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Acquisition of Indian Business
by ForCo
Sale of Bus. By ICo to ForCo
Merge I Co into ForCo
© PRAVIN P. SHAH & CO. 3
◦ Indian Co. sells one Unit to F Co.
Sale by way of Slump sale or Itemised Sale
Intel, USA slump sold its Branch to a WOS of Intel
◦ FEMA Issues
For F Co. would Acq. of Unit would constitute a Branch?
If Yes, then RBI permission
HO’s Track Record in 5 yrs & Net Worth > $1 lakh considered
Defn. Includes Mfg. of Goods but Reg. don’t mention
Land / Bldg. by Branch - Filing of Form IPI with RBI
© PRAVIN P. SHAH & CO. 4
◦ Company Law
◦ Sale of whole / substantial Undertaking – s.293(1)
Ordinary Resl. by Seller Co.
Postal Ballot for Listed Cos.
Special Resln. under Cos. Bill + PB for all Cos.
◦ Competition Act
◦ ForCo has no presence in India
◦ Consider whether transaction requires Anti-trust permission
under UK or Other Laws?
© PRAVIN P. SHAH & CO. 5
Sale of Assets
Direct Taxes
Slump Sale: s.50B
Asset Sale: S.50, 50C, 45
Indirect Taxes VAT/CENVAT
© PRAVIN P. SHAH & CO. 6
◦ Slump Sale
Lump sum consideration – No itemised break-up
Excess of SC over Networth = LTCG / STCG
Taxable u/s. 45 r.w. s.50B
◦ Itemised Sale
Itemised Break-up over A&L
Gains Taxable:
S.50C: Land & Building
S.50: Depreciable Assets – S.50C also
S.45(1): Other Assets
◦ Funds in Seller Co. - consider DDT on Dividend / Tax on VL
◦ FCo.’s Indian Branch taxable @ 40%+SC+EC
© PRAVIN P. SHAH & CO. 7
© PRAVIN P. SHAH & CO. 8
VAT?
If Itemised Sale?
If Slump Sale?
Lump sum consideration w/o break-up to A/L
Is a slump sale a sale in the course of Business?
Service Tax?
CENVAT Credit of Unit available to Buyer Co.?
Service Tax on Sale?
Stamp Duty
Movables
Conveyance
No Agr.
Immovable On what
Value
What about Slump Sale
Agr?
© PRAVIN P. SHAH & CO. 9
Instead of direct Acqn. FCo can consider having a
WOS which can acquire the Business
Example
L&T wanted to sell its Ready Mix Concrete (RMC)
Business
RMC was a unit within L&T
Lafarge of France was interested in buying this RMC unit
Agreement reached for $349 million
© PRAVIN P. SHAH & CO. 10
◦ Can Sunrise (Indian Company) merge into Union
Jack (For Co) ?
◦ Can Union Jack issue its shares to shareholders of
Sunrise India?
◦ Is it possible u/s.394 of Companies Act?
Can Transferee Co. be a Foreign Co.?
◦
© PRAVIN P. SHAH & CO. 13
◦ Does the Companies Bill 2012 permit such a Merger?
◦ FEMA Regulations?
Can Indian Shareholders own shares in Foreign Co. by
way of merger
◦ Tax Exemption available?
© PRAVIN P. SHAH & CO. 14
© PRAVIN P. SHAH & CO. 15
Union Jack
UK
Sunrise India UJ
India
UK
India
Merges Into
Indian
Shareholders
© PRAVIN P. SHAH & CO., CAs 16
Holdco Union
Jack Ltd
Sunrise India
India
Abroad
merges with
100%
E.g.,: Makemytrip India, WNS Holdings, Genpact
Acquisition of For. Business by ICo
Merge FCo into
ICo
Demerger from Fco into ICo
Sale of Bus. By ForCo to
ICo
Takeover of ForCo
by ICo
© PRAVIN P. SHAH & CO. 18
◦ Company Law
Does the Companies Act permit such a Merger?
Does the Companies Bill permit such a Merger?
Permission of High Court of Transferee – IndCo
◦ Foreign Law
Permission, if any, under Foreign Laws
Do all jurisdictions allow Foreign mergers?
