7th RESIDENTIAL CONFERENCE (2013) ON

INTERNATIONAL TAXATION BY

THE CHAMBER OF TAX CONSULTANTS AT BENGALURU

_________________________________________________________________________

CROSS BORDER RESTRUCTURING

– TAX & REGULATORY ASPECTS

- Anup P. Shah, Chartered Accountant

SYNOPSIS

I. INTRODUCTION & SCOPE

II. GLOBAL STRATEGIES

III. CROSS-BORDER STRUCTURES

IV. ACTION PLAN

V. APPLICABLE INDIAN LAWS

VI. APPLICABLE FOREIGN LAWS

VII. JURISDICTION STUDY – LEGAL FRAMEWORK

VIII. USE OF INTERMEDIATE HOLDING COMPANY

IX. STITCHING UP THE DEAL

X. CASE STUDIES FOR GROUP DISCUSSION

I. INTRODUCTION & SCOPE

(A) Introduction

1.1 The purpose of this paper is to deal with some key issues in cross-border business

structuring / restructuring which can be discussed in a group at the RRC.

Although a subject like cross-border restructuring merits an RRC to itself because

of the myriad laws and complications, the idea is to give a holistic view of the key

facets of some important restructuring strategies.

1.2 The world is a global village! Globalisation and technological innovations have

triggered a slew of restructuring initiatives the world over. India is in the forefront

from this restructuring wave. In fact several global investors are asking

international companies whether they have an Indian connection? Further, the

WTO is increasingly changing the way the global competition is impacting the

Indian businesses. WTO Agreements, such as, TRIMs, TRIPs, GATS, etc., are

forcing countries and companies to look beyond national boundaries.

1.3 That is why, today, more than ever, India is witnessing a number of cross-border

Mergers and Takeovers. Foreign companies being merged into Indian companies,

Indian companies taking over Foreign companies, and Foreign companies taking

over Indian companies are all becoming everyday news. According to some

reports, the value of cross-border M&A deals in the calendar year 2012 involving

India rose to US $ 43.4 billion.

1.4 Tax professionals play an important role in cross-border mergers, acquisitions,

exits, etc. However, more often than not we are content focusing on the tax issues

alone whereas we are capable and competent to even handle the various legal and

regulatory issues. Further, it is not enough that they know only Income-tax,

FEMA, Companies Act and other laws. They also should have a feel of the

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business perspective to be able to make a better contribution in their areas of

expertise.

1.5 With such a staggering amount of cross-border transactions taking place, it is

essential to consider the legal and tax aspects of these deals. This Paper examines

some of the key issues and lays down some case studies for group discussion

under each restructuring strategy.

(B) Scope of the Paper

1.6 The scope of the subject-matter of this Paper is very wide and therefore, the Paper

focuses only on a few carefully selected topics. It is not even possible to deal

with all the significant issues. Since the Topic is Cross-border Restructuring, the

transactions of Foreign Direct Investment and Overseas Direct Investment which

fall under the purview of Cross-Border Investments have not been considered.

1.7 The focus of this Paper is to give the guidelines for structuring of various Cross-

border Restructuring. Thereafter, various Restructuring transactions have been

presented as Case Studies for Group Discussion.

II. GLOBAL STRATEGIES

2.1 Internationalisation strategies are one of the strategies which a company can adopt

for growth and survival. The celebrated Management Guru, Michael Porter, in his

book “The Competitive Advantage of Nations” has analysed what makes a nation

competitive. He laid down the Porter’s Diamond which are four factors in a

country which create globally competitive organisations. These are Factor

conditions, i.e., resources of a country, demand conditions in the domestic market,

related / supporting industries to the one in which a country excels and Firm

strategy, structure and rivalry which are the nation’s conditions determining

competition. Countries which have abundance of one or more of these factors

would attract companies from other countries, thereby leading to cross-border

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acquisitions and mergers. According to the management guru, Sumantra Ghoshal,

companies can follow four types of International Strategies, based on a matrix of

two factors, cost reduction and localisation:

(a) Global Strategy – Low Cost Highly Standardised products, e.g., Chinese

Goods.

(b) International Strategy – High Cost Highly Standaridised products, e.g.,

Apple products.

(c) Multi-domestic Strategy – High Cost Highly Localised products, e.g.,

Japanese car manufacturers in India.

(d) Transnational Strategy – Low Cost Highly Localised products, e.g.,

McDonalds / KFC introducing Vegetarian options in India.

2.2 A cross-border restructuring could be for various purposes:

• Growth: Tata Steel acquiring Corus

• Consolidating market share: Holcim acquiring a majority stake in ACC

and Gujarat Ambuja Cements

• Increasing stake in JVs: Vodafone buying out Essar

• Foreign Parent increasing stake in Indian Subsidiary: Unilever’s open

offer for Hindustan Unilever Ltd

• Foreign Parent desirous of delisting Indian Subsidiary: Cadbury UK’s

delisting bid for Cadbury India Ltd.

• Access to newer markets by Indian companies: Bharti Airtel acquiring

Zain Africa

• Access to newer markets by foreign companies: Vedanta acquiring Cairn

India

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• Ready infrastructure and common customers: Oracle buying out iflex

Solutions

• Supply chain management: Adani Group acquiring Mines in Australia and

Indonesia

• Entry in a highly regulated but attractive domestic market: Etihad picking

up 24% stake in Jet Airways Ltd

• Foreign Private Equity Funds acquiring Indian companies: Blackstone

acquiring Gokaldas Exports Ltd

• Exits to foreign Private Equity Funds / FDI Investors: Foreign PEs selling

their stake in Multi-Commodity Exchange Ltd

• For raising overseas funds since the foreign markets provide a better

valuation than domestic market: Makemytrip.com Ltd making an IPO of

its Holding company on NASDAQ instead of an Indian listing

• For getting an inroad into other markets: Otsuka entering into a JV with

Claris Lifesciences Ltd for its product portfolio in Latin America and

other unregulated overseas markets.

A tax or legal consultant who does not pay heed to the commercial objectives

behind a restructuring but merely pays attention to the tax and legal aspects would

be like a person who misses the wood for the trees. Any restructuring, be it

foreign or Indian, is based upon a sound commercial strategy.

2.3 The client may propose to undertake a cross-border restructuring for a variety of

objectives or purposes. The role of a Consultant is to ensure that the structure

achieves those objectives or purposes, or he may advise the client that it may not

be possible to achieve the client’s objectives either fully or partly and therefore

the client should modify the objectives or purposes or should abandon or modify

the nature of the cross-border transactions.

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2.4 Some of the key factors which influence a cross-border restructuring strategy,

include:

(a) Clearly define the objectives behind the overseas restructuring.

(b) Develop strategies or options for achieving the objectives, e.g., mergers

and acquisitions are not an objective but a means to an end. An outbound

acquisition should not be undertaken because they are in vogue but for

carefully identified objectives and advantages, such as for cost reduction,

for achieving certain market share, to be a globally competitive producer,

etc.

(c) Lifecycle of the business – determine the stage at which the business is in

its lifecycle – growing business, stable business , dead business, etc.

(d) Diligently evaluate all the possible options and then make the final

selection. Often, the agreed option may have its own advantages and

disadvantages.

(e) Consider the long-term as well as the short-term implications of a

particular strategy.

(f) Systematic implementation of the selected option is also very essential.

Because of improper implementation, even good business restructuring

strategies have failed. This is where a consultant with good knowledge of

Indian and international taxation, DTAAs, corporate laws, foreign laws,

etc., would be quintessential.

(g) There could be several impediments or roadblocks to successful business

restructuring, such as, tax issues, regulatory hurdles, etc. They must be

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borne in mind before undertaking a restructuring assignment and before

selecting a particular restructuring method.

(h) Business is dynamic and therefore, business restructuring is not

necessarily a one-time event. Periodically, one needs to have an overall

view of the business and its direction and decide about the need or an

opportunity for restructuring.

