foreign Seller 45

46 SEBI Takeover Regulations 2011 Acquirer s SH Acquisition possible % Any % any time till 24.99% ~ Excess PA for 26% 25-75% Creeping Acqn. 5% in any FY ~ Excess PA for 26% 25-75% Can make a Voluntary Offer for 10% Over 75% Follow Delisting Regulations,

47 Fame-Inox-Reliance Fame Promoters sold 43.28% stake to Inox Stake Sale done by Block Deals on BSE/ NSE No tax on promoters ~ s. 10(38) Inox acquired an addln. 7.21% by Block deals Sale triggered Open Offer by Inox Competitive Bid by Reliance Acquired 35% stake by Open Market Operations Both parties did not garner any stake in Offer 47

48 Fame-Inox-Reliance Subsequent Rights Issue by Fame Inox acquired 18.14% by way of a Rights Stake reached 68.35% Soon, Inox acquired 5% from Open Market Current 73% Reliance now a Passive Investor with 22% stake 48

49 Sale of Unlisted Cos. S Sale of Shares of Unlisted Co. X P. Ltd. News Broadcasting Co. Unabsorbed Depn. & B/f Business Loss Existing SHs want to sell 100% stake Buyer wants benefit of Depn. & Loss PROBLEM S.79 - Can t Transfer > 49% stake till b/f loss set off 49

50 Stamp Duty Transfer of Shares SD covered by ISA and not BSA SD under 0.25% of consideration No SD if shares in Demat form 50

51 Share Sale by Resident to PROI Auto Route of FIPB, except: Sectors with caps, incl d broadcasting, print, satellites, etc. Auto Route of RBI, except: Sectors not eligible for FDI under Auto Route Cases where Takeover Regs. attracted More than 25% stake acquired Sectoral Caps breached due to acquisition 51

52 Share Sale by Resident to PROI Auto Route of RBI: Pricing Guidelines Listed Cos. as per Market value Unlisted Cos. Fair Value as per DCF Method Form FC-TRS should be filed with documents Transfer of shares in tranches Pricing fixed on Milestones achieved by Co. Permitted? 52

53 Share Subscription Agr SSA / SHA-cum-SSA Executed by PEs / VCFs / for FDI Investor agrees to invest an amount for a certain % stake CPs / Covenants / R&Ws Liable to be 0.1% of contract amount if below Rs % of contract amount if above Rs. 10 lakhs 53

54 Complex Structuring RIL Rights Subscription Network 18 Rights of 2700 cr Promoter Cos. owning 40% stake Eenadu 1400 cr for TV cr for Loans Acqn. of Channels for 1925 cr TV 18 Rights of 2700 cr 1925 cr for Eenadu 421 cr for Loans RIL Trust ZOCDs for 1700 cr + Excess Rights 54

55 Complex Structuring Terms of ZOCDs RIL could end up controlling N18 & TV18 On conversion ZOCDs would constitute 99.99% of Promoter Cos. Q. Would ZOCDs lead to a Change of Control + Open Offer Valuation of Eenadu? If Promoters subscribe to unsubscribed Rights would it lead to a delisting situation for N18? 55

56 56

57 PE Funding 57

58 Special Rights Pre-emptive: Investor has a pre-emptive right to participate in future issues of equity & convertible same terms & price as others To retain his Shareholding in CO. RoFR Tag Along Drag Along 58

59 Validity of Special Rights SEBI s View for Listed Companies: Cairns-Vedanta Bombay HC Decisions: Single Bench Division Bench Do these Rights need to be incorporated in Articles? 59

60 Veto Rights Veto Rights / Affirmative Vote Fundamental Issues -Investor s consent is a must Should be clearly spelt out rather than leaving it broad and vague Q. Does giving Veto Rights to a PE / Investor in a Listed Co. make it a Promoter? 60

61 Buyback by Co. Limits under Cos. Act 25% of Eq. + Free Reserves 25% of Eq. Capital per FY Can use Free Reserves, Sh. Premium Auto. Route of RBI (for Foreign PE) if: Pricing G/L for Unlisted Max. as per DCF Form FC-TRS 61

62 Buyback by Co. Capital Gains exempt if DTAA provides A Ltd (AAR) Buyback offered only by Mauritian Co. AAR ~ Device to evade DDT Exemption denied and Income recharecterized as Dividend Spirit of GAAR applied Correctness? 62

63 Buyout of Investor by Promoters FIPB permission? Automatic Route of RBI Pricing Guidelines: Valuation- Not higher than? Reporting requirements? CA s Certificate on TDS / ITO s NOC 63

64 Buyout of Investor by Promoters Put & Call Options by Promoters? Are they valid under FEMA? RBI s stance CFDIP Amdt & Deletion What if Fixed Price Exit What if subject to Pricing G/L 64

65 Buyout of PE by Promoters Put & Call Options by Promoters? Are they valid under SCRA? SEBI s stance + Informal Guidance SCRA: 1995 Amdt Notification + P&H Decision Bombay HC Decisions Latest Judgment 65

66 FDI 66

67 FDI in M & E Sectors FDI in M & E Advertising & Films Hardware / Uplinking / Teleports Broadcasting Print Media 100% Automatic Route Sectorwise Conditions Sectorwise Conditions News - 26% Scientific 100% Facsimile 100% 67 67

68 FDI in Broadcasting Sectors Broadcasting Terrestial / FM Cable DTH HeadEnd In The Sky 26% FDI+PIS Approval MIB Cond. 49% FDI+PIS Approval MIB Cond. 20%FDI + 29%PIS Approval MIB Cond. 49% Auto + up to 74% FIPB MIB Cond

69 FDI in Hardware Facilities Hardware Uplinking Hubs / teleports Uplinking Non-news Uplinking News 49% FDI+ FII Approval 100% Approval 26% FDI + FII Approval PIS not from a PAC 69 69

70 FDI in Print Media Type of Media % FDI Conditions Newspapers dealing with News & Current Affairs 26% FDI + FII Approval Route Earlier all Invst Banned Indian editions of Foreign Magazines on News 26% FDI + FII Approval Route MIB Conditions Scientific & technical Mag. 100% Approval Route MIB Conditions Facsimile Edition of Foreign Newspapers 100% Approval Route MIB Conditions 70

71 Downstream FDI STAR INDIA HOLDING BV ALREADY OWNED 20% 324 CR 49% TS INVST (51 % TATA SONS SUB) 49% Does Star s Holding in Tata Sky (Direct + Indirect) cross the 20% Sectoral Cap? TATA SKY LTD 71

72 FDI in Gaming Sector 100% FDI allowed in Gaming FDI Prohibitted in Gambling Q. What is Gaming & What is Gambling? Is it a Game of Skill or a Game of Chance Chance ~ Skill ~ Rummy / Horse Racing / KBC? FDI in Fantasy Cricket / Football? FDI in Casinos? By Resorts route? 72

73 Thank You!!