Permission of Foreign St. Ex since Wall Four listed abroad,
e.g., requirements of SEC, USA
© PRAVIN P. SHAH & CO. 20
Tax Implications?
◦ Can you merge under Income-tax
◦ Yes
◦ CGT by Fco for Business in India?
◦ No CGT by the Indian Shareholders holding shares in
Fco.- Conditions?
© PRAVIN P. SHAH & CO. 21
Other Laws
◦ FIPB’s approval required for merger
What if Foreign WOS merges into Indian HoldCo.?
E.g., Wipro’s Singaporean & Bermuda WOS with Wipro
◦ Do SEBI Takeover Regs. Apply?
◦ Permission of CCI
◦ If ICo is listed – SEBI Permission is required
Cl. 24 of Listing Agreement
© PRAVIN P. SHAH & CO. 22
© PRAVIN P. SHAH & CO. 23
◦ Stamp Duty Art. 25 under Mah. Stamp Act
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
◦ Specific Entries in Guj / Kar / Raj / Ker / WB / TN
◦ In States where no Specific Entry?
© PRAVIN P. SHAH & CO., CAs 24
Alternatives to Merger
Forming WOS
Abroad &
then merger
of F Co with
WOS
Forming WOS
Abroad &
then WOS
acquiring
F Co
I II
Instead of Merger of FCo.
◦ Can consider Demerger of Assets from FCo. To ICo.
Same Legal Provisions as a Merger of FCo. Into ICo.
Transfer of capital asset Tax Exempt
Issue of shares by Ico. Tax Exempt
© PRAVIN P. SHAH & CO. 25
◦ FEMA Regulations
Up to 400% of Networth of Ico.
ECBs can be used for acquisition
Valuation of existing FCo.
◦ Company Law
S.372A = Up to 100% of Free reserves or 60% of Paid-up Capital + Reserves
◦ Consider Foreign TOR / Delisting Laws
Hart Scott Rodino Act in US / City Code in UK
US Co. fully owned by non-us people – restricted activity / addl. Tax
Add. Reporting
In US Open Offers vary Statewise + Federal Act – Tender Act
Apollo Tyres would be delisting Cooper Inc. after acquisition
© PRAVIN P. SHAH & CO. 26
◦ Income-tax
S.56(2)(viia) applicable on acquisition of listed FCo.?
S.14A Disallowance for Interest?
Whether s.14A applicable for overseas investments?
© PRAVIN P. SHAH & CO. 27
Acquisition by Stock Swap
© PRAVIN P. SHAH & CO. 28
Clothes
Ltd (ICO)
Wall Four
(FCO)
Foreign SHs
Issue of
shares
Takeover
of shares
Overseas Direct Invst. by Share Swap:
◦ ICo issues its shares in return for shares of FCo
◦ Auto Route for Outbound
◦ Valuation of FCo by Invst Banker – No specific method
◦ FIPB permission for Inward Invst. Leg
Consideration Other than Cash
◦ Undertaking from NR Shs.
Sale of ICo shs. to be as per FEMA Regs. only
© PRAVIN P. SHAH & CO. 29
FEMA Issues
◦ Would Acq. of Unit constitute a Branch abroad for Ico?
Overseas Branch treated as PRII
Can have a Bank A/c abroad for normal business operations
Branch cannot enter into Contract in Contravention of FEMA
Cannot create Financial Liability , contingent / actual
Surplus Funds Can’t be invested abroad & must be repatriated
Limit on Remittances to Bank A/c for Initial & Recurring Exp.
Acqn. of Imm Property abroad for Business & Residential
Purposes of staff allowed within above limits
© PRAVIN P. SHAH & CO. 30
◦ Stamp Duty abroad on assets acquired
◦ Capital Gains Tax for Seller
◦ Limited Liability Angle
Would expose Indian party to Unlimited Liability
Consider a WOS which would acquire
Sale of only IPRs, Plant, Brand by Jaguar Land Rover, UK to
Tata Motors Ltd
Cash Consideration of $2.3 billion agreed upon
© PRAVIN P. SHAH & CO. 31
© PRAVIN P. SHAH & CO., CAs 32
SPV 2 (UK)
Ford Motors
UK
Sale of Assets
of Jaguar
Land Rover
India
Singapore SPV 1 (Singapore)
Equity Funding
Equity Funding-
TML Cash Resources
UK
On “Goodwill on Merger” ◦ Smiffs Securities Ltd. (SC)
Excess Consideration paid over NAV of Transferor
Intangible asset eligible for Depn.