III. CROSS-BORDER STRUCTURES

3.1 Let us next look at some of the typical structures which one comes across in

cross-border restructuring. These are by no means exhaustive but they give a fair

idea of the myriad structures which one comes across:

(a) Mergers - Two or more companies combine to form a third company or

one company merges into another. Thus, one or more companies go out of

existence. One of them is an Indian company while the other is foreign

(Merger of the offshore promoter companies of Adani Enterprises Ltd with

itself).

(b) Takeovers - Acquisition of an Indian company by a foreign company

either entirely in the case of an unlisted company (Panasonic acquiring

Anchor Electricals) or promoter stake in the case of a listed company

(Daiichi Sanyo buying out the Singh brothers in Ranbaxy).

It could also be a 100% acquisition of a foreign company by an Indian

company (Hindalco acquiring Novelis, Canada) or buying a controlling

stake (Religare Capital buying a controlling stake in Noah Financial,

South Africa).

(c) Asset Sale – A foreign company may acquire the business assets of an

Indian company on a lock, stock and barrel basis (Slump sale of a branch

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by Intel Asia Electronics Inc., to its Group Company). Similarly, an Indian

company may acquire the business of a foreign company (Tata Motors

acquiring the Plant, Machinery and IPR of Jaguar and Land Rover from

Ford Motors). Alternatively, an Indian company may sell its foreign assets

to a foreign company (3i Infotech selling its US Billing unit to Cerberus

Capital Management, US). Recently, Apollo Tyres sold a part of its South

African operations to Sumitomo Rubber. It sold rights to the Dunlop brand

across Africa, the sales network of its African operations and one of its

African plants while retaining another of its African plants.

(d) JV – An Indian Joint Venture between an Indian company and a foreign

company could be of several types: a franchisee agreement (McDonalds in

India), technical collaboration (Hero-Honda), regulatory driven (Bajaj

Allianz Insurance), for risk and capital sharing (Van Oordz BV +

Hindustan Construction Company coming together for a project), etc. A

foreign JV could be formed between an Indian and a Foreign Partner

(Bharat Forge’s Chinese JV with FAW Corpn, China).

(d) Buyback – Buyback of shares of foreign investor by the Indian company

(Buyback of Citi’s shares by Nitesh Estate’s Bangalore SPV). This could

also be by way of a Court-approved Scheme for Reduction of Capital.

(e) Buyout – Indian promoters buying out foreign investor (DLF buying out

DE Shaw’s investment in DLF Assets Ltd)

(f) Stake Increase – Foreign parent increasing its stake in Indian companies

(Glaxo UK’s open offer for Glaxo India to 72.5%).

(g) Delisting - Foreign parent increasing its stake in Indian listed companies

and delisting them (Walt Disney delisting UTV Software

Communications).

8

(h) Offshore Holding Company – Indian company transferring all its

offshore assets in a holding company (Indian Hotels’ proposal to park its

overseas hotel assets in an international company).

These structures are illustrated with the help of the following diagram:

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Cross-Border Restructuring

Outbound Acquisition

Of Company

Merger

Takeover

JV

Of Business

Slump Sale

Itemised Sale

Inbound Acquisition

Of Company

Takeover

JV

Of Business

Slump Sale

Itemised Sale

PE / FDI Exits

Buyback

Reduction

VL

Buyout

Promoter Moves

Stake Increase

Delisting

Offshore Holding Co.

IV. ACTION PLAN

4.1 The entire assignment of advisory in respect of an Restructuring Transaction can

be divided into the following three phases:

• Transaction Structuring

• Documentation

• Implementation

All the three steps are important from the viewpoint of a client. The focus of this

Paper is to basically discuss the first phase, i.e., transaction structuring.

4.2 Iterative Nature of Structuring Process

It is important to realise that the process of restructuring is iterative in nature, i.e.,

the various steps involved are completed through several iteration or repetitive

steps. It may involve going back and forth. Hence, it is useful to adopt a building

block or a modular approach under which all the necessary tasks are first

identified, then completed through several iterations and finally synthesised to

develop a unified structure.

4.3 Areas Where Clients May Need Advice/Assistance

The client may need advice/assistance in one or more of the following areas:

• Structure to be adopted

• FEMA Regulations

• Procedural Compliance

• Jurisdiction Selection

• Sources of Funding

• Capital Structuring

• Shareholding Structuring

• Financial Projections

• Cross-border Taxation, Transfer Pricing Provisions, DTAA

Provisions, etc.

• Advice on Laws of Foreign Country

• Advice on Indian Laws, e.g., Companies Act, Taxation, Stamp Duty,

Takeover Regulations, etc.

• Documentation

• Implementation Assistance

V. APPLICABLE INDIAN LAWS

5.1 While an exhaustive list of all laws and all sections to be considered is not

possible, a bird’s eye view of some of the important Indian Regulations which one

must consider in cross-border restructuring are given below.

5.2 Income-tax has and continues to be one of the most vexed aspects in a cross-

border transaction. Some of the key issues to be borne in mind are as follows:

Issue Remarks

Residential Status of a

Company

• A foreign company is a resident of India if its control and

management is situated wholly in India during the year.

• This is a matter of fact - SMR Investments Ltd v DDIT,

ITA Nos. 4084 & 46/D/2006

• C&M is determined by the place where the Head and Seat

and the Directing Powers of the Company are located, i.e.,

the place from where the Board functions and not where the

shareholders are located – Narottam and Periera Ltd., 23

ITR 454 (Bom)

• Place of Effective Management may be different from that

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place where the shareholders reside - Natwest, P No 9 of

1995, 220 ITR 377 (AAR) / DLJMB Mauritius, 228 ITR

268 (AAR)

• Entire shareholding is Indian or that some of the Directors

are from India would not be material as long as other facts

prove it is a foreign company - Radha Rani Holdings, 110

TTJ 920 (Del ITAT)

• However, PoEM could also be where the shareholders are

located if they give instructions on how to carry out day-to-

day operations - Saraswati Holding Corp., 111 TTJ 334)

(Del ITAT) / Integrated Container Feeder Service, 278

ITR 182(Mum ITAT)

• Any body corporate incorporated abroad would be treated

as a company under the IT Act.

• A foreign company, whether listed or unlisted, would

always be deemed to be a closely held company under the

IT Act.

Deemed Dividend • A voluntary liquidation / capital reduction of a company

gives rise to deemed dividend – Vijay Kumar Budhia, 204

ITR 355 (SC); G. Narasimhan, 236 ITR 327 (SC)

• Buyback of shares does not give rise to deemed dividend.

However, in light of s.115QA inserted by the FA 2013, this

has become irrelevant for unlisted companies.

Income deemed to

accrue or arise in India

Enough has been written and said on the Vodafone saga and its

aftermath in the form of amendment to S.9 relating to taxation

of indirect transfers.

Capital Gains on

Liquidation

FMV of assets received (-) cost of shares (-) Amount taxed as

Deemed Dividend is taxable in the hands of the shareholders

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Capital Gains on

Buyback

• In case of listed companies, consideration received (-) cost

of shares is taxable in the hands of the shareholders

• In case of unlisted companies, see s.115QA, i.e., buyback

tax on companies

Capital Gains on

Reduction

FMV of assets received (-) cost of shares (-) Amount taxed as

Deemed Dividend is taxable in the hands of the shareholders

Capital Gains on

Mergers / Demergers

• Amalgamations which satisfy the conditions of s.2(1B) and

Demergers which satisfy conditions of s.2(19AA) are tax

neutral for shareholders

• Transfer of assets in a merger / demerger is tax neutral for

the transferor company, if the transferee is an Indian

company

• Merger / Demerger between two foreign companies is tax

neutral in certain cases

Indexation on shares Not available to non-resident investors

Slump Sale • Sale Consideration (-) Networth is taxable as long-term /

short-term capital gains

• Even negative networth is to be considered while computing

such capital gains - Summit Securities P Ltd., 145 TTJ

273 (Mum SB)

• Certain assets can be left out if they don’t vitiate the going

concern concept - Coromandel Fertilisers Ltd., 90 ITD

344 (Hyd) / Max India Ltd., 112 TTJ 726 (Amr)

Sale of Shares Different rates depending upon type of seller, long-term or

short-term capital asset, listed or unlisted securities, off-market

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or on-market sale.

