1. Basics of Tax - Mergers & Acquisition

2. Contents Modes of M&A Recent M&A Transactions 2 1 3 Taxation Aspects 4 Regulatory Aspects 5 Case Studies

3. Recent M&A Transactions

4. Recent M&A Transactions – News Clippings 3 The worlds largest retailer Diageo buys fresh 26% in United Spirits for INR 11,449 crore, gains control July 2, 2014 ET Sun Pharma to acquire Ranbaxy in $3.2 bn deal Apr 26, 2015, Business Standard Google sells Motorola to Lenovo for $2.91 billion January 29, 2014, The Verge Reliance Industries completes acquisition of Network 18 Media and TV18 Broadcast Ltd. July 7, 2014, ET Reliance Power to acquire all hydro projects of Jaypee group July 27, 2014, Business Standard Thomas Cook buys Sterling Holiday for INR 870 crore in a transaction structured through a multi layered process, involving both cash and stock swaps. February 9, 2014 Adani Ports and Special Economic Zone (APSEZ) completes 100% acquisition of Dharma Port from Tata Steel and L&T IDPL for INR 5,500 crore. May 17, 2014 Flipkart buys out Myntra for $300 m May 23, 2014, The Hindu Facebook Buys WhatsApp for $19 Billion February 19, 2014, Bloomberg Businessweek

5. Need for M&A

6. 5 Acquisition of Competence or Capability Achieve Economies of Scale Diversification – Entry into new market/ product Opening up of Indian Economy Attract overseas investments Financial / commercial restructuring

7. Modes of M&A

8. 7 Mergers & Acquisitions (M&A) [1/2] Modes Amalgamation / Merger Modes of M&A De-merger Acquisitions Asset PurchaseShare Purchase Slump Sale Itemized Sale Capital Re- organization Buy-back Capital Reduction Liquidation

9. Mergers & Acquisitions (M&A) [2/2] Key considerations under M&A Structuring……..its beyond Tax c Changing Regulatory Environment Foreign Exchange Regulations Securities Law Indirect Taxes Income Tax Act Stamp Duty Companies Act and Accounting  Understanding the FDI Regulations  Seeking necessary RBI/ FIPB approvals  Complying with prescribed guidelines  Compliance with SEBI Regulations/approvals  Stock exchange compliances  Sales Tax / VAT applicability on business transfer, mergers / demergers  Service tax regulations  Scheme of arrangements u/s 391 – 394 of the Companies Act  Approvals from RD/ ROC/ OL  Complying with prescribed procedures, resolution, filings etc  Accounting implications and disclosures.  Understanding state specific stamp duty laws  Planning levies/ registration charges  Adjudication proceedings etc.  Tax implications in the hands of the Seller, purchase / Transferor Transferee / Company, shareholders  Helping maximize depreciation benefit  Continuity of Carry forward of losses  Tax neutrality of restructuring and continuity of fiscal benefits 8 Impact on stakeholders such as shareholders, creditors and employees also important

10. Taxation Aspects

11. Tax Neutrality Section 2(1B) – Amalgamation Meaning -  Merger of one company (B Co.) with another company (A Co.)  Merger of two or more companies to form a new company Conditions -  all property of transferor company become property of transferee company  all liabilities of transferor company become liabilities of transferee company  shareholders holding not less than three fourths in value of the shares in transferor company become shareholders of transferee company (other than shares already held by transferor or its subsidiary company) 10 A Co B Co A Shareholders B Shareholders MERGER Companies Act, 2013 permit cross border mergers or amalgamation. However, relevant provisions (sec 234) have not been made effective yet Merger Merger conditions

12. Key tax implications No capital gain on transfer of capital assets in the hands of Co. B if Co. A is an Indian company [Sec. 47(vi)]; No capital gains in the hands of shareholders of Co. B if : The transfer is made in consideration of shares in the Co. A except where the shareholder itself is the amalgamated company, and Co. A is an Indian company. Expenditure on amalgamation – tax deductible in the hands of Co. A in five equal installments [Sec. 35DD] Co. ACo. B Merger of Co B into Co A Issues: Whether deduction u/s 80-IA/80- IB/80-IC would be carried forward to amalgamated company Whether MAT credit in books of amalgamating co would be transferred to amalgamated co Shareholders Issue of shares Merger Key tax implications 11

13. 12 A Co B Co A Shareholders B Shareholders Option 1  Merger of B Co. into A Co.  A Co. issues shares to B shareholders i.e. 25% shareholders of B Co. Structure Mechanics Issue of shares Merger Case study 75% 25% Merger  Merger of A Co. into B Co.  B Co. issues shares to A shareholders i.e. 75% shareholders of A Co. Structure Mechanics A Co B Co A Shareholders B Shareholders Option 2 Issue of shares 75% 25% Merger 25%

14. Tax Neutrality Section 2(19AA) – Demerger Meaning -  Transfer of one or more undertakings of the demerged company (P Co.) to a resulting company (Q Co.) Conditions -  All the property and liabilities of the undertaking are transferred.  Property and liabilities will be transferred at the respective book values.  Resulting Company issues its shares to the shareholders of the demerged company on a proportionate basis [except where the resulting company itself is a shareholder of the demerged company].  At least three-fourths shareholders in value of the demerged company will become shareholders of the resulting company.  Transfer of Business Undertaking is on a going concern basis. Undertaking – includes part of undertaking or unit or division of undertaking or a business activity taken as a whole, but does not include individual assets and liabilities or any combination thereof not constituting a business activity 13 Q Co P Co A Shareholders B Shareholders Demerger of A Business AB Demerger Conditions

15. Key tax implications: No capital gain on transfer of capital assets in the hands of Co. A [Sec. 47(vib)] No capital gain on transfer / issue of shares [Sec.47(vid)] Expenditure on demerger– tax deductible in five equal installments [Sec. 35DD] Cost of shares in resulting company = (Cost of shares in demerged company) x (Net Book Value of assets transferred/ Net Worth of demerged company pre-demerger) [Sec.49(2C)] Actual cost of transferred assets in the hands of Resulting company = Actual Cost in the hands of Demerged company [Explanation 7A to sec.43(1)]; and Transfer of accumulated loss and unabsorbed depreciation to resulting company allowed [Sec. 72A] Where directly relatable to undertaking, such loss; Where not directly relatable, in the proportion of the assets retained and transferred Company B Shareholders Demerger Issue of shares Bus. A Shareholders Bus. C Company A Bus. A Bus. B Bus. A Whether deduction u/s 80-IA/80- IB/80-IC would be carried forward to the Resulting co. Issues: Demerger Key tax implications 14

16. 15 Q Co P Co A Shareholders B Shareholders Demerger of A Business AB Option 1 Issue of Shares & payment of cash to all the shareholders. Manner of Discharge of Consideration Discharge of Consideration in shares & cash Q Co P Co A Shareholders B Shareholders Demerger of A Business AB Option 2 Option given to the shareholders to receive Shares or cash. Manner of Discharge of Consideration Discharge of Consideration in shares or cash 60% shareholders received Shares and 40% received cash. Merger & Demerger Demerger – Case study

17. Utilization of tax losses & unabsorbed depreciation Section 72A of the Act Amalgamation/ Merger  Carry forward of tax losses and depreciation allowed to Amalgamated Company if: - Amalgamating Company o Owns Industrial Undertaking (Manufacturing or processing of goods, computer software, Power Generation/distribution, telecommunication business, mining or construction of Ships, Aircrafts or rail systems) or a Ship or a Hotel. o Has been engaged in the business for 3 or more years o Has held 3/4 th of the book value of fixed assets for preceding 2 years - Amalgamated Company o Continues to hold 3/4 th of the book value of fixed assets for 5 years o Continues the business for 5 years o Achieve 50% of installed capacity of the undertaking before the end of 4 years from the date of amalgamation & maintain upto 5 years Demerger  Benefit of set-off of tax losses & depreciation related to the Demerged undertaking available to the Resultant Co  Undertaking need not be an ‘Industrial Undertaking’, unlike in Amalgamation  Allocation of losses on direct or proportionate basis 16 Merger & Demerger Continuity of business losses/unabsorbed depreciation in Merger/Demerger

18. Section 79 of the Act  Applicable only to closely held companies o companies other than companies in which public are substantially interested  No carry forward / set off of accumulated business losses o in case common shareholding of 51% is not maintained as on last day of the financial year  Includes all losses except carry forward / set off of unabsorbed depreciation  Section not applicable where there is a change in shareholding of an Indian Company which is a Subsidiary of a F Co. as a result of the Merger or Demerger of the F Co. subject to the condition that 51% shareholders of the merging or demerging F Co. continue to be the shareholders of the amalgamated or resulting F Co. 17 Utilization of tax losses & unabsorbed depreciation Merger & Demerger Impact on business losses due to change of shareholding This is very relevant in Acquisitions (including global acquisitions) which leads of change of shareholding

19. Case Study A Co Services & Investment business ABC CoXYZ Co X Co Manufacturing business  A Co is a closely held company & X Co is a Listed Company  A Co has accumulated tax losses in services business  Proposal to consolidate A Co and X Co Facts of the Case Merger of A Co with X Co – Availability of losses? 1 Reverse merger of X Co with A Co. – Availability of losses? 2 De-merger of Services business of A Co into X Co. – Availability of losses? 3 18 Accumulated Loss Options Merger & Demerger Continuity of business losses/unabsorbed depreciation in Merger/Demerger – Case Study 1

20. 19 X Ltd A Ltd (Listed Co) Shareholder B Pre - Acquisition 40%60% X Ltd A Ltd 100% Post - Acquisition Whether accumulated tax Losses of X Ltd would lapse ? Whether possible to protect losses X Ltd is engaged in the business of manufacturing and selling soaps A Ltd proposes to acquire the shareholding of X Ltd from B Merger & Demerger Impact on losses due to change of shareholding – Case Study 2 Accumulated Losses

21. 20 Q Ltd Shareholder A Shareholder B Pre - Acquisition 40%60% Q Ltd Shareholder A 100% Accumulated Losses Post - Acquisition A proposes to acquire the shareholding of Q Ltd from B Merger & Demerger Impact on due to change of shareholding – Case Study 3 P Ltd 100% Accumulated Losses Would accumulated tax Losses of Q Ltd lapse ? Would accumulated tax Losses of P Ltd lapse ? 100%

22. 21 X Ltd Shareholder A Shareholder B Pre - Merger 40%60% Accumulated Tax Losses Post - Merger Would accumulated tax Losses of Y Ltd lapse ?X Ltd proposes to merge into Y Ltd Merger & Demerger Impact on losses due to change of shareholding – Case Study 4 Y Ltd 100% Shareholder A Shareholder B 40%60% Y Ltd Merger

23.  Tax Incentives are either based on business (u/s 80-IA/80-IB/10B) or Area/ Region based (u/s 80-IC/10A /10C)  Continuity of unexpired period of tax holiday to the transferee company in amalgamation / de-merger except u/s Section 80-IA(12A)  Explicit provisions not provided for Slump sale in the Act leading to ambiguity on availability or otherwise 22 Tax Holidays  MAT payable on book profits in the absence of Nil/lower tax profits  Credit for MAT allowable to the assessee company who has paid such taxes  Amalgamating Co ceases to exist after amalgamation.  No specific provision for carry forward of MAT credit in case of amalgamation or de- merger  Recent Judicial precedents allowing the credit to Transferee Company MAT Credit Merger & Demerger Carry forward of tax incentives and MAT Credit 1.SKOL Breweries vs ACIT (Mumbai ITAT)

24.  Choice of Appointed date  Not specifically defined in the Act  Interpreted based on rulings of the Apex Court  The date of amalgamation is the date mentioned in the scheme and approved by the court unless the Court specifies any other date  Relevant for tax purposes as it is classified as the date of amalgamation / de-merger 23 Appointed Date April 1, 2014September 30, 2014April 1, 2015 Effective Date of Merger Appointed Date Concept: Date on which merger/ demerger is deemed to be effective. RetrospectiveProspective Merger & Demerger Concept and relevance of Appointed Date in Merger/Demerger

25.  Transfer of “undertaking” for lump sum consideration without values being assigned to individual assets and liabilities 24 Concept of Slump Sale  Undertaking includes any part of the undertaking or a unit or division of an undertaking or business activity taken as a whole but does not include individual assets and liabilities or any combination thereof not constituting a business activity Meaning of Undertaking Slump Sale  Capital gain = Slump Sale consideration minus Tax Net-worth of undertaking;  Tax Net-worth: Book Value of Non-depreciable Assets + WDV of Depreciable Assets - Value of Liabilities  Any change in the value of assets on account of revaluation is ignored.  Provisions relating to indexation not applicable. Asset Sale Normal capital gains computation applicable Capital Gain Computation Choice of MNC’s Increasing choice of MNC’s investing in Indian businesses especially when there are past Tax liabilities/doubts of hidden liabilities Lien of tax authorities on assets transferred Tax Authorities may declare a transaction void if a tax demand is pending against an assessee – Tax clearance certificate to be obtained; Slump Sale / Asset Sale (1/1) Concept and taxability

26. 25 X Ltd Shareholders Mechanics 100% Mechanics Whether this transaction is “demerger” or “slump sale”?? Slump sale vis-à-vis Demerger – Case Study Y Ltd Transfer of Business A A Issue of shares to shareholders Whether this transaction is “demerger” or “slump sale”?? X Ltd Shareholders 100% Y Ltd Issue of shares to X Ltd A Transfer of Business A

27.  Purchase of own shares by Company - empowered under section 68 of Companies Act, 2013 26 Concept  Out of Free reserves or Securities premium account or Proceeds of a fresh issue of shares or securities other than the proceeds of an earlier issue of shares of the same kind of shares / securities Source  Not subject to deemed dividend – specifically excluded from definition of deemed dividend u/s 2(22)  Subject to capital gains (long term or short term depending upon period of holding of shares) u/s 46A in the hands of shareholder.  New levy on buyback of unlisted shares u/s 115QA introduced by Finance Act 2013  Applicable to domestic companies on buyback under s. 68 of Companies Act, 2013  Levy @ 20% on the company buying back shares on “distributed income” i.e. consideration paid less amount received for issue  Exemption in the hands of shareholder (Section10(34A)) Key Tax implications Buyback (1/1) Concept and taxability Key Conditions  Maximum buyback in a financial year = 25% of the company’s paid up capital + free reserves  Maximum buyback of equity shares in a financial year = 25% of the total paid-up equity capital in that financial year  Debt equity ratio not to exceed 2:1 post buy back  Permitted for fully paid up shares only  Buyback possible in case specified defaults have been remedied and 3 years have passed from time of remedy of default  Not permitted out of money borrowed from Banks/ Financial Institutions.

28.  Capital Reduction: Repayment of excess capital by Company - empowered u/s 66 of Companies Act,2013  Liquidation: dissolution of company and distribution of assets to its shareholders 27 Concept  Out of surplus cash / assets with the Company Source  Subject to deemed dividend u/s 2(22) (d) / u/s 2(22) (c) read with Section 46  deemed dividend to the extent of accumulated profits  incremental distribution to be treated as capital gains - cost of acquisition available as deduction  No indirect tax or stamp duty implications Key Tax implications Capital Reduction / Liquidation (1/1) Concept and taxability Key Conditions  To be authorized by Articles of Association  Special resolution to be passed by shareholders  Subject to approval from High Court/ Tribunal  Subject settlement of dissenting creditors

29. 28 Typical Court process in Merger/ Demerger/ Capital reduction Drafting of the Scheme of arrangement, finalization of the appointed date, etc 1 7 Board meetings of Transferor Co. and Transferee Co. to approve the Scheme 8 2 4 Timeline for completion of implementation process ~ 6-8 months File Chairman’s report and petitions with the HC(s) Issuing notices to Regional Director (RD) & Official Liquidator (OL) 5 Holding of shareholders’/ creditors’ meeting (if not dispensed) as per the directions of jurisdictional HC(s) 3 Application to Jurisdictional HC(s) for Directions for meeting 9 6 Public notices in newspapers Obtaining NoC from RD & OL, if any Final Court hearing(s) and filing the final order with RoC Under the Companies Act 2013, National Company Law Tribunal (‘NCLT’) would have the powers to approve the High Court Scheme. However, relevant provisions of Cos Act 2013 has not been notified yet.

30. Regulatory Aspects

31. The objectives of the Stock Exchanges & SEBI is to protect the interest of the public shareholders Regulatory aspects of M&A (1/4) Key securities control regulations  As per clause 40(A) of the listing agreement a company is required to maintain minimum level of public shareholding of 25%  Approval of stock exchange / SEBI to the Scheme under clause 24(f) of the listing agreement  Fairness opinion to be obtained from Merchant Banker  Certificate from the Statutory auditor on compliance of Accounting Standards to be obtained  Public shareholders can play an active role in approval of Schemes as per revised circular 30 Listing Agreement  Any person acquiring 25% or more stake in a listed company shall make mandatory open offer to public shareholders – minimum size of mandatory open offer 26%  Creeping acquisition of 5% p.a. permitted beyond 25% holding but upto 75% holding without triggering open offer  Exemption for Court Schemes available with conditions i.e. Scheme directly involving the Target Co. is exempt while not directly involving the Target Co. is exempt only if cash consideration is <25% of total consideration and post Scheme, atleast 33% of voting rights in combined entity to be held by same persons who held the entire voting rights earlier; Takeover Code Concept: Every listed company is required to sign a listing agreement. Concept: SEBI to monitor and regulate the control & acquisition of a listed company

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

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

34. 33 Companies Act 2013 – Now notifiedImpact of proposed DTC on M&A – CFC, GAAR, etc.Exchange Control Regulations – FDI, Pricing GuidelinesTax Accounting Standards enactedRevamp of Stamp Duty provisions – Centre and StateInternational Financial Reporting StandardsCompetition ActApplicability of GAAR – Postponed till March 31, 2017 Game changers Regulatory aspects of M&A (4/4) Changing game & new rules in the old games

35. Transaction Case Study

36. 100% MAT Planning Shareholders A Co.  A Co. to merge with B Co. under a court approved Scheme of Amalgamation  B Co. to record listed investments at fair value of Rs. 20 based on purchase method of accounting 1.No MAT on future sale upto Rs. 20 2.Sale of listed shares exempt from tax if long-term 3.Critical to justify commercial rationale for merger 35 B Co. Listed Investments Mechanics of the Deal Book Value – Rs. 10 Fair Value – Rs. 20

37. 100% Indirect transfers – Vodafone issue F Co. 1 F Co. 2  Buyer can acquire shares of I Co. or F Co. 2 to acquire Indian assets  Acquisition of I Co. shares to trigger capital gains tax in India  Acquisition of F Co. 2’s shares – whether taxable? 1.If F Co. 2 derives “substantial” value from I Co., gains taxable in India 2.“Substantial” is defined under the Act – At-least 50% value of F Co derives based on value of I Co 36 Buyer I Co. Mechanics of the Deal Overseas India

38. 100% Listing without IPO Shareholders Listed Co.  Pursuant to merger / demerger, Unlisted Co. to issue shares to shareholders of Listed Co.  Unlisted Co. to automatically list without following the IPO process 37 Unlisted Co. Mechanics of the Deal Shareholders Option 1 – Merge Listed Co. into Unlisted Co. Option 2 – Demerge a business undertaking from Listed Co. to Unlisted Co. Issue shares

39. Financial re-structuring  Company can approach the Court to adjust losses against Capital  Net Worth not impacted – however, ability to repatriate cash through dividend improves  Tax implications including MAT liability to be evaluated in detail prior to implementation 38 Option LiabilitiesRs.AssetsRs. Capital1,000Net Assets200 Losses(800) TOTAL200TOTAL200 Pre LiabilitiesRs.AssetsRs. Capital200Net Assets200 Losses-- TOTAL200TOTAL200 Post

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