Motives and Innovative ways of Structuring and Accounting ... · PDF fileStructuring and...
Transcript of Motives and Innovative ways of Structuring and Accounting ... · PDF fileStructuring and...
Motives and Innovative ways ofStructuring and Accounting forBusiness combination
Presenter: Amrish Shah
January 20, 2017
*Intended for general guidance only
Page 2 CTC Training Presentation
► Modes of M&A in India
► Indian laws impacting M&A
► Case Studies
► IndAS 103 vs AS-14
Content
Page 3 CTC Training Presentation
M&AM&A
BusinessPurchaseBusinessPurchase
Merger / DemergerMerger / DemergerAcquisitionsAcquisitions InternalRestructuring
InternalRestructuring
Financialrestructuring/
Enhancingstake/repatriation
Enhancingstake/repatriation
Focus on corebusiness /hive-off
of non corebusiness/monetize
Consolidation ofbusinesses /
entities
Focus oninorganic growth/strategic or non
strategicinvestments
Focus on corebusiness /sell off
non corebusiness
DemergerDemergerBuybackBuybackSharePurchase
SharePurchase
Slump Sale /Itemised SaleSlump Sale /Itemised Sale
CapitalReduction
CapitalReduction AmalgamationAmalgamation
Overview - Modes of M&A in India
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Newton Tax: Every action has a tax and regulatory reaction
CompaniesAct, 2013
Indirecttax
CompetitionAct
FDI
ExchangeControl
StampdutyIncome-tax
SEBI
Industry specific laws like Insurance, Telecom, Banking etc. should be considered
Ind AS
Indian laws impacting M&A
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Key regulations
Income tax
► Tax neutrality
► Availability of tax exemptions/benefits
► Transfer of tax credits
► Step up in tax basis
Companies Act
► NCLT approval
► Approval of shareholders,creditors & other statutoryauthorities
► Post implementation procedures
SEBI & Stock exchange► Listing of shares / New Co
► Stock exchange approvals
► Take-over code implications
► Filing compliances
Stamp duty► Valuation of shares
► Indian Stamp Act vs. StateStamp Act
► Valuation of immovable property
► Set-off of stamp duty
Exchange control► Issue of shares to non resident
on merger
► FDI / RBI – Approval / automaticroute
Other regulations► Competition Act
► Indirect tax
► Industry specific law
Cross border► Host jurisdiction compliances
► Tax implications in hostjurisdiction
Accounting► Impact under Ind-AS 103
► Nature of transaction – Commoncontrol or otherwise
Key regulatory considerations on M&A
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Company A Company B
ShareholdersShareholders ShareholdersShareholders
Merger of Companies A & B with Company C
SUB Co
HOLD Co
SUB Co
HOLD Co
Merger of SUB Co with HOLD Co
Consideration in the formof shares of Company B
Consideration in the form of shares of Company C
Merger of Company A with Company B
No shares to be issuedby HOLD Co
Consideration in theform of shares ofSUB Co
Shareholders
Merger of HOLD Co with SUB Co
100%100%
Company A Company B Company CMerger
Merger
Domestic merger / amalgamation situations
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F CO 1 F CO 2
Shareholders
F CO
INDIA
I CO
Shareholders
I CO
OUTSIDE INDIA
Merger of F CO 1 (holding I CO) with F CO 2 Merger of F CO with I CO
Consideration in the formof shares of F CO 2 Consideration in the
form of shares of ICO
INDIA
OUTSIDE INDIA
Merger
F CO
INDIA
I CO
OUTSIDE INDIA
Shareholders
Merger of I CO with F COConsideration in the form ofshares ofF CO
Cross border merger situations
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Hold Co
DIV 1
Shareholders
WOS CODIV 2
100%
100%
Demerger ofDIV 2
CO 1
DIV 1
Shareholders
CO 2
DIV 2
100%
100%
Demerger ofDIV 2
Demerger of DIV2 to Hold Co -no consideration to be issuedsince Hold Co holds 100% in
WOS Co
Demerger of DIV2 to non-WOS against consideration
to shareholders of CO 1
CO 2
DIV 1
Shareholders
CO 3
DIV 2100%
100%
Demerger ofDIV 2
Demerger of DIV2 to Co 3against consideration to
shareholders of CO 1CO 1
1 2
3
DIV 1
Shareholders
CO 2
DIV 2
100%
100%
Demerger ofDIV 2
Demerger of DIV2 to Co 2against 80% cash consideration
to shareholders of CO 1 and20% cash consideration to CO 1CO 1
4
Domestic demerger situations
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Case Study 1: Slump Exchange
Background / Transaction mechanics► Seller Co to transfer Unit 2 to Buyer Co on a ‘going concern’ basis
► Buyer Co to issue RPS / NCDs in exchange for businesstransferred
► RPS / NCDs to be redeemed after an agreed period
Key Considerations
► IndAS and MAT impact to be evaluated
► Impact under GAAR
► Commercial rationale for slump exchange
Unit 2Unit 2Unit 2Unit 2Unit 1Unit 1
Seller Co Buyer Co
Transfer of business on goingconcern basis by way of
“slump exchange”
Issue of RPS / NCDs inexchange for business
transfer
Whether ‘slump exchange’ can be regarded as ‘slump sale’ and taxedunder Section 50B of the Act?