S.56(2) and Rule

11U/11UA

• Applies when any foreign company acquires any shares in

an unlisted Indian company. A foreign company, whether

listed or unlisted is always treated as a company in which

public are not substantially interested.

Transaction must take place at FMV or higher. FMV is to

be valued as per Rule 11UA, which is the book value of the

shares. The DCF valuation is not applicable for this

purpose. Posers - Do these provisions apply to:

o Shares received on merger/demerger?

o Shares subscribed under a rights issue?

o Bonus Issue?

• The above provisions are not applicable if a foreign LLP /

firm acquires shares in an unlisted Indian company.

• The above provisions apply when an unlisted Indian

company acquires shares in any foreign company.

• Restriction on issue of shares at a price not exceeding fair

market value does not apply to issue to a non-resident.

Carry Forward of losses • In case of a closely-held company no carry forward / set off

of business losses and capital losses is allowed if 51% of the

beneficial voting power changes hands.

• This section does not apply to carry forward of unabsorbed

depreciation - CIT v. Concord Industries Ltd., 116

Taxman 845 (SC)

• Not applicable if Indian company is a subsidiary of a

foreign listed company; Non-discrimination Clause in

DTAA applies - Daimler Chrysler India, 120 TTJ 803

(Pune)

15

DTAA / Limitation of

Benefit

• LOB restricts Treaty benefits to genuine residents.

Substance over Form Test

• E.g., Singapore DTAA allows Treaty Benefits only to a

company listed in Singapore or one which has an annual

expenditure on operations in Singapore of S$200,000 / Rs.

50 lakhs in the last 24 months preceding the date of transfer.

• LOB recently inserted in India’s Treaties with Luxembourg,

UAE, Mexico, Kuwait, Saudi Arabia, etc.

• No LOB in Treaties with Mauritius, Cyprus, etc.

Non-discrimination

Clause

• Indian Subsidiary of a Foreign Listed Company is a

company in which public are not substantially interested.

• Is this not discrimination against a foreign company?

• Daimler Chrysler India, 120 TTJ 803 (Pune) has held

that this amounts to discrimination

Transfer Pricing • Every transaction of business restructuring with an

Associated Enterprise would be covered within the

definition of an International Transaction, irrespective of

whether it has a bearing on profits or income of the

enterprises.

• Transfer pricing compliances would now be required for all

such restructuring transactions.

• Transfer Pricing in the case of guarantee commission and

interest free loan are an increasing area of concern.

S.93: Transfer of asset

to Non-resident

• One obscure section which is often ignored in structuring

Outbound Transactions is s.93 which contains anti-tax

avoidance provisions. It deals with avoidance of Income

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Tax by Transactions Resulting in Transfer of Income to

Non-Resident

• This section applies even if the person who transfers the

asset and the person who has the power to enjoy the income

of the non-resident are two different persons. What is

essential is that by virtue of the transfer, the person resident

in India must acquire a right to enjoy the income of the non-

resident -Chidambaram Chettiar, 60 ITR 28 (SC).

Tax on Foreign

Dividends

Dividends received from certain foreign investee companies

(26%+ stake) are taxed at a concessional rate of 15%

Tax on Buyback by

unlisted companies

• Tax on company buying back shares @ 20% on sale

consideration (-) amount received for shares bought back

• Applicable only to unlisted companies

• Applicable even if buyback out of Securities Premium

Account?

• No tax on shareholder

• No credit available to shareholder

• Plugs Treaty benefit in case of non-resident shareholder

GAAR, when it comes

into force

5.3 The Indian regulatory scenario in this respect is as follows:

Law /

Regulation

Remarks

Companies Act, • Ss. 391-394 - Mergers, Demergers, reconstruction of Indian

17

Law /

Regulation

Remarks

1956 and

corresponding

provisions in

the Companies

Bill, 2012

companies. The Transferee Company must be an Indian Company

only. However, the Transferor Company can be any Company,

whether Indian or Foreign.

• S.77A - Buyback of Shares

• S.81(1A) – Preferential issue

• Ss.100-104 -Reduction of Capital

• Provisions relating to Voluntary Liquidation

• S.293 – Slump Sale

• S.372A – Inter corporate Investments

• Ss.108-111A – Transferability of shares

• Special rights in public companies – Right of First Refusal/Tag

Along/Drag Along / Russian Roulette, etc.

FEMA / FDI

Policy

• FEMA – It should be ascertained whether the acquisition of assets

in India or abroad constitutes a branch?

• Consolidated FDI Policy

• FEMA Inbound Investment Regulations

o Issue of shares for consideration other than cash requires prior

FIPB approval.

o Takeover of companies in Financial Services Sector is now on

the Automatic Route of RBI, e.g., Warburg’s acquisition of

Future Capital Holdings.

o An Open Offer by a Non-resident is on an Automatic Route,

e.g., Unilever’s offer for Hindustan Unilever’s shares.

o There is no provision for a foreign company to acquire an

Indian company by issuing its shares to the Indian shareholders,

i.e., a reverse stock swap – FIPB’s view in Sahjanand

Technologies P Ltd

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Law /

Regulation

Remarks

• FEMA Outbound Investment Regulations

o R.7 must be considered for acquisitions in financial services

sector, e.g., Religare’s acquisition of Hichens Harison & Co., a

UK stock broker.

o RBI has prescribed detailed guidelines for overseas investments

by NBFCs. These are in addition to the FEMA Regulations.

• Round-tripping – Although there is no express provision either in the

FEMA or in the Regulations, it refers to Indian money going abroad

as Outbound Investment and then being rerouted into India as FDI.

This is prohibited and the RBI / ED has launched proceedings

against several companies for round tripping.

Indirect

Taxation

• VAT on sale of business

• Transfer of CENVAT Credit

Stamp Duty • Stamp Duty on Merger

• Stamp Duty on Transfer of Shares / Debentures

• Stamp Duty on Sale of Business / Assets

• Stamp Duty on Share Purchase Agreement / Shareholders’

Agreement

SEBI Takeover

Regulations

Substantive and Procedural provisions relating to Takeover of a Listed

Company. Diageo’s acquisition of United Breweries is one example.

Provisions have also been enacted for indirect acquisition of a listed

company. A recent example of an indirect acquisition as a result of a

cross-border restructuring is that of Shree Digvijay Cement Co. Ltd.

The promoter shareholding of this company was held by Cimpor, a

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Law /

Regulation

Remarks

Portuguese Listed Company. As a result of a complex scheme of

restructuring and takeover between Cimpor, Votorantim, a Brazilian

company and InterCement Austria, an Austrian company, the entire

shareholding of Cimpor, Portuguese was held by Votorantim, Brazil.

This resulted in a change of control and an indirect acquisition of Shree

Digvijay triggering an open offer to the public.

Accounting AS-14 and other Generally Accepted Accounting Principles and

Practices

Listing

Agreement and

Securities

Contract

(Regulation)

Act, 1957

• Provisions relating to minimum non-promoter shareholding in listed

companies. Procter & Gamble has developed an innovative scheme

for complying with this requirement in the case of Gillette India

Ltd. They have sought to reclassify an earlier promoter as a public

shareholder.

• Prior approval of Stock Exchange for Restructuring of Listed

Companies

SEBI (Issue of

Capital &

Disclosure

Requirement)

Regulations,

2008

Preferential issue by listed companies. Daiichi Sanyo acquired

Ranbaxy by a combination of preferential issue of fresh shares in

Ranbaxy as well as buying out the promoters’ existing shares.

SEBI Delisting

Regulations

• A Foreign Company may acquire an Indian listed Company and it

may desire to delist the company. Delisting has caught on in a big

way in the Indian capital markets with several MNCs, such as,

Reckitt Benkiser, Hughes Software, E-serve, Cadbury, etc., leading

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Law /

Regulation

Remarks

the way.