Question of valuation of ‘goodwill’ not before SC
◦
On “Acquired Goodwill” on Slump / Asset Buys ◦ Excess consideration paid over Net Value of Assets
◦ Represents Intangibles acquired
© PRAVIN P. SHAH & CO. 33
© PRAVIN P. SHAH & CO. 35
Growth Bank
Foreign Co.
Wealth
Indian Co.
Foreign &
Indian
Shareholders Acquires Shares
From
◦ Auto Route of FIPB
Except in following:
Sectors with caps
Including:
Defence
Air transport
ARC / banks
Broadcasting
Commodity Exchanges
Credit Info Cos.
Insurance
Telecom / satellites
© PRAVIN P. SHAH & CO. 36
◦ Sale by NR to NR - Auto Route of RBI:
No Pricing Guidelines
◦ Sale by Resident to NR - Auto Route of RBI:
Pricing Guidelines
Listed Cos.
Valuation of Company by CA / MB
Form FC-TRS should be filed with documents
Quadruplicate
With Bank
Undertaking from NR: He is eligible to Buy
Copy of SPA
◦
© PRAVIN P. SHAH & CO. 37
◦ Auto Route of RBI available?
Cases where Takeover Regs. attracted
Co. in Financial Services / Banks, Insurances, NBFCs,
◦ Can Foreign Bank acquire Commodity Brokerages?
Does RBI / FIPB permit such an acquisition?
Have there been instances where such takeovers have
been blocked by RBI / SEBI?
© PRAVIN P. SHAH & CO. 38
◦ Indirect Entry into Real Estate Business
◦ Can a Foreign Co. acquire stake in an Indian Co. which
has a Real Estate Subsidiary?
Does it tantamount to indirect entry into a real estate
business?
◦
© PRAVIN P. SHAH & CO. 39
◦ Sale of shares of NBFC-D – change of control:
Requires prior Approval of RBI’s DNBS?
◦ Sale of shares of NBFC-ND
Prior Public Notice ?
To be given by NBFC and Transferor / Transferee
Notice must give reasons for sale, details of transferee
1 National & 1 local vernacular newspaper
© PRAVIN P. SHAH & CO. 40
◦ Indirect Change of Control / Dominant Promoter
Group requires NOC:
Broking Co. – BSE / NSE
DP – NSDL / CDSL
Com. Broker – FMC, MCX, NCDX
Housing Finance – National Housing Board
© PRAVIN P. SHAH & CO. 41
Acquirer’s SH Acquisition possible – Takeover Code
0-24.99% 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, 2009
© PRAVIN P. SHAH & CO. 42
Acquisition of 54% from Promoters + 10%
Preferential Issue would trigger TOR
◦ Growth would have to make an Open Offer for 26%
◦ Assuming full subscription, Stake of Growth would
be 90%
Max. Permissible Stake is 75%
© PRAVIN P. SHAH & CO. 43
◦ Date of Public Announcement?
MOU: 1st April: Price Rs. 450 / sh
BoD approved Pref. Issue: 10th April: Price: Rs. 500/sh.
EGM Resln.: 10th May: Price: Rs. 600/sh
◦ Which Date to be adopted?
◦
© PRAVIN P. SHAH & CO. 44
SELLER & SCENARIO LTCG STCG
Tax for Domestic Sellers
On-market & STT paid Nil 15%
Off-market (Listed) 10% or 20% with
Indexation
Normal Tax Rates / 30%
Tax for Foreign Sellers
On-market & STT paid Nil 15%
Off-market (Listed) 20% without Indexation
or 10% - controversy
40%
© PRAVIN P. SHAH & CO. 45
Controversy
Foreign Sellers selling Listed Shs. on off-market basis
◦ Q. Concessional rate of 10% available to FCo? (s.112)
Mum ITAT – No in BASF AG (Mum)
Mum ITAT – Yes in Chicago Pneumatic Tool Company (Mum)
AAR – Yes in Timken / McLeod Russel / Fujitsu Services Ltd
AAR – No in Cairns UK, Castleton Investment
Judicial Controversy?
