Basics of Tax - Mergers & Acquisition - PowerPoint Presentation

1. Basics of Tax - Mergers & Acquisition

2. ContentsModes of M&ARecent M&A Transactions213Taxation Aspects4Regulatory Aspects5Case Studies

3. Recent M&A Transactions

4. Recent M&A Transactions – News Clippings3The worlds largest retailer Diageo buys fresh 26% in United Spirits for INR 11,449 crore, gains controlJuly 2, 2014 ETSun Pharma to acquire Ranbaxy in $3.2 bn deal Apr 26, 2015, Business StandardGoogle sells Motorola to Lenovo for $2.91 billionJanuary 29 , 2014, The VergeReliance Industries completes acquisition of Network 18 Media and TV18 Broadcast Ltd.July 7, 2014, ET Reliance Power to acquire all hydro projects of Jaypee groupJuly 27 , 2014, Business StandardThomas Cook buys Sterling Holiday for INR 870 crore in a transaction structured through a multi layered process, involving both cash and stock swaps.February 9, 2014Adani Ports and Special Economic Zone (APSEZ) completes 100% acquisition of Dharma Port from Tata Steel and L&T IDPL for INR 5,500 crore.May 17, 2014 Flipkart buys out Myntra for $300 m May 23, 2014, The HinduFacebook Buys WhatsApp for $19 BillionFebruary 19, 2014, Bloomberg Businessweek

5. Need for M&A

6. Need for M&A5Need for M&AAcquisition of Competence or CapabilityAchieve Economies of ScaleDiversification – Entry into new market/ product Opening up of Indian EconomyAttract overseas investmentsFinancial / commercial restructuring

7. Modes of M&A

8. 7Mergers & Acquisitions (M&A) [1/2]ModesAmalgamation / MergerModes of M&ADe-mergerAcquisitionsAsset PurchaseShare PurchaseSlump SaleItemized SaleCapital Re-organizationBuy-backCapital ReductionLiquidation

9. Mergers & Acquisitions (M&A) [2/2] Key considerations under M&A Structuring……..its beyond TaxcChanging Regulatory EnvironmentForeign Exchange RegulationsSecurities LawIndirect TaxesIncome Tax ActStamp DutyCompanies Act and AccountingUnderstanding the FDI RegulationsSeeking necessary RBI/ FIPB approvalsComplying with prescribed guidelinesCompliance with SEBI Regulations/approvalsStock exchange compliancesSales Tax / VAT applicability on business transfer, mergers / demergersService tax regulationsScheme of arrangements u/s 391 – 394 of the Companies ActApprovals from RD/ ROC/ OLComplying with prescribed procedures, resolution, filings etcAccounting implications and disclosures.Understanding state specific stamp duty lawsPlanning levies/ registration chargesAdjudication proceedings etc.Tax implications in the hands of the Seller, purchase / Transferor Transferee / Company, shareholdersHelping maximize depreciation benefitContinuity of Carry forward of lossesTax neutrality of restructuring and continuity of fiscal benefits8Impact on stakeholders such as shareholders, creditors and employees also important

10. Taxation Aspects

11. Tax NeutralitySection 2(1B) – AmalgamationMeaning -Merger of one company (B Co.) with another company (A Co.)Merger of two or more companies to form a new companyConditions -all property of transferor company become property of transferee company all liabilities of transferor company become liabilities of transferee companyshareholders holding not less than three fourths in value of the shares in transferor company become shareholders of transferee company (other than shares already held by transferor or its subsidiary company)10A CoB CoA ShareholdersB ShareholdersMERGERCompanies Act, 2013 permit cross border mergers or amalgamation. However, relevant provisions (sec 234) have not been made effective yetMerger Merger conditions

12. Key tax implicationsNo capital gain on transfer of capital assets in the hands of Co. B if Co. A is an Indian company [Sec. 47(vi)];No capital gains in the hands of shareholders of Co. B if :The transfer is made in consideration of shares in the Co. A except where the shareholder itself is the amalgamated company, andCo. A is an Indian company.Expenditure on amalgamation – tax deductible in the hands of Co. A in five equal installments [Sec. 35DD]Merger of Co B into Co AIssues:Whether deduction u/s 80-IA/80-IB/80-IC would be carried forward to amalgamated companyWhether MAT credit in books of amalgamating co would be transferred to amalgamated coShareholdersIssue of sharesMergerKey tax implications11