• If as a result of the acquisition, the promoter holding crosses the

higher of 90% of the total issued capital or the aggregate percentage

of the pre offer promoter shareholding + 50% of the offer size, then

the delisting bid is deemed to be successful.

• The Foreign Company has to buy out the public holding in

accordance with the reverse book-building process, wherein the

acquirer quotes a floor price and the shareholders tender their bids

for prices at which they want the acquirer to buy out their shares.

Competition

Act

• Competition Act and Business Combination Regulations

• The CCI regulates all mergers, acquisitions, etc., which are above

the threshold limit and which are not in the exempted category

• The threshold for attracting the Business Combination Regulations

is as follows:

Location Type Total Assets Total Turnover

Only in India No Group Rs. 1,500 cr. Rs. 4,500 cr.

Only in India Group Rs. 6,000 cr. Rs. 18,000 cr.

In and

outside India

No Group US $ 750 m (of

which at least

Rs. 750 cr. in

India)

US $ 2250 m (of

which at least

Rs. 2,250 cr. in

India)

In and

outside India

Group US $ 3,000 m

(of which at

least Rs. 750 cr.

in India)

US$ 9,000 m (of

which at least

Rs. 2,250 cr. in

India)

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Law /

Regulation

Remarks

Some cross-border restructurings approved by the CCI include:

(a) Slump Sale by Wockhardt of its nutrition business and also the

sale of certain related intellectual properties to Danone Group, a

French MNC.

(b) Merger of two listed Japanese Steel companies, Nippon Steel

Corporation and Sumitomo Metal Industries, since their assets /

turnover of along with those of their Indian subsidiaries

exceeded the threshold.

(c) In the case of GS Mace Holdings Ltd – Max India Ltd, the CCI

held that acquisition pursuant to a contract note (without any

investment or loan agreement) by an FII which exceeds the

threshold of 25% is an acquisition in the ordinary course

requiring the prior approval of CCI.

(d) Cross-border mergers within the Group do not require the

approval of the CCI. e.g.,, Tata Chemical’s merger of its 100%

Mauritian subsidiary with itself.

Other Laws • NBFC Directions and RBI Act in case of takeovers / mergers of

NBFCs.

• Valuation Guidelines under FEMA

• Directives issued by other Ministries / Regulators, e.g., Defence,

TRAI (telecom), RBI (banks), MIB (broadcasting companies), etc.

VI. APPLICABLE FOREIGN LAWS

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6.1 In addition to the Indian Laws, one must also bear in mind the applicable Foreign

Laws in structuring the outbound business transactions. This can be ascertained

from the relevant foreign professional or a consultant. For example, if you want

to form an Offshore Company in Mauritius, you have to comply with the

requirements of forming an Offshore Company in Mauritius as prescribed by the

Financial Services Authority. Further, if the entity would engage into financial

services, then it will also require a licence from that authority. Similarly, several

countries have specific provisions for formation of a company in that country for

a particular business. For Example : China’s Provincial Foreign Investment

Regulations, FSA Registration in the UK, MAS Licence in Singapore and FDA

Licence in the USA for selling medicines.

6.2 Different countries may have different types of legal entities which you can select

for a foreign JV/WOS. For example, for offshore jurisdiction, Mauritius has

GBC-1 and GBC-2. Both have advantages and disadvantages. For example, if the

offshore company wants to employ any local Mauritius person in Mauritius, then

it has to be necessarily a GBC-1 Company and not a GBC-2 Company. Similarly,

the US has different types of companies, such as C-corporation, S-corporation,

LLP and LLC. Further, in tax haven countries, such as Mauritius, Bermuda, it is

possible to have a Protected Cell Company. The legal nature of the foreign entity

to be formed should be carefully selected.

6.3 The special tax provisions of the foreign jurisdiction should also be borne in

mind. For example, in Singapore there is a tax exemption scheme for new

companies. Subject to certain conditions, a newly incorporated and tax-resident

Singapore company may qualify for full tax exemption on the first Singapore

$100,000 of chargeable income. The exemption applies only to the qualifying

company’s first three consecutive years of assessment. Further, various countries

have special tax rules, such as Controlled Foreign Corporation Rules, Passive

Foreign Income Corporations, etc., which should also be borne in mind,

particularly while entering into a JV with a foreign entity.

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VII. JURISDICTION STUDY – LEGAL FRAMEWORK

7.1 Each country has its own legal framework within which businesses must operate.

When an Indian entity is contemplating restructuring with a foreign Company it

cannot do so in ignorance of the local laws of that country. The legal ecosystem

prevalent in that country would decide the mode of acquisition, the terms of the

acquisition, etc. Discussed hereunder are the salient features of the legal systems

of a few important jurisdictions to give an idea about the myriad and diverse

nature of cross-border investments and acquisitions. Please note that international

law is very dynamic and hence, every Indian company making an acquisition and

its advisors must always ascertain the law provisions from a lawyer practicing in

that jurisdiction.

7.2 Australia

(a) Australia allows listed / unlisted public / private / limited liability companies.

The Corporations Act 2001 governs all companies.

(b) Acquisition of more than 14.99% stake in any company requires a

notification to the Commonwealth Treasurer. However, this provision is not

applicable if the acquisition is of a value of less than A$100 million.

(c) The Australian Competition and Consumer Commission looks after all

cases of anti-trust and competition provisions, including mergers, business

combinations, etc.

(d) Acquisition of a stake in a company having more than 50 members triggers

an Offer Procedure and a detailed process is to be followed. Interestingly, this

applies even if the company is a private company.

(e) Australia does not have any exchange control legislation.

7.3 Brazil

(a) Brazil allows corporations and limited liability companies. LLCs have

various restrictions and hence, may not be advisable for joint ventures.

24

(b) No approvals are needed for share acquisitions. However, FDI is restricted in

certain key sectors, such as, media, aviation, energy, etc.

(c) The Conselho Administrativo de Defesa Econômica or CADE looks after

all cases of anti-trust and competition provisions, including mergers, business

combinations, etc. Interestingly, there is no waiting period under the anti-trust

laws for a business combination.

(d) Brazil does not have any exchange controls but it requires due registration of

all FDI with the country’s Central Bank.

7.4 China

(a) Companies incorporated under the People’s Republic of China (PRC) could

be LLCs with no shares or limited companies with share capital. In addition

to the Company Law, there are other legislations which govern joint ventures

and wholly owned subsidiaries in China. Foreign-invested Enterprises (FIEs)

may be Equity Joint Venture (EJV), Co-operative Joint Venture (CJV) or a

Wholly Foreign-Owned Enterprise (WFOE) or a Foreign-Invested Joint

Stock Limited Company (FISC). EJVs and CJVs are LLCs while WFOEs

and FISCs are limited companies.

(b) Anti-trust laws are administered by the Ministry of Commerce of the PRC

and the State Administration for Industry and Commerce. In addition, several

approvals are required in case of sensitive sectors.

(c) Acquisition of a stake in an LLC requires the consent of all other investors of

that LLC. Acquisition of listed companies is subject to the provisions under

the PRC Securities Law.

(d) The PRC has exchange control laws divide all transactions into Capital

Account and Current Account.

7.5 England

(a) Companies can be a listed /unlisted public / private / limited liability

company. The Companies Act of England is quite similar to the Companies

Act of India.

25

(b) Business combinations are regulated by the Enterprise Act 2002 and the

Office of Fair Trading. However, those mergers and acquisitions which are

governed by under the European Community Merger Regulation

139/2004 are not covered by this Act.

(c) Acquisition of listed companies is governed by the City Code on Takeovers

and Mergers. The SEBI Takeover Regulations are modeled on this City

Code.

(d) There are no exchange control legislations in the UK.

7.6 France

(a) Companies in France are regulated by the French Code of Commerce and

can be general partnerships, limited partnerships, joint stock companies and

limited liability companies. Joint stock companies can be corporations (SA),

limited partnership with shares or simplified joint stock companies (SAS).