© PRAVIN P. SHAH & CO. 46
For Sale by Mauritius Co.
◦ Can Treaty benefits be denied if only TRC / Can Dept. apply LoB?
CBDT’s Cir. 789 + Govt. Press Release 1st Mar 13
Universal Music (Bom) – TRC Sufficient for beneficial interest
AAR ~ Ardex Investments / Dyanmic India Fund / Moody’s Analytics /
Smithkline Beecham / Castleton Investment / Armstrong World /
Aditya Birla Nuvo (Bom) – Decision based on Specific Facts
Vodafone Amdt. Does not nullify Treaty Benefits
Capital Gains not taxable by virtue of Indo-Mauritius Treaty
Revisit the situation once GAAR comes into force
© PRAVIN P. SHAH & CO. 47
For sale by Singapore Co. ◦ Singapore + some other DTAA contains a LoB & Bona fide Clause
© PRAVIN P. SHAH & CO. 48
LoB
USA
UK
UAE
Lux. Iceland
Saudi Arabia
Finland
If at all Tax payable by FCo.
◦ Both Buyer and Seller Located Abroad
Payment received abroad but shares located in India
Would Foreign Buyer have to deduct tax at source on payments
made to Foreign Seller?
◦
© PRAVIN P. SHAH & CO. 49
If at all Tax payable by FCo.
◦ Can AO impute CG if sale price lower than DCF Valn. Under FEMA
Guidelines?
◦ If Sale to Associate Enterprises
DCF can be used for determining ALP?
Can Auto Approval of RBI be considered as deemed ALP?
© PRAVIN P. SHAH & CO. 50
MAT
◦ Is It applicable on Sale of Shares by Foreign Cos.?
Does MAT only apply to Indian Cos.?
Does it apply to Foreign Cos. only if they have a PE?
© PRAVIN P. SHAH & CO. 51
Return
◦ Foreign Seller has to file a Return in India even though no
tax liability
◦ Necessary to have all facts in a wide amplitude
◦ AAR ~ VNU International / Dana Corp., Castleton
Investment Ltd.
Stamp Duty
◦ Transfer Deed @ 0.25% if not in demat form
◦ If SPA executed Addl. Duty?
© PRAVIN P. SHAH & CO. 52
◦ Can Growth AG set up an Indian WOS to buy Wealth?
FDI in WOS requires FIPB Approval
Status of WOS?
Leveraging debt?
Downstream Invst. Provisions if O& C by NRs
Comply with Sectoral Caps, Pricing, Reporting conditions
Can Fco issue its own shares as consideration to SH of
Ico?
© PRAVIN P. SHAH & CO. 53
◦ Conditions for repatriation of FDI Funds by Real estate co.
Minimum Capitalisation - Met
3 years lock-in: Expire on Oct 2013
50% of Project must be developed?
◦ Can Hyper (NR) sell to another NR during lock-in Period?
No outflow /remittance from Indian Co. Space
Is lock-in qua Investor or qua Investment?
© PRAVIN P. SHAH & CO. 55
Can Hyper (NR) sell to Promoter (Domestic Investor) in 3 years?
Can Hyper’s shareholder (Cipher) sell the shares of Hyper to
Viber (another NR) before 3 years?
No transaction at Indian level
Transfer of Foreign Investor offshore
For such Indirect transfers consider impact of Amendment to s.9 –
Vodafone.
© PRAVIN P. SHAH & CO. 56
PRAVIN P. SHAH & CO., CAs 57
Buyback of Shares
Reduction of Capital
Buyout by Promoter
Voluntary Liquidation
◦ 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) :
Pricing G/L
Max. Price DCF Guidelines
What if Pricing G/L not met?