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Case Study 2: Issue of shares by Holding Company
Background / Transaction mechanics
► Hold Co to incorporate Company in a tax efficient jurisdiction
► F Co to incorporate company in India (say New Co)
► India Co through NCLT approved scheme to demerge Unit 2 toIndia Co
► As a consideration for demerger, F Co to issue shares to SPV(ie shareholder of India Co)
Key Considerations
► Whether the ‘demerger’ would be regarded as tax neutral underAct?
► Definition of resulting company includes F Co?
► Cost of acquisition and period of holding of resulting company shares
► Commercial rationale for demerger
► NCLT approval required
► Tax & regulatory implications in overseas jurisdictions to beconsidered
► Impact under GAAR
Unit 2Unit 2Unit 2Unit 2Unit 1Unit 1
Hold Co
Overseas
India Co New Co
Demerger
India
SPV F CoIssue ofshares
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Case Study 3: Cash repatriation through buyback
Background / Transaction mechanics
► Indian company is allowed to repurchase its shares to extent ofup-to 25% of paid up share capital and free reserves
► Shareholders (including Promoters) can participate in tenderoffer through stock exchange
Key considerations► No capital gains tax for non-resident where shares are held for
more than 12 months
► Securities transaction tax at 0.1% of value of the shares boughtback
► No Minimum Alternate Tax for non-residents
► BOD, Shareholders approval required via special resolution
► Impact on promoter shareholding post buyback
► Tax and regulatory implications in overseas jurisdiction
► Impact under GAAR
Buy-back ofshares
Public
India Co(publicly traded)
Non-residentpromoter
75% 25%
Buy-back ofshares
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Case Study 4: Issue of Bonus NCDs through scheme
Background / Transaction mechanics► India Co to reward its shareholders by issue of bonus NCDs through
approved scheme of arrangement
► Terms of bonus NCDs to be appropriately structured keeping in perspectivebusiness plan:
► Tenure of NCDs
► Interest to be payable annually or on redemption
► NCDs to be listed
Key Considerations► Upfront DDT cost @20.36% on issue of bonus NCDs – However, tax break
@ 34.61% on interest paid
► Interest paid liable for applicable WHT (subject to Tax Treaty benefit)
► PV of tax arbitrage benefit to be evaluated (i.e. upfront DTA cost vis-à-visinterest tax break)
► NCLT approval required
► Eligibility to claim Tax Treaty benefit
► Tax and regulatory implications in overseas jurisdiction
► Impact under GAAR
► Impact on Debt / Equity, EPS and other key ratios
India
Overseas
F Co
India Co
Issue of bonusNCDs
Bonus NCDs optically treated as“dividend” from investor perspective and
provides cost effective funding to thecompany
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Case study 5: Cross border merger
Background / Transaction mechanics
► Merger of Overseas Co with India Co
Key Considerations
► Powers to approve schemes have been transferred to NCLT
► Provisions dealing with cross border mergers not yet notified
► Clarity awaited on way forward for cross border schemes
► Companies Act, 2013 permits inbound merger from entities innotified jurisdictions. One would need to evaluate the specifiedjurisdictions once the section is notified.