(b) The French Monetary & Financial Code govern foreign investment in

France. For most investments, a notification is required. FDI in sensitive

sectors requires prior approval from the Minister of the Economy.

(c) Business combinations are regulated by the French Code of Commerce and

the Competition Council. However, those mergers and acquisitions which are

governed by under the European Community Merger Regulation

139/2004 are not covered by this Act.

(d) Acquisition of more than 33.33% stake in a listed company triggers the Open

Offer procedures.

(e) There are no exchange control legislations in France.

7.7 Germany

(a) German Companies could be a GmbH (an LLC) or an AG (joint stock

companies).

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(b) Except for FDI in certain sensitive sectors, such as, banking, insurance, etc.,

no approvals are required.

(c) Business combinations are regulated by the Act against Restraints of

Competition and the Competition Council. However, those mergers and

acquisitions which are governed by under the European Community

Merger Regulation 139/2004 are not covered by this Act.

(d) Acquisition of more than 25% stake in a company must inform the target

company. Acquisition of control over a listed company involves making an

open offer.

(e) There are no exchange control legislations in Germany.

7.8 Hong Kong

(a) Hong Kong allows listed / unlisted public / private / limited liability

companies.

(b) Except for FDI in certain sensitive sectors, such as, banking, broadcasting,

insurance, etc., no approvals are required.

(c) Hong Kong does not have anti-trust legislation.

(d) Acquisition of public companies is regulated by the Hong Kong Code on

Takeovers and Mergers. Since Hong Kong was a UK dependent territory,

this Code is somewhat similar to the UK City Code.

(e) There are no exchange control legislations in Hong Kong.

7.9 Italy

(a) Italy allows listed / unlisted public / private / limited liability companies.

(b) Except for FDI in certain sensitive sectors, such as, banking, insurance,

broadcasting, telecommunications, etc., no approvals are required.

(c) Business combinations are regulated by the Italian Anti-trust Act.

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(d) In case of an acquisition of 30% or more of a listed company, an open offer is

required.

(e) There are no exchange control legislations in Italy. However, certain

transactions need to be reported to the Government Agencies.

7.10 Japan

(a) Japan has amended its Companies Act and now has 4 entities ~ KK, Godo

Kaisha, Goshi Kaisha and Gomei Kaisha.

(b) No approvals are required for FDI. However, certain sectors require prior

notification.

(c) Business combinations are regulated by the Antimonopoly and Fair Trade

Maintenance Act. The Fair Trade Commission regulates this Act.

(d) In case of an acquisition of 5% or more of a listed company, a tender offer is

required.

(e) There are no exchange control legislations.

7.11 Malaysia

(a) Malaysia allows companies limited by shares - Sdn. Berhad. The Companies

Act is modeled on the English Companies Act and hence, quite similar to the

Indian Act also.

(b) Foreign Investment requires approval of the Foreign Investment Committee

(FIC). The FIC has formulated the ‘Guidelines for the regulation of

Acquisition of Assets, Mergers and Take-Overs’. Further, all manufacturing

activities require approval of the Ministry of International Trade and

Industry (MITI) under the Industrial Co-Ordination Act.

(c) Business combinations require the approval of the FIC or the MITI. However,

there are no anti-trust laws in Malaysia.

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(d) Acquisition of control (33% or more stake) of a public company triggers an

open offer under the Malaysian Code on Takeovers and Mergers. This Code

applies to both listed and unlisted public companies.

(e) There are very limited exchange control legislations.

7.12 Netherlands / Holland

(a) Companies in Holland may be limited liability private companies (BV) or

public companies (NV).

(b) No approvals are required for foreign investment.

(c) Business combinations are regulated by the Dutch Competition Act.

(d) Acquisitions in Holland are regulated by a spate of legislations:

o Supervision Act

o Merger Code

o Works Council Act

o Takeover Directive of 2004

(e) There are no exchange control legislations.

7.13 Singapore

(a) Singapore allows companies limited by shares (private or public) or LLPs.

(b) Except for foreign investment in certain sectors, such as, banking, financial

activities, securities, media, etc., no approvals are required.

(c) Business combinations are governed by the Competition Act, 2004.

(d) The Singapore Code on Takeovers and Mergers applies to takeovers of

listed companies and triggers an open offer once shares in excess of 30% are

acquired.

(e) There are no exchange control legislations.

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7.14 South Africa

(a) Companies may be private or public.

(b) Foreign investment does not require any approvals.

(c) Business combinations are governed by the Competition Act, 1998.

(d) The Companies Act applies to takeovers of any public company or a private

company with more than 10 shareholders. If more than 35% of these

companies is acquired, then a similar offer must be made to all shareholders.

In case of listed companies, additional requirements are imposed by the Stock

Exchange Regulations.

(e) South Africa has Exchange Control Regulations. However, there are no curbs

on foreign investment other than certain registration requirements.

7.15 South Korea

(a) South Korea has the Korean Commercial Code which allow limited

liability companies and unlimited liability companies .

(b) All FDI is regulated by the Foreign Investment Promotion Act (FIPA) and

the Foreign Exchange Transaction Act (FETA). Most sectors have no

restrictions for FDI. However, a few sectors are either restricted or subject to

Government approval. All investments carry a reporting obligation under

FIPA /FETA.

(c) Business combinations are regulated by the Monopoly Regulation and Fair

Trade Act.

(d) An acquisition of 5% or more of a listed company carries certain reporting

obligations.

(e) The FETA and FIPA are the legislations dealing with exchange controls.

However, they are quite liberal in operation.

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7.15 Switzerland

(a) Swiss Companies could be a Sarl (an LLC) or an AG (joint stock companies).

(b) Except for foreign investment in companies owning immovable property, no

approvals are required.

(c) Business combinations are regulated by the Swiss Law on Cartels.

(d) Acquisition of more than 33% stake in a listed company involves making an

open offer for 100% of its shares.

(e) There are no exchange control legislations.

7.17 USA

(a) Companies in USA are regulated both by Federal and State Law. Thus, one

comes across some States, such as, Delaware which have relatively liberal

laws and hence, a majority of the small companies are incorporated in

Delaware. A Company can be an LLC, an S-Corp or a C-Corp.

C-Corporations are the most commonly used type of corporations suitable

for businesses of any size. C-Corporations can have any number of

shareholders. If a corporation has S-Corporation status, it is treated as a

Partnership or a Limited Liability Company for tax purposes. S-

corporations are not separately taxable entities, so the income is "passed-

through" to the shareholders.

(b) Certain sectors such as aviation, media, etc., have limited foreign ownership.

(c) Business combinations are heavily regulated by the Sherman Act, the

Clayton Act, the Federal Trade Commission Act. A detailed filing is

required for mergers and acquisitions over a certain size. This filing is known

as the Hart Scot Rodino Filing.

(d) Takeover regulations are governed by both Federal and State Laws and

hence, one must consider both of these when making an acquisition for a US

Company.

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(e) There are no exchange control legislations.

VIII. USE OF INTERMEDIATE HOLDING COMPANY

8.1 If an Indian entity is contemplating a restructuring transaction involving an

Outbound Investment, then it should bear in mind whether or not to involve an

Intermediate Holding Company (IHC).

8.2 Structuring Options for IHC for Outbound Restructuring

(A) The three broad options regarding structuring of Outbound Investments /

Acquisition/ Merger of Foreign Company with Indian Company are:

• Direct Operating Company

India Foreign Country

Indian company acquires in / invests directly in a Foreign

Company or Foreign Company is merged directly into Indian

Company.

• Intermediary Holding Company (“IHC”) in:

• Tax Haven Jurisdiction: Mauritius, BVI, Netherlands, Malta,

Liechtenstein, etc.

• US, Europe, Asia-Pacific

The above transactions are done via an IHC. Thus, an IHC is floated

abroad and the Foreign Company is merged into this IHC or the

Foreign Company is acquired by this IHC.

• Regional Holding Companies (“RHC”)

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• If there are several operating WOS / JVs, it may be worthwhile

to have Regional Holding Companies, e.g., one for North

America, one for EU Countries, one for Asia, etc.