Reporting? FC-TRS
CA’s Certificate on TDS / ITO’s NOC
© PRAVIN P. SHAH & CO. 58
◦ Buyback Tax payable by Unlisted Company
Tax @ 20% + SC + Cess
No Tax in hands of Investor
No credit of Buyback Tax to Investor
Negates benefit of DTAA – No benefit of coming through
DTAA
© PRAVIN P. SHAH & CO. 59
Reduction of shares held by PE / FDI alone
◦ Shares cancelled and consideration paid
◦ Court process u/s. 100 of Companies Act
◦ Selective Reduction possible
◦ Auto Route of RBI subject to Pricing Guidelines
© PRAVIN P. SHAH & CO. 60
Reduction @ Price not higher than DCF Valuation
Tax consequences
Co. liable to pay DDT up to Accumulated Profits
Excess of consideration over Cost & Dividend = LTCG
No tax on Cap Gains if Treaty benefits available to Mauritian
Investor
Bennett Coleman (Mum SB) – No Cap Gain or Loss
© PRAVIN P. SHAH & CO. 61
Automatic Route of RBI
Pricing Guidelines:
◦ Valuation- Not higher than? DCF
◦ Reporting requirements? FC-TRS
CA’s Certificate on TDS / ITO’s NOC
© PRAVIN P. SHAH & CO. 62
Put & Call Options by Promoters to PE?
◦ Are they valid under FEMA?
RBI’s stance – Indirect ECB – Thus, Not Allowed
CFDIP – Amdt. & Deletion
What if Fixed Price Exit
Not Allowed by RBI
What if subject to Pricing G/L – Should be permissible
© PRAVIN P. SHAH & CO. 63
Put & Call Options by Promoters to PE?
◦ Are they valid under SCRA?
SCRA Applicable to Unlisted Companies also?
SEBI’s stance + Informal Guidance – - No
SCRA: 1995 Amdt. – Options Trading Allowed
1961 Notification + P&H Decision - Allowed
Bombay HC –– Yes / No / Yes
Govt. Disinvestment Cases – Balco - Sterlite
Latest amendment to SCRA moved by Law Ministry - Allowing
© PRAVIN P. SHAH & CO. 64
Pre-emptive
RoFR
Tag Along
Drag Along
Russian Roulette
Texas Shoot Out
Dutch Auction
© PRAVIN P. SHAH & CO. 65
SEBI’s View – Not Allowed
Bombay HC Decisions:
Single Bench – Not Allowed
Division Bench –- Allowed
◦ Do these Rights need to be incorporated in Articles?
Yes.
◦ Can they be incorporated in A/A of a Listed Co.?
◦ Position under Companies Bill 2012 – Allowed
◦ Do Special rights to PE by Listed Co. make it Promoter
© PRAVIN P. SHAH & CO. 66
VL is an Internal Affair
◦ No court process
◦ DDT up to Accumulated Profits
◦ Excess received over Cost is Capital Gains
◦ Can be in cash or in specie
FEMA Requirements?
Is it feasible in this case?
◦
© PRAVIN P. SHAH & CO. 67
© PRAVIN P. SHAH & CO. 69
Foreign Group Holding Co.
Listing abroad – NYSE, Euronext, FTSE, AIM
Better valuation – Makemytrip, WNS, Genpact
Can retain funds abroad
◦ Most Important Pre-requisite
Who would be the Promoter of Foreign Holdco?
Holdco should not be wholly C&M not in India
© PRAVIN P. SHAH & CO. 70
Structure for Transferring shares from R to NR
Gift not allowed under FEMA Regulations
Only allowed between close relatives with RBI Permission
Hence, Gift ruled out
Sale of shares by Indian Promoter to Holdco
Auto Route under FEMA
Price not lower than Preferential issue Pricing in case of
sale of Listed shares to NR
File Form FC-TRS
© PRAVIN P. SHAH & CO. 71
Sale of shares by Indian Promoter to Holdco
Can Listed Shares be sold on floor of St. Ex.?
If yes, then no Tax on LTCG to seller
If Off-market sale @ FMV
Tax on Resident Seller
© PRAVIN P. SHAH & CO. 72
Sale of shares by Indian Promoter to Holdco
Can promoter sell @ below FMV
Stamp Duty @ 0.25% if not in demat form
If SPA executed Addl. Duty in Maharashtra
© PRAVIN P. SHAH & CO. 73
Takeover Code implications
Transfer of shares held by Mr. A or his Investment Cos.
to Holdco entirely held by him
Consider Exemptions u./R. 10(1)(a)
Or else approach SEBI for Specific Exemption u/R11(1)
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