India Co
India
Overseas
Overseas Co
X%Inbound mergerof Overseas Cowith India Co
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Case study 6: Exit for Foreign Investor
Background / Transaction mechanics
► Hold Co to merge with List Co
► List Co to issue shares to Promoters and Foreign Investor as aconsideration for merger
Key Considerations
► Create liquidity for investor – Feasible for them to exit from ListCo business at any time
► Minimal tax leakage to investor on exit from List Co business infuture
► Exit at Hold Co level would result into cash trapped at H Co level– There could be DDT / capital gains tax leakage
Foreign Investor
Hold Co
Promoters
50% 50%
List Co
Public40%
60%
Merger
Foreign Investor
List Co
Promoters
20% 60%
Public
20%
Resultant Structure
Transaction Structure
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Case study 7: Leveraged Business acquisition
Background / Transaction mechanics
► Buyer Co to incorporate New Co and infuse funds via CCDs
► New Co to acquire entire shareholding of Target Co from seller
► Merger of Target Co with New Co
Key Considerations
► Availability of interest deduction?
► Commercial rationale to be justified
► Appointed date of merger
► Eligibility to claim Tax Treaty benefit to be evaluated
► Tax implications in overseas jurisdiction
► BEPS impact for hybrid instruments (BEPS Action Plan 2)
► Eligibility to claim depreciation on goodwill?
► Approval requirement for New Co from FDI/ exchange controlperspective?
► Impact under GAAR
New Co
India
Overseas
Buyer Co
100%
Subscriptionof CCDS
Target Co
Seller Co
Shareacquisition
1
2
3
Merger
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Case study 8: Dual residency
Background / Transaction mechanics
► UK Co – a UK incorporated company with tax residency inCyprus
► POEM in Cyprus (business operations, employees, trading operations)
► Valid TRC in Cyprus
► UK Co has undergone tax assessments in Cyprus
Key Considerations
► BEPS Action plan 6 provides for model treaty to prevent thegranting of treaty benefits in inappropriate circumstances
► Article 4 of Multilateral instruments provides for dual residencyclause
► Tax residency of dual resident company to be mutually decided byrelevant authorities of respective jurisdictions (ie. UK and Cyprus)
► Tax residency no longer based on POEM test
India Co
India
Overseas
UK Co(Tax resident of
Cyprus)
X%
Page 17 CTC Training Presentation
Mauritius Protocol – Capital gains impact
► India and Mauritius signed the Protocol for amending the IM treaty on 10th May 2016 (Notified on 10 August 2016)
► With this Protocol, India obtains taxation rights on capital gains in a phased manner
Timing of investment Nature of provision Tax implications
Investments made upto March 31, 2017 andsold at any point of time Grandfathering provisions
Ø Not taxable in India, subject to treaty benefits
Ø Pre-Protocol scenario to continue to apply
Investments made on or after April 1, 2017and sold on or by March 31, 2019 Transitionary provisions
Ø Taxable at 50% of applicable domestic tax rates
Ø Subject to fulfillment of LOB conditions
Investments made on or after April 1, 2017and sold on or after April 1, 2019 Future provisions Ø Taxable in India at applicable domestic rates
Page 18 CTC Training Presentation
Case study 9: Investment through instruments otherthan shares in Indian Unlisted Co (Post 31 March’17)
Background / Transaction mechanics
► Investment after 1st April 2017 could be made throughinstruments other than shares, say compulsorily convertibledebentures (“CCDs”) to be issued by India Co
► Subsequent exit can be made by M Co by sale of CCDs
Key Considerations
► Eligibility to claim Tax Treaty benefit
► Tax and regulatory implications in overseas jurisdiction
► Impact under GAAR
India Co
India
Mauritius
M Co
CCDs
Divestment of CCDs
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Case study 10: Follow on funding structure
Background / Transaction mechanics
► M Co to subscribe to partly paid shares of I Co prior to 31 March 2017
► Follow on funding can be made to service balance obligation towards unpaidportion of the shares
► Balance consideration to be received within 12 months
► However, if issue size is > Rs 500 Crs, then balance consideration can bebrought in after 12 months subject to satisfaction of conditions
► At the time of divestment , M Co to transfer shares in I Co to third party
Key Considerations
► Time limit to convert partly paid to fully paid (12 months) and otherrestrictions
► Eligibility to claim Treaty benefit
► Tax and regulatory implications in overseas jurisdiction
► Legal and commercial feasibility
► Impact under GAAR
India Co
India
Mauritius
M Co
X%
Divestment
Page 20 CTC Training Presentation
Business CombinationIndian GAAP vs IndAS
Page 21 CTC Training Presentation
Identifying a business combinationB
US
INE
SS
CO
MB
INAT
ION • Transaction or
event in whichacquirerobtainsCONTROLover one ormoreBUSINESSes
CO
NTR
OL • Power over the
investee• Exposure, or
rightsto variablereturns
• Ability to useits power overthe investee toaffect theamount ofinvestorreturns
BU
SIN
ES
S • Integrated setof activitiesand assets
• Capable ofbeingconducted andmanaged toprovide return
• Returnsincludedividends andcost savings.