• Depending upon the need of the business and other factors, one

can increase the layers of companies between the Indian

company and the foreign WOS / JV company. For example,

there may be an Umbrella Holding Company under which

there may be different IHCs for different Business Units and

under some of the IHCs, there may be RHCs and under an

RHC there may be different Operating WOS / JVs. Where

RHCs are not required, the Operating WOS / JVs may be

directly under an IHC.

(B) Need for IHC / RHC : It should be selected only if there is a definite

advantage of having the same. One has to weigh the cost of creation and

maintenance as well as the cost and hassles of compliance of tax and other

laws applicable to IHC / RHC versus the benefit to be derived from the

same.

(C) The following are the important considerations:

(i) FEMA permits an Indian SPV. However, practical experience has

shown that the RBI frowns upon multi-layered structures. In fact the

Dy. Governor of the RBI in one of his public speeches has stated that

one contentious issue which needs to be addressed for providing a

transparent policy framework for outward FDI relates to multi-

layered structures. The motivations range from genuine

business/commercial considerations to taxation benefits which are

available to any global investors. On the flip side at times the

underlying motive could be to create opacity through a labyrinth of

33

structures for reasons unjustified on business grounds or from the

point of view of home country’s interest. Hence, there is a need to

have a greater clarity in our approach in this regard. In fact, the

NBFC Department of the RBI has expressly prohibited the use of

multi-layered structures / cross-jurisdictional structures for outbound

investment by NBFCs. At best, a single IHC is permitted.

(ii) Companies Bill 2012: A Company cannot make investment through

more than 2 layers of investment companies. The restriction is on 2

layers of investment companies and not operating companies. An

Investment Company means a company whose principal business is

acquisition of shares, debentures or other securities. This is one of

the most important restrictions under the Bill. However, this

restriction does not apply if an Indian company acquires any foreign

company and if such foreign company has investment subsidiaries

beyond two layers as per the foreign laws.

(iii) Barrier : Product Liability

(iv) Can raise funds in SPV against its Holdings. For instance, one very

large listed Indian manufacturing company planned to transfer all its

foreign investments to a German subsidiary and then list this

subsidiary abroad to unlock value.

(v) Secrecy from competitors

(vi) Administrative convenience

(vii) Cost of formation and maintenance

(viii) Tax Implications must be considered:

• Dividend income received by the IHC from the subsidiary may

either be exempt from tax or be subject to tax in the IHC

jurisdiction.

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• Capital gain realised from sale of shares of the subsidiary may

either be exempt from tax or be subject to tax at a full/

concessional rate in the IHC jurisdiction.

• Controlled Foreign Corporation (CFC) Regulations might

become a reality once the Direct Taxes Code is implemented.

Under that scenario, tax would be payable in India on income

retained in the IHC even if not distributed to India.

• Thin-capitalisation Rules - Some countries have Thin

Capitalization Rule, according to which if the proportion of

debt: equity is more than that permitted under the relevant tax

law, then the interest on the excess loan capital will not be

allowed as a deduction. For example, Australia has a Thin

Capitalization Rule. In case a foreign investor owns more than a

specified percentage of the equity, control or income of an

Australian Enterprise and that Enterprise has interest-bearing

loans from the Foreign Investor, then an acceptable level of

Debt-Equity must be maintained. In most cases, a 3:1 ratio is

acceptable. In case the Ratio is exceeded, interest on the excess

debt portion would be disallowed in computing the Australian

Enterprise’s income.

• Singapore, Luxembourg and the UK do not have specific Thin

Capitalization Rules. However, the UK Tax Authorities closely

scrutinise companies which have a very high proportion of debts

in their capital structure. Similarly, in Luxembourg, highly

leveraged holding companies are closely scrutinised. The

Netherlands has specific Rules regarding Thin Capitalization.

35

• Control and Management / Place of Effective Management of

the Company

(ix) One has to consider the purpose of setting up of an intermediate

holding company. In other words, the decision should be driven by

objectives of the client.

(x) For example, if there is no tax treaty between India and the foreign

country where the operating company will be situated, then it may be

worthwhile to consider setting up an intermediate holding company

in a country where there is a tax treaty between India and the country

of IHC. In that case, there should also be a tax treaty between the

country of IHC and the country of the operating company. Even if

there is no tax treaty between the country of IHC and the country of

the operating company, it may still be worthwhile to set up an IHC if

there are no tax disadvantages.

(xi) Sometimes, it may be advisable to set up an IHC for non-tax

considerations. For example, let us suppose that an Indian entity

wants to set up an operating WOS in Mozambique for Diamond

mining. The Indian company does not want to transfer the profit of

the WOS in Mozambique to India due to tax considerations. At the

same time, it does not want to retain its profit in the Mozambique

WOS due to an uncertain political scenario. In that case, the Indian

company can set up an IHC in Mauritius, which can have a step-

down subsidiary in Mozambique. Then, the profit of the

Mozambique WOS can be parked in the Mauritius IHC.

(xii) There may be other commercial reasons for interposing an IHC. For

example, if an Indian company wants to set up several operating

36

companies or branches in foreign countries, then it may be

worthwhile to have an IHC for the purpose of effective

management of the funds. In that case, if one operating company

has surplus funds, it can remit the same to the IHC and the IHC can

give it to another operating company which requires the funds

without routing it to India and then sending it from India to the

second operating company.

(E) Preferred Tax Jurisdictions for Setting Up IHC

Whenever an Indian entity wants to consider an investment /acquisition/

merger of a foreign Company, a question often arises is, whether it is

necessary/advisable to have the operating company in the country of

operations and have an IHC for holding the investment for an operating

foreign company? Further, the IHC may be located in India or abroad.

Let us look at tax provisions on IHC in certain jurisdictions.

Ireland

No. Particulars Local Tax Rate

1. Dividend 25% (Note a)

2. Capital Gain Tax Nil (Note b)

3. Withholding Tax on

dividend to India

Nil

Notes:

(a) Dividend received by an IHC in Ireland from a foreign subsidiary is

subject to tax at the corporate tax rate which is 25%. However, IHC can

take a credit of withholding tax on dividend received. Irish tax legislation

37

also provides that any credit that cannot be used can be carried forward

indefinitely and offset against Irish tax on foreign dividends in subsequent

periods.

(b) There is no capital gain tax on sale of shares by IHC if the following

conditions are satisfied:

• If the investee company is a resident in a country with which Ireland

has a Tax Treaty,

• It exists wholly or mainly for the purpose of carrying on a trade, or

alternatively be a member of a trading group.

• For the exemption to apply, the investor company must have held, for

a period of at least one year at the time of disposal, directly or

indirectly a "substantial shareholding" in the investee company. The

requisite percentage of shareholding in the investee company broadly

speaking, is, 5%.

Netherlands

No. Particulars Local Tax Rate

1. Dividend Nil in certain cases (Notes a & b) & 15% for Others

2. Capital Gain Tax Nil in certain cases (Notes a & b) & 25% for Others

3. Withholding Tax on

dividend to India

10%

Notes:

(a) If dividends are received by a Dutch IHC from a subsidiary that qualifies

for the Dutch participation, dividend is exempt from taxation.

(b) The dividend received from a subsidiary company, which is a resident of

another EU member state, exempt from tax in the hands of the parent

company. Similarly, capital gains realised on the disposition of the shares

of such a subsidiary company are exempt.

38

Mauritius

No. Particulars Local Tax Rate

1. Dividend 3% (effective tax rate for GBC 1)

2. Capital Gain Tax Nil

3. Withholding Tax on

dividend to India

5% rate is applicable if recipient has at least 10%

holding, otherwise the rate is 15%

Singapore

No. Particulars Local Tax Rate

1. Dividend Nil subject to Note below

2. Capital Gain Tax Nil

3. Withholding Tax on

dividend to India

Nil

Note:

Foreign sourced dividend will be exempt if the following conditions are satisfied:

• Only persons resident in Singapore qualify for the tax exemption.

• Dividend received from a foreign company is exempt if the income is

received from a jurisdiction with headline tax rate of at least 15%.

Headline tax rate of a foreign jurisdiction refers to the highest corporate

tax rate of the foreign jurisdiction. It need not be the actual rate of tax

imposed by the foreign jurisdiction on the specified foreign income

• The tax may be imposed by the foreign jurisdiction either on the dividend

itself or on the income out of which the dividend is paid.

Otherwise, such dividend will be subject to tax @ 17% (corporate tax rate).

39

Cyprus

No. Particulars Local Tax Rate

1. Dividend Nil (Note a)

2. Capital Gain Tax Nil (Note b)

3. Withholding Tax on

dividend to India

Nil

Notes:

(a) Dividend received by Cyprus Company from its subsidiary company abroad

will be exempt from tax in Cyprus.

(b) In Cyprus capital gains are only taxable on the transfer of immovable

property or the transfer of shares of the company whose assets include

immovable property. Other capital gains are not taxable, for e.g. Capital gain

form transfer of shares of subsidiary company.

China

No. Particulars Local Tax Rate

1. Dividend 25%

2. Capital Gain Tax 25%

3. Withholding Tax on

dividend to India

10%

8.3 Structuring Options for IHC for Inbound Restructuring

While enough has been written about using an IHC for Outbound Restructuring, it

may be noted that IHCs can also be used for Inbound Restructuring, i.e., FDI in

India / Acquisition of an Indian Company / Acquisition of Business of an Indian

40

Company by a Foreign Company. Thus, under this structure, the Foreign Investor

sets up an IHC in India which is used as a vehicle for acquisitions / investments.

IHC may be set up as a 100% subsidiary of the foreign company or as a JV with

an Indian entity. For instance, Otsuka of Japan acquired a business from Claris

Lifesciences Ltd in a JV between itself and Claris.

The following factors need to be considered in this respect:

a) FIPB approval is required for FDI in an Investment Company

b) According to the RBI Guidelines, an Investment Company would be

classified either as a Core Investment Company (CIC) or as a Non-

Banking Financial Company. Only certain CICs, i.e., Systemically

Important CICs (CIC-ND-SI) needs to be registered with the RBI

whereas all NBFCs need to be registered prior to starting the financial

business. This is a very important requirement for an Indian IHC.

c) Issue of shares by the IHC to the investor must bear in mind the provisions

of s.56(2)(viia) of the Income-tax Act. Accordingly, if the issue is at lower

than the fair market value, then the difference is income in the hands of

the investor. At the same time, the FEMA Guidelines require that the issue

must be at a value which is not lower than the DCF valuation of the IHC.

Moreover, the recent transfer pricing controversy (the Shell dispute) over

whether the issue of shares in an Indian company is subject to transfer

pricing regulations should also be remembered.

d) If the Indian IHC is used to acquire another Indian company, then double-

layer taxation is a factor. Dividend declared by the operating company to

the IHC would be subject to Dividend Declaration Tax in the hands of the

IHC. When the IHC, in turn, declares a dividend, it would get a credit for

the DDT paid by the IHC.

e) If the IHC is the holding company of a listed Indian company, then the

provisions of the SEBI Takeover Regulations relating to an Indirect

41

Acquisition should be considered when the shares of the IHC are

transferred.

f) As per the Companies Bill 2012, an Indian company cannot make

investment through more than 2 layers of investment companies. This

restriction applies even to NBFCs, CICs and to private companies.

IX. STITCHING UP THE DEAL

Next let us examine briefly the steps involved in completing such a deal.

9.1 Term Sheet

The starting point of all acquisitions, mergers, whether inbound or outbound, is a

Term Sheet. A ‘Term Sheet’ records the understanding arrived at between the

Company, the Promoters and the PE on the key decision areas for PE making the

investment. A Term Sheet summarizes the principal terms and conditions for

proposed investment in Company. It is subject to applicable regulatory

requirements, satisfactory completion of due diligence and definitive

documentation and is not intended to be and is not an exhaustive description of

the agreement, arrangement or understanding between the parties.

9.2 Due Diligence

A formal legal, operational and financial due diligence is a must in any cross-

border acquisition. Due to our obsession with all things foreign, we sometimes

make the mistake of presuming that all foreign companies would be law

compliant and hence, do not undertake a due diligence while acquiring a foreign

company. Nothing could be farther than the truth!! It is wrong to generalise that

all foreign companies are law abiding. Our experience has shown that the due

diligence sometimes reveals shocking violations by large International companies.

9.3 Valuation

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9.3.1 Valuation in the case of any deal, foreign or Indian is always the most important

part. Due regard must be had to specific laws and circumstances of the foreign

countries while valuing a foreign business. Again take nothing at face value and

be on guard at all times.

9.3.2 Let us look at some of the issues which one typically comes across while carrying

out a valuation for a cross-border restructuring:

(a) Transfer of Shares to Non-residents: In case of a sale of shares of

unlisted companies the sale should be at a price not lower than the DCF

valuation of the company. The issues in this respect are as follows:

(i) The foundation of any DCF valuation is projecting the Free Cash

Flow of the business. A minority shareholder may not be privy to

the projections of the investee company. In spite of that he is

forced to adopt the DCF method.

(ii) The DCF method may not be suitable in the case of certain

industries, such as, NBFCs, Banks, Insurance Companies, etc. In

these industries, a Price to Book Value or some other Method may

be more appropriate. However, no deviation is permissible from

the method.

(iii) The DCF method is to be adopted even for start-ups which are only

at a business plan stage. However, investment by way of

subscription to Memorandum of Association of a company can be

made at face value.

43

(iv) Forecasting the Growth Rate for the Free Cash Flow while

computing the Terminal / Perpetuity Value should not be done on

an ad-hoc basis.

(b) Mergers and Demergers: The typical issues which one encounters in

valuation for Indian Court-approved Scheme of Arrangements, including

cross-border ones, are as follows:

(i) While sanctioning the Scheme, the Court would not interfere with

the valuation as long as the shareholders have by a majority

approved the Scheme and a competent expert has valued the Share

Exchange Ratio – Hindustan Lever Ltd, 83 Comp Cases 30

(SC); Miheer H Mafatlal, 87 Comp. Cases 792 (SC).

(ii) While working out the share exchange ratio, the valuer may adopt

one or more methods, such as, Book Value, Earnings

Capitalisation Method, Discounted Cash Flow, Market Price, EPS,

etc. Some important decisions which have dealt with the method of

valuation, include, Miheer H Mafatlal, 87 Comp. Cases 792

(SC), Bihari Mills 58 Comp. Cases 6 (Guj), Tinsukia Electric

Co., (1989) 3 SCC 709, Jindal (India) Ltd., (1998) 1 Comp LJ

36 (Del), Apco Electricals P Ltd 86 Comp. Cases 457

(Guj),Varuna Investments, 106 Comp. Cases 410 (Bom), etc.

(iii) Valuation based on DCF Method is valid – Nods Worldwide Ltd,

32 SCL 491 (Mad).

(iv) The use of DCF Method is not always possible. In Dr. Mrs.

Renuka Datla vs Solvay Pharmaceutical B.V. (2003) 57 CLA

134 (SC), the value on the basis of capitalization of past earnings

was allowed. The discounted cash flow method was not used by

44

the valuer because no independent (third party) projections were

provided and there was a vast difference in the projections which

two parties had provided.

(v) Mathematical calculation of Share Exchange ratio is technical and

best left to the experts – Asian Coffee, 103 Comp. Cases 17 (AP).

9.4 Documentation

This is succeeded by Definitive Documentation, such as a shareholders’

agreement, a share purchase agreement, a sale purchase agreement, etc., as the

case may be. While making an outbound merger / acquisition / takeover it is very

important to involve a good local Chartered Accountant and a Lawyer.

