Company law in India
- An acquisition of shares is acceptable with prior approval of the audit committee and board of directors. Share sale between related parties may also require prior shareholders’ approval. Earlier mergers or demergers were largely governed by sections 391-394 of the Companies Act, 1956.
- Recently, with effect from 15 December 2016, sections 230-240 of the Companies Act, 2013, were notified(except Section 234 of Companies Act, 2013), following to which all the Schemes of Arrangement now require approval of the National Company Law Tribunal (NCLT) as against the High Court earlier.
- As per the procedures, any scheme is first approved by the audit committee, the board of directors, stock exchanges (if shares are listed) and then by the shareholders/creditors of the company with a requisite majority (i.e. majority in number and 3/4th in value of shareholders/creditors voting in person, by proxy or by postal ballot).
- NCLT gives its final approval to the scheme after considering the observations of the Regional Director, Registrar of Companies, Official Liquidator, income tax authorities, other regulatory authorities (RBI, stock exchanges, SEBI, Competition Commission of India [CCI], etc.) and any other objections filed by any other stakeholder interested in or affected by the scheme.
Income-tax Act, 1961
- Implications under the Income Tax Act, 1961 can be understood from the following three perspectives:
- Tax concessions to the Amalgamated (Buyer) Company.
- If the amalgamating company has incurred any expenditure eligible for deduction under sections 35(5), 35A(6),35AB(3), 35ABB, 35D, 35DD, 35DDA, 35E and/or 36(1)(ix), prior to its amalgamation with the amalgamated company as per section 2(1B) of the Act and if the amalgamated company is an Indian company,then the benefit of the aforesaid sections shall be available to the amalgamated company, in the manner it would be available to the amalgamating company had there been no amalgamation. Also under section 72A of the Act, the amalgamated company is entitled to carry forward the unabsorbed depreciation and unabsorbed accumulated business losses of the amalgamating company provided certain conditions are fulfilled.
- Tax concessions to the Amalgamating (Seller) Company.
- Any transfer of capital assets, in the scheme of amalgamation, by an amalgamating company to an Indian amalgamated company is not treated as transfer under section 47(vi) of the Act and so no capital gain tax is attracted in the hands of the amalgamating company.
- Tax concessions to the shareholders of an Amalgamating Company.
- When the shareholder of an amalgamating company transfers shares held by him in the amalgamating company in consideration of allotment of shares in amalgamated company in the scheme of amalgamation, then such transfer of shares in not considered as transfer under section 47(vii) of the Act and consequently no capital gain is attracted in the hands of the shareholder of amalgamating company. Where an Indian target entity is sought to be acquired by a foreign entity, it may be noted that the corporate laws permit only domestic companies to be amalgamated. So the foreign acquirer have to create a local special purpose vehicle (SPV) in India to give effect the amalgamation with the Indian company and more over the SPV avails the tax benefits on amalgamation under the Act since the same are subject to the amalgamated company being an Indian company.
- In the case of foreign companies holding shares of Indian companies, on amalgamation or de-merger of the foreign company with another foreign company, the transfer of shares would enjoy exemption from capital gains tax, subject to the following conditions:
- At least 25% shareholders of the amalgamating foreign company, 75% of shareholders of the de- merged company continue to remain share holders of the amalgamated foreign company/resulting foreign company and
- Such transfer does not attract tax on capital gains in the country of incorporation of the amalgamated/resulting company. Amalgamation when effective: – Date of amalgamation. Every scheme of amalgamation provides for a transfer date from which the amalgamation is effective i.e., the Appointed Date‘. The effective date‘is the date when the amalgamation actually takes place after obtaining the jurisdictional Court Approval and furnishing of the relevant documents with the Registrar of Companies. The effective date thus differs from the appointed date.
- Tax Implications on Mergers and Acquisitions Mergers and acquisitions (M&As) in India
- Mergers and acquisitions are an accepted strategy for corporate growth. While they may create value, mitigate agency problems associated with a firm's free cash flow, enhance the firm's market power, or help utilize tax credits.
- The tax impact of properly structuring the disposition and acquisition of a company can have a very material impact on the economics of the transaction to both parties. , there are numerous tax planning opportunities that allow each party to obtain its specific tax and economic objectives without harming the other party.
Securities laws in India
- Any acquisition of shares of more than 25% of a listed company by an acquirer would trigger an open offer to the public shareholders. Any merger or demerger involving a listed company would require prior approval of the stock exchanges and SEBI before approaching NCLT.
- Further, under the Takeover Code, a merger or demerger of a listed company usually does not trigger an open offer to the public shareholders.
Foreign Exchange Regulations in India
- Foreign exchange regulations Sale of equity shares involving residents and nonresidents is permissible subject to RBI pricing guidelines and permissible sectoral caps.
- A merger/demerger involving any issuance of shares to non-resident shareholders of the transferor company does not require prior RBI/government approval provided that the transferee company does not exceed the foreign exchange sectoral caps and the merger/demerger is approved by the Indian courts.
- Issuance of any instrument other than equity shares/compulsorily convertible preference shares/ compulsorily convertible debentures to the non-resident would require prior RBI approval as they are considered as debt.
- Where an acquisition relates to a sector where foreign investment is restricted and therefore needs prior regulatory approval from the central government, the waiting period for such approvals can range from six to eight weeks. The central government has delegated authority to the Foreign Investment Promotion Board (FIPB) under the support of the Ministry of Finance to grant such approvals on its behalf. In practice, delays are notuncommon and the definitive timing to obtain FIPB approval is hard to predict.
- Foreign investment in the insurance sector is restricted to 49 per cent of the share capital of the Indian insurance company. In addition, the Indian insurance company is required to obtain a license from the Insurance Regulatory and Development Authority and adhere to several reporting, solvency and accounting requirements.
- Tax residency certificate
- Non-resident taxpayers are mandatorily required to furnish a tax residency certificate along with the prescribed information such as status of the taxpayer, country of incorporation, tax identification number, etc, for claiming the benefit of an applicable tax treaty.
- Withholding tax
- Where the payee is a non-resident or a foreign company, there is a legal obligation on the payer (whether resident or non-resident) to deduct tax at source when making any remittance to the former, if such payment constitutes income which is chargeable to tax under the Tax Act read with the applicable tax treaty.
Competition regulations in India
Any acquisition requires prior approval of CCI if such acquisition exceeds certain financial thresholds and is not within a common group. While evaluating an acquisition, CCI would mainly scrutinize if the acquisition would lead to a dominant market position, resulting in an adverse effect on competition in the concerned sector.
Stamp duty in India
- The Indian Stamp Act, 1899, provides for stamp duty on transfer/issue of shares at the rate of 0.25%. In case the shares are to be withdrawn, there would be no stamp duty on transfer of shares.
- Conveyance of business under a business transfer agreement in the case of a slump sale is charged to stamp duty at the same rate as in the case of conveyance of assets. Typically, a scheme of merger/demerger is charged to stamp duty at a concessional rate as compared to conveyance of assets. The exact rate levied depends upon the specific entry under the respective state laws.