Page 22 CTC Training Presentation
Business CombinationIndian GAAP vs IndAS
Area Indian GAAP Ind-AS
Scope No comprehensive standard covering allbusiness combinations. AS 14 deals only withamalgamation
Ind-AS 103 deals with both amalgamations andacquisitions except formation of joint ventureand acquisition of assets which do notconstitute business
Accounting forcommoncontroltransactions
No standard differentiates between commoncontrol and other business combinations but AS14 allows use of pooling of interest method foraccounting of amalgamation in the nature ofmerger
Appendix C of Ind-AS 103 deals withaccounting for Business Combinationsinvolving entities under common control. Itrequires the same to be accounted for usingthe pooling of interest method.
AcquisitionDate
The date of amalgamation / acquisitionmentioned in the court scheme is the acquisitiondate
The date on which the acquirer effectivelyobtains control of the acquiree is the acquisitiondate
Accounting forassets andliabilities takenover
Under purchase method, the acquired assets andliabilities are recognised at their existing bookvalues or consideration is allocated to individualassets and liabilities based on their acquisitiondate fair values.
Under purchase method, the acquiredidentifiable assets, liabilities and contingentliabilities are recognised at fair value.
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Business CombinationIndian GAAP vs IndAS
Area Indian GAAP Ind-AS / IFRS
Consideration Consideration for the amalgamation means theaggregate of the shares and other securitiesissued and the payment made in the form ofcash or other assets by the acquirer to theshareholders of the acquiree. While it isrequired that non-cash elements ofconsideration should be included at fair value, itis also stated that the value of any securities(forming part of consideration) fixed by statutoryauthorities may be taken to be their fair value.
The cost of acquisition is the amount of cash orcash equivalents paid, plus the fair value of otherpurchase consideration given. The fair value ofsecurities issued by the acquirer is determined atthe date of exchange.
Non-controllinginterest
Minority interest is valued at its proportionateshare of historical book value of net assets andpresented outside shareholders’ equity
Non-controlling interest is stated either atacquisition-date fair value or at non-controllinginterest’s proportionate share of acquiree’sidentifiable net assets and included withinshareholders’ equity
Accounting forgoodwill /bargainpurchase
Under AS 14, excess of consideration paid overthe net assets acquired is recorded as goodwilland is amortised to profit or loss over a periodnot exceeding 5 years. In case of bargainpurchase, the difference is recorded as capitalreserve.
As per Ind-AS 103, on acquisition date, acquirerwill recognise the excess as goodwill andsubsequently it would be recorded as cost lessimpairment losses. Amortisation of goodwill isprohibited. Bargain purchase should berecognised immediately in OCI and accumulatedas capital reserve.
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Thank you.
DisclaimerThe objective of this presentation is to facilitate discussions at a conceptual level. Thispresentation should not be construed as an opinion and a detailed technical evaluationwould need to be carried out in light of complete facts and information. Our commentsare based on the current practice and interpretation of the provisