business reorganization and consolidation

Business reorganization / consolidation - Our services

Neha Singhi & CoPractising Company Secretary

Modes of M&A in IndiaModes of M&A in India

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Neha Singhi & Co Practising Company Secretary

Acquisitions

Share Purchase

M&A

Merger / Demerger

Amalgamation Demerger Business Purchase

SlumpSale

ItemizedSale

Modes of M&A in India

Merger / DemergerMerger / Demerger

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Merger

• Merger refers to consolidation of two or more entities

• Involves transfer of assets and liabilities from one or more transferor companies to a transferee company and in consideration, the transferee company issues shares to the shareholders of transferor company

• High Court approval required (section 391-394 of Companies Act)

• Time frame - around 4 - 6 months

What is a Merger?

• Income tax neutral

• Losses can be carried forward and set-off by the transferee company

The transaction

Shareholders

Company A Company BMerger

Consideration in the form of shares

of Company B

Alternative structure

Company A Company B

Shareholders

Merger

Company C

ShareholdersShareholdersKey tax aspects:

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• Demerger involves transfer of identified business undertaking from one company to another

• In consideration, the company which acquires the business, issues shares to shareholders of the selling company

• High Court approval required (section 391-394 of Companies Act)

• Time frame - around 4 - 6 months

What is a demerger?

Business A Business B

Shareholders of selling company

Selling company

(‘Demerged Company’)Buyer

company

(‘Resulting Company’)

Demerger of business B

Consideration in the form of shares of buyer company

The transaction

The resultant structure

Business A

Selling company

(‘D Co’)Business B

Buyer company (‘R Co’)

Shareholders

Demerger

• Income tax neutral

• Losses can be carried forward and set-off by the transferee company

Key tax aspects:

Modes of acquisitionsModes of acquisitions

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Slump sale / Hive-off

• Involves transfer of identified business undertaking on a lock stock and barrel basis from one company to another for a lump sum consideration

• Buyer to pay consideration (typically, in the form of cash) to the seller company. Values can not to be assigned to individual assets / liabilities

• No Court approval required - can be achieved through shareholder resolution and a business transfer agreement

• Time frame - 1 – 2 months

What is a hive off/ slump sale? The transaction

The resultant structure

Business A

Selling company

Business B

Buyer company

Shareholders

Business A Business B

Selling companyBuyer

company

Consideration

Shareholders

Sale of business B

• Capital gains arises to the seller, unless buyer is a 100 per cent subsidiary or parent

• Arguable that the provisions of section 50C (i.e. land and building to be transferred at stamp duty valuation) not applicable

Key tax aspects:

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Itemised sale

• Involves transfer of business where consideration is identified against each asset

• In consideration, the buyer company to pay cash to the seller company

• No Court approval required - can be achieved through shareholder resolution and a business transfer agreement

• Time frame - 1 – 2 months

What is an itemised sale?

Selling companyBuyer

companyItemized sale

of assets

Consideration

• Capital gains to be computed on each item / asset sold

• Provisions of section 50C (i.e. land and building to be transferred at stamp duty valuation) applicable

Key tax aspects:

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Target company

Existing shareholder(s)

Structure 1

Acquirer company

Buy out of equity stake from existing shareholders

Structure 2

Preferential issue by Target company

Certain acquisition structures

Cash

Transfer of shares

Target company

Existing shareholder(s)

Acquirer company

Cash infusion

Issue of

shares

Share Purchase

Our servicesOur services

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Our services

Newton redefined - Every action has a tax and regulatory reaction

SEBI Income Tax Stamp Act

FEMA

Companies Act

Accounting

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Our services

Our scope of work would be divided into 3 Phases:

Phase Scope of work

Phase I Advice on the suitable options for achieving the consolidation and other specific queries of the management.

Phase II Assistance in re-locating the registered office, if required, (specifically, from stamp duty costs perspective) and pre-implementation high level diagnostic review

Phase III Implementation - Assistance in the consolidation process adopted (including assistance in post implementation intimations)

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Analysis in analyzing the suitable options for achieving the consolidation from a tax and regulatory stand point, specifically from the following perspective:

Income-tax Act, 1961 Companies Act, 1956 Foreign Exchange Management Act, 1999 Foreign Direct Investment Regulations SEBI regulations Service tax Value Added Tax Stamp Duty regulations

Comments on specific queries of the management from a tax and regulatory perspective on each of the options identified.

Phase I

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Assistance in relocating the registered office, if required (specifically, from stamp duty costs perspective)

Undertaking tax due diligence for verifying the quantum of tax losses (business loss and unabsorbed depreciation) incurred since the date of incorporation and the eligibility to carry forward the same.

Highlighting the safeguards/ issues/ fiscal impacts (incentives or detriments), if any, that would need to be considered both pre and post consolidation / acquisition to maximize the efficiency of consolidation / acquisition, to the extent feasible.

Identifying the approvals required under the aforesaid legislations/ regulations.

Obtaining a list of pending litigation, arbitration or investigation involving the Companies before any Court or regulatory body that may impact the consolidation / acquisition process.

Obtaining a list of executed and pending agreements. Hold discussions with the management of the Companies to understand restrictions, if any, relating to such agreements that may impact the consolidation / acquisition process.

Discussions with the management of the Companies to understand any other specific issues that may significantly impact the proposed consolidation / acquisition.

Phase II

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During the entire implementation exercise, we would act as ‘Project Leader’ who would assist in implementing the proposed merger. More specifically, as Project Leaders we would carry out the following:

Co-ordinate between the various agencies involved to facilitate smooth implementation i.e., We will be the single point contact between the Companies and the Legal Counsel;

Ensure that the time frames for implementation are adhered to; and Proactively identify issues and ensure that roadblocks in the implementation process are addressed.

Holding preliminary meetings and discussions with the management of the Companies for preparation of the Scheme to be filed with the High Court / Applications to be filed with various regulatory authorities

Holding discussions with the management of the Companies in relation to the following key decision points and assisting the Companies in the determination of the following:

The ‘Appointed Date’ for the proposed merger; Whether the books need to be closed and the financial statement is required to be drawn as on the ‘Appointed Date’; The consideration and mode of discharge of the same; Whether valuation of the businesses is required for the purpose of arriving at the consideration; and The accounting treatment to be adopted in the books of the amalgamated company under India GAAP for reflecting the

business transferred.

Phase III

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Liaising with the Legal Counsel and assisting him in relation to the following:

- Drafting of scheme of merger / demerger and preparation of notice/ explanatory statement to shareholders;

- Preparation and filing of the first petition with the High Court;

- Calling for meetings with shareholders, creditors on approval of the scheme or obtaining dispensation of the same;

- Drafting the second petition to be filed with the High Court and filing the same with the High Court along with the Final Scheme;

- Drafting public notices, explanatory statements, advertisements to be published etc in connection with approval of the scheme;

- Follow up for the sanction of the Scheme by the High Court after necessary modifications, if any.

Liaising with RoC and RD for forwarding their respective reports to the High Court.

Post consolidation / acquisition process viz. Filing with the ROC & Intimation to relevant authorities etc.

Phase III (cont..)

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Thank You

business reorganization and consolidation

Business

seller company

company bmerger consideration

selling company d

transferee company issues

business b buyer company

transfer of business

business b shareholders

services neha singhi