Knowledge of local laws and practices is a great advantage. For instance, our

client was negotiating for the takeover of the brands and operations of an Italian

fashion company which was under bankruptcy. The local Italian lawyer alerted

the Indian company that according to the Suspensive Conditions under Italian

Bankruptcy Law, although our client could own and operate the brands in Italy,

it could not transfer or give them out of licence elsewhere until the fulfilment of

either of the following two conditions:

(i) Ratification of the Composition with Creditors; or

(ii) A bankruptcy procedure is initiated for the Italian Company and the

Bankruptcy Trustee can no longer revoke or terminate the Agreement in

any of its parts, in accordance with the Italian Bankruptcy Law.

9.5 International Arbitration

(a) The importance of proper drafting of acquisitions, etc., the clause relating

to the arbitration cannot be overemphasized. It is quite common for Indian

45

businesses to sign a contract without questioning the arbitration clause. In

such cases, when a dispute actually arises, the Indian concern finds out

that the arbitration / dispute resolution clause is something which it would

not have ordinarily agreed upon. This is one area which small and medium

enterprises in particular should be more careful since they usually do not

rely upon much external professional assistance.

In case the parties desire that the disputes which arise under the agreement

must be settled by way of arbitration only, then the agreement must

specifically incorporate a clause to that effect.

(b) International arbitration could either be institutional or ad hoc. In the case

of an institutional arbitration, the parties agree to be bound by the rules of

an institutional arbitral tribunal, e.g., the International Chamber of

Commerce (ICC), Paris.

(c) In the case of an ad hoc arbitration, all matters are left open to the

discretion of the parties to the dispute.

(d) Once it is decided whether to go in for an institutional or an ad hoc

arbitration, the next important issue is the language of the arbitration.

(e) The venue of the arbitration is also important and can be mentioned in the

agreement. While deciding upon the place, the parties may select a neutral

venue to neutralise any home-turf advantage. This is often done in the case

of ad hoc arbitrations.

(f) An illustrative arbitration clause may be as follows:

“Any dispute arising in connection with or arising out of this

agreement will be referred to the arbitration of the International

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Chamber of Commerce, Paris, and will be in accordance with its

Rules. The venue of the arbitration will be London, United

Kingdom and the language will be English.”

X. CASE STUDIES FOR GROUP DISCUSSION

10.1 Now that the background has been set, let us discuss some case studies. While it

may not be possible to discuss all of these in group discussion, the idea is to show

the breadth and length of the topic of cross-border restructuring.

10.2 CASE STUDY-1: ACQUISITION OF BUSINESS IN INDIA

Facts

(a) Sunrise India Ltd is a very successful Indian company engaged in

manufacturing of FMCG products. It has a turnover of Rs. 4,600 cr. Its

summarised Balance Sheet as on 31st March 2013 is as follows:

Rs. in Cr.

Share Capital 175.00 Net Fixed Assets

(factory and land at

Maharashtra)

609.00

Reserves & Surplus 1,400.00 Investments 552.00

Net Current Assets 414.00

1,575.00 1,575.00

The Income-tax WDV of the Fixed Assets is Rs. 500 cr.

(b) Union Jack Ltd is a British MNC engaged in the same line of business

with presence across the world. It does not have a presence in the Indian

market and hence, it desires to acquire the business of Sunrise India Ltd.

For various strategic reasons, it does not wish to acquire the shares of

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Sunrise India Ltd. The parties have agreed upon an Enterprise Valuation

of Rs. 2,000 crores for Sunrise.

Required

(i) Please advise Union Jack Ltd on the possible strategies for business

acquisition.

(ii) Advise it on the various Income-tax and Regulatory Issues which would

be applicable for either party.

(iii) Would your answer have been different if Sunrise India Ltd was a

subsidiary of a Foreign Holding Company?

10.3 CASE STUDY-2: ACQUISITION OF OVERSEAS BUSINESS

Facts

(a) Wall Four Inc. is a US based company engaged in multi-brand retail

trading. It is engaged in the retail trade of sports equipment and sports

apparels across the USA. Its current market price is $5 per share, its book

value is $ 11 per share and EPS is $1.5 per share.

(b) Clothes Ltd is an unlisted Indian company engaged in retail trading in

India. However, it does not have a presence in the sports retailing field.

Further, it wishes to make inroads into the American market. For this

purpose, it desires to acquire Wall Four Inc. It is open to acquiring the

business or acquiring the shares of Wall four Inc. and then continuing

Wall Four as its subsidiary.

Required

(i) Please advise Clothes Ltd on all the possible strategies for business

acquisition.

(ii) Advise it on the various Income-tax and Regulatory Issues.

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10.4 CASE STUDY-3: ACQUISITION OF INDIAN COMPANY

Facts

(a) Wealth Multipliers Ltd (“Wealth”) is an Indian NBFC which is listed on

BSE / NSE. It has various subsidiaries for different businesses, such as,

stock broking, commodity broking, real estate, etc. It has been promoted

by a clutch of foreign and local investors as follows:

Investor Jurisdiction % Stake

Finance Private Equity Fund-III Mauritius 14%

Opportunities Lifecycle Inc. Singapore 10%

Indian Promoters Indian 30%

Total 54%

(b) Growth Bank AG (“Growth”) is a German Banking Company. Growth

desires to acquire Wealth Multipliers Ltd to enter the financial services’

business in India.

(c) The promoters of Wealth have entered into an Agreement on 1st April

2013 with Growth as follows:

(i) Growth to acquire the entire stake held by the promoters @ Rs.

450 per share

(ii) Growth to subscribe to a preferential allotment by Wealth of 10%

of its post-issued capital @ Rs. 450 per share.

The Board of Directors approved the Preferential Issue to Growth on 10th

April, 2013, on which date the market price was Rs. 500 per share. It was

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approved by the Shareholders’ Resolution in the EGM on 10th May, 2013

on which date the price was Rs. 600 per share.

Required

(i) Please advise on the tax implications for all the sellers.

(ii) What regulatory compliances would have to be borne in mind?

10.5 CASE STUDY-4: EXIT OF PE / FDI FUNDS

Facts

(a) Space Realty Ltd is a real estate company. It is a subsidiary of a listed real

estate company – Ace Projects Ltd. It is developing an FDI compliant

project – a large integrated township.

(b) Hyper Ventures Ltd is a Mauritius based Private Equity Investor. It had

invested $100 million in Ace Realty Ltd for a 45% stake on October 2010.

The Share Subscription Agreement provided that Ace would give an exit

to Hyper at the end of three years by one or more modes. The promoters of

Space, i.e., Ace Projects Ltd have also given an undertaking to buy out

Hyper if all modes fail. The Agreement provided that Hyper would be

given an exit at such a price as would give it an IRR of 25%.

(c) Hyper is now to be given an exit.

Required

(i) What Exit Options are available?

(ii) What are the tax and regulatory issues under each of these Options?

(iii) Is the Share Subscription Agreement under which the promoters have

given a commitment to buyout the FDI Investor legally valid?

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(iv) Is there any other condition to be fulfilled for allowing repatriation of

funds?

(v) Can Hyper exit today by selling its stake in Space to Viber Fund, Cyprus,

another Private Equity Fund? Thus, no transaction takes place at an India

level.

(vi) Hyper, in turn, is owned by Cipher Fund, a Mauritius Company. Can

Cipher today sell the shares of Hyper to Viber? Thus, no transaction takes

place at an India level.

10.6 CASE STUDY-5: OFFSHORE GROUP HOLDING COMPANY

Facts

(a) Apex Group is into the infrastructure space and has 7 different companies

for different verticals – oil and gas, road, power, ports, SEZ, logistics and

ship building. All of these companies are listed in India. The promoter

group in these companies consists of Mr. A or his wholly owned private

limited companies.

(b) Apex has been advised that if it were to consolidate the promoter

shareholding in all these different companies into one foreign company

and then list that company on an overseas stock exchange, say, NYSE,

LSE, etc., then it would get a very good valuation.

(c) For this purpose, the Group has been advised that the promoters may gift

the promoter shareholding to the offshore holding company.

Required

(i) Enumerate the regulatory and tax consequences of entering into such a

structure.

(ii) What is the single-most important factor for such a structure?

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