13. 12A CoB CoA ShareholdersB ShareholdersOption 1Merger of B Co. into A Co.A Co. issues shares to B shareholders i.e. 25% shareholders of B Co.Structure MechanicsIssue of sharesMergerCase study75%75%25%MergerMerger of A Co. into B Co.B Co. issues shares to A shareholders i.e. 75% shareholders of A Co.Structure MechanicsA CoB CoA ShareholdersB ShareholdersOption 2Issue of shares75%75%25%Merger25%25%

14. Tax NeutralitySection 2(19AA) – DemergerMeaning -Transfer of one or more undertakings of the demerged company (P Co.) to a resulting company (Q Co.)Conditions -All the property and liabilities of the undertaking are transferred.Property and liabilities will be transferred at the respective book values.Resulting Company issues its shares to the shareholders of the demerged company on a proportionate basis [except where the resulting company itself is a shareholder of the demerged company].At least three-fourths shareholders in value of the demerged company will become shareholders of the resulting company.Transfer of Business Undertaking is on a going concern basis. Undertaking – includes part of undertaking or unit or division of undertaking or a business activity taken as a whole, but does not include individual assets and liabilities or any combination thereof not constituting a business activity13Q CoP CoA ShareholdersB ShareholdersDemerger of A BusinessABDemerger Conditions

15. Key tax implications:No capital gain on transfer of capital assets in the hands of Co. A [Sec. 47(vib)]No capital gain on transfer / issue of shares [Sec.47(vid)]Expenditure on demerger– tax deductible in five equal installments [Sec. 35DD]Cost of shares in resulting company = (Cost of shares in demerged company) x (Net Book Value of assets transferred/ Net Worth of demerged company pre-demerger) [Sec.49(2C)]Actual cost of transferred assets in the hands of Resulting company = Actual Cost in the hands of Demerged company [Explanation 7A to sec.43(1)]; andTransfer of accumulated loss and unabsorbed depreciation to resulting company allowed [Sec. 72A]Where directly relatable to undertaking, such loss;Where not directly relatable, in the proportion of the assets retained and transferredCompany BShareholdersDemergerIssue of sharesBus. AShareholdersBus. CCompany ABus. ABus. BBus. AWhether deduction u/s 80-IA/80-IB/80-IC would be carried forward to the Resulting co.Issues:DemergerKey tax implications14

16. 15Q CoP CoA ShareholdersB ShareholdersDemerger of A BusinessABOption 1Issue of Shares & payment of cash to all the shareholders.Manner of Discharge of ConsiderationDischarge of Consideration in shares & cashQ CoP CoA ShareholdersB ShareholdersDemerger of A BusinessABOption 2Option given to the shareholders to receive Shares or cash.Manner of Discharge of ConsiderationDischarge of Consideration in shares or cash60% shareholders received Shares and 40% received cash.Merger & DemergerDemerger – Case study

17. Utilization of tax losses & unabsorbed depreciationSection 72A of the ActAmalgamation/ MergerCarry forward of tax losses and depreciation allowed to Amalgamated Company if:Amalgamating CompanyOwns Industrial Undertaking (Manufacturing or processing of goods, computer software, Power Generation/distribution, telecommunication business, mining or construction of Ships, Aircrafts or rail systems) or a Ship or a Hotel.Has been engaged in the business for 3 or more yearsHas held 3/4th of the book value of fixed assets for preceding 2 yearsAmalgamated Company Continues to hold 3/4th of the book value of fixed assets for 5 years Continues the business for 5 yearsAchieve 50% of installed capacity of the undertaking before the end of 4 years from the date of amalgamation & maintain upto 5 yearsDemergerBenefit of set-off of tax losses & depreciation related to the Demerged undertaking available to the Resultant CoUndertaking need not be an ‘Industrial Undertaking’, unlike in AmalgamationAllocation of losses on direct or proportionate basis16Merger & DemergerContinuity of business losses/unabsorbed depreciation in Merger/Demerger

18. Section 79 of the ActApplicable only to closely held companiescompanies other than companies in which public are substantially interestedNo carry forward / set off of accumulated business lossesin case common shareholding of 51% is not maintained as on last day of the financial yearIncludes all losses except carry forward / set off of unabsorbed depreciationSection not applicable where there is a change in shareholding of an Indian Company which is a Subsidiary of a F Co. as a result of the Merger or Demerger of the F Co. subject to the condition that 51% shareholders of the merging or demerging F Co. continue to be the shareholders of the amalgamated or resulting F Co.17Utilization of tax losses & unabsorbed depreciationMerger & DemergerImpact on business losses due to change of shareholdingThis is very relevant in Acquisitions (including global acquisitions) which leads of change of shareholding

19. Case StudyA CoServices & Investment businessABC CoXYZ CoX CoManufacturing businessA Co is a closely held company & X Co is a Listed CompanyA Co has accumulated tax losses in services businessProposal to consolidate A Co and X CoFacts of the CaseMerger of A Co with X Co – Availability of losses?1Reverse merger of X Co with A Co. – Availability of losses?2De-merger of Services business of A Co into X Co. – Availability of losses?318Accumulated Loss OptionsMerger & Demerger Continuity of business losses/unabsorbed depreciation in Merger/Demerger – Case Study 1

20. 19X LtdA Ltd (Listed Co)Shareholder BPre - Acquisition40%60%X LtdA Ltd100%Post - AcquisitionWhether accumulated tax Losses of X Ltd would lapse ?Whether possible to protect lossesX Ltd is engaged in the business of manufacturing and selling soapsA Ltd proposes to acquire the shareholding of X Ltd from BMerger & Demerger Impact on losses due to change of shareholding – Case Study 2Accumulated Losses

21. 20Q LtdShareholder AShareholder BPre - Acquisition40%60%Q LtdShareholder A100%Accumulated LossesPost - AcquisitionA proposes to acquire the shareholding of Q Ltd from BMerger & DemergerImpact on due to change of shareholding – Case Study 3P LtdP Ltd100%Accumulated LossesWould accumulated tax Losses of Q Ltd lapse ?Would accumulated tax Losses of P Ltd lapse ?100%

22. 21X LtdShareholder AShareholder BPre - Merger40%60%Accumulated Tax LossesPost - MergerWould accumulated tax Losses of Y Ltd lapse ?X Ltd proposes to merge into Y LtdMerger & Demerger Impact on losses due to change of shareholding – Case Study 4Y Ltd100%Shareholder AShareholder B40%60%Y LtdMerger

23. Tax Incentives are either based on business (u/s 80-IA/80-IB/10B) or Area/ Region based (u/s 80-IC/10A /10C)Continuity of unexpired period of tax holiday to the transferee company in amalgamation / de-merger except u/s Section 80-IA(12A)Explicit provisions not provided for Slump sale in the Act leading to ambiguity on availability or otherwise22Tax HolidaysMAT payable on book profits in the absence of Nil/lower tax profitsCredit for MAT allowable to the assessee company who has paid such taxesAmalgamating Co ceases to exist after amalgamation.  No specific provision for carry forward of MAT credit in case of amalgamation or de-mergerRecent Judicial precedents allowing the credit to Transferee CompanyMAT CreditMerger & Demerger Carry forward of tax incentives and MAT CreditSKOL Breweries vs ACIT (Mumbai ITAT)

24. Choice of Appointed dateNot specifically defined in the ActInterpreted based on rulings of the Apex CourtThe date of amalgamation is the date mentioned in the scheme and approved by the court unless the Court specifies any other dateRelevant for tax purposes as it is classified as the date of amalgamation / de-merger23Appointed DateApril 1, 2014September 30, 2014April 1, 2015Effective Date of MergerAppointed DateAppointed DateConcept: Date on which merger/ demerger is deemed to be effective. RetrospectiveProspectiveMerger & Demerger Concept and relevance of Appointed Date in Merger/Demerger

25. Transfer of “undertaking” for lump sum consideration without values being assigned to individual assets and liabilities24Concept of Slump SaleUndertaking includes any part of the undertaking or a unit or division of an undertaking or business activity taken as a whole but does not include individual assets and liabilities or any combination thereof not constituting a business activityMeaning of UndertakingSlump SaleCapital gain = Slump Sale consideration minus Tax Net-worth of undertaking;Tax Net-worth: Book Value of Non-depreciable Assets + WDV of Depreciable Assets - Value of LiabilitiesAny change in the value of assets on account of revaluation is ignored.Provisions relating to indexation not applicable.Asset SaleNormal capital gains computation applicableCapital Gain ComputationSlump Sale / Asset Sale (1/1)Concept and taxability

26. 25X LtdShareholdersMechanics100%MechanicsWhether this transaction is “demerger” or “slump sale”??Slump sale vis-à-vis Demerger – Case StudyY LtdTransfer of Business AAIssue of shares to shareholdersWhether this transaction is “demerger” or “slump sale”??X LtdShareholders100%Y LtdIssue of shares to X LtdATransfer of Business A

27. Purchase of own shares by Company - empowered under section 68 of Companies Act, 201326ConceptOut of Free reserves or Securities premium account or Proceeds of a fresh issue of shares or securities other than the proceeds of an earlier issue of shares of the same kind of shares / securities SourceNot subject to deemed dividend – specifically excluded from definition of deemed dividend u/s 2(22)Subject to capital gains (long term or short term depending upon period of holding of shares) u/s 46A in the hands of shareholder.New levy on buyback of unlisted shares u/s 115QA introduced by Finance Act 2013Applicable to domestic companies on buyback under s. 68 of Companies Act, 2013Levy @ 20% on the company buying back shares on “distributed income” i.e. consideration paid less amount received for issue Exemption in the hands of shareholder (Section10(34A))Key Tax implicationsBuyback (1/1)Concept and taxabilityKey ConditionsMaximum buyback in a financial year = 25% of the company’s paid up capital + free reservesMaximum buyback of equity shares in a financial year = 25% of the total paid-up equity capital in that financial yearDebt equity ratio not to exceed 2:1 post buy backPermitted for fully paid up shares onlyBuyback possible in case specified defaults have been remedied and 3 years have passed from time of remedy of defaultNot permitted out of money borrowed from Banks/ Financial Institutions.

28. Capital Reduction: Repayment of excess capital by Company - empowered u/s 66 of Companies Act,2013Liquidation: dissolution of company and distribution of assets to its shareholders27ConceptOut of surplus cash / assets with the CompanySourceSubject to deemed dividend u/s 2(22) (d) / u/s 2(22) (c) read with Section 46 deemed dividend to the extent of accumulated profitsincremental distribution to be treated as capital gains - cost of acquisition available as deductionNo indirect tax or stamp duty implicationsKey Tax implicationsCapital Reduction / Liquidation (1/1)Concept and taxabilityKey ConditionsTo be authorized by Articles of AssociationSpecial resolution to be passed by shareholdersSubject to approval from High Court/ TribunalSubject settlement of dissenting creditors

29. 28Typical Court process in Merger/ Demerger/ Capital reductionDrafting of the Scheme of arrangement, finalization of the appointed date, etc17Board meetings of Transferor Co. and Transferee Co. to approve the Scheme824Timeline for completion of implementation process ~ 6-8 monthsFile Chairman’s report and petitions with the HC(s)Issuing notices to Regional Director (RD) & Official Liquidator (OL)5Holding of shareholders’/ creditors’ meeting (if not dispensed) as per the directions of jurisdictional HC(s)3Application to Jurisdictional HC(s) for Directions for meeting96Public notices in newspapersObtaining NoC from RD & OL, if anyFinal Court hearing(s) and filing the final order with RoCUnder the Companies Act 2013, National Company Law Tribunal (‘NCLT’) would have the powers to approve the High Court Scheme. However, relevant provisions of Cos Act 2013 has not been notified yet.

30. Regulatory Aspects

31. The objectives of the Stock Exchanges & SEBI is to protect the interest of the public shareholdersRegulatory aspects of M&A (1/4)Key securities control regulationsAs per clause 40(A) of the listing agreement a company is required to maintain minimum level of public shareholding of 25%Approval of stock exchange / SEBI to the Scheme under clause 24(f) of the listing agreement Fairness opinion to be obtained from Merchant Banker Certificate from the Statutory auditor on compliance of Accounting Standards to be obtainedPublic shareholders can play an active role in approval of Schemes as per revised circular30Listing AgreementAny person acquiring 25% or more stake in a listed company shall make mandatory open offer to public shareholders – minimum size of mandatory open offer 26%Creeping acquisition of 5% p.a. permitted beyond 25% holding but upto 75% holding without triggering open offerExemption for Court Schemes available with conditions i.e. Scheme directly involving the Target Co. is exempt while not directly involving the Target Co. is exempt only if cash consideration is <25% of total consideration and post Scheme, atleast 33% of voting rights in combined entity to be held by same persons who held the entire voting rights earlier;Takeover CodeConcept: Every listed company is required to sign a listing agreement.Concept: SEBI to monitor and regulate the control & acquisition of a listed company

32. Regulatory aspects of M&A (2/4)FDI and Stamp Duty aspectsIssue of shares to non resident shareholders pursuant to Scheme (merger/Demerger) of domestic companies is covered under automatic routeFDI regulations to be complied with – especially regulated sectors (sectors in which FDI is restricted/prohibited)Reporting requirements as per the RBI needs to be complied withPricing guidelines to be complied with;31FEMAPayable on the High Court Order?Payable on transfer of immovable property and issue of sharesStamp Duty

33. 32Regulatory aspects of M&A (3/4)CCI:: Merger Control Regime - Meaning of ‘Combination’Subject to specified limits:Any acquisition of control, shares, voting rights or assets Acquisition of control over an enterprise if the person already has direct/ indirect control over another enterprise in similar product/ serviceMerger or amalgamationrequires mandatory pre-approval from Competition Commission of India (CCI)Overseas transactions with impact on competition in India also coveredExemption for certain routine transactions e.g. Intra-Group restructurings, asset acquisitions etc.CCI

34. Game changersRegulatory aspects of M&A (4/4) Changing game & new rules in the old games

35. Transaction Case Study

36. 100%MAT PlanningShareholdersA Co.A Co. to merge with B Co. under a court approved Scheme of AmalgamationB Co. to record listed investments at fair value of Rs. 20 based on purchase method of accountingNo MAT on future sale upto Rs. 20Sale of listed shares exempt from tax if long-termCritical to justify commercial rationale for merger35B Co.Listed InvestmentsMechanics of the DealBook Value – Rs. 10Fair Value – Rs. 20

37. 100%Indirect transfers – Vodafone issueF Co. 1F Co. 2Buyer can acquire shares of I Co. or F Co. 2 to acquire Indian assetsAcquisition of I Co. shares to trigger capital gains tax in IndiaAcquisition of F Co. 2’s shares – whether taxable?If F Co. 2 derives “substantial” value from I Co., gains taxable in India“Substantial” is defined under the Act – At-least 50% value of F Co derives based on value of I Co36BuyerI Co.Mechanics of the DealOverseasIndia

38. 100%Listing without IPOShareholdersListed Co.Pursuant to merger / demerger, Unlisted Co. to issue shares to shareholders of Listed Co.Unlisted Co. to automatically list without following the IPO process37Unlisted Co.Mechanics of the DealShareholdersOption 1 – Merge Listed Co. into Unlisted Co.Option 2 – Demerge a business undertaking from Listed Co. to Unlisted Co.Issue shares

39. Financial re-structuringCompany can approach the Court to adjust losses against CapitalNet Worth not impacted – however, ability to repatriate cash through dividend improvesTax implications including MAT liability to be evaluated in detail prior to implementation38OptionLiabilitiesRs.AssetsRs.Capital1,000Net Assets200Losses(800)TOTAL200TOTAL200PreLiabilitiesRs.AssetsRs.Capital200Net Assets200Losses--TOTAL200TOTAL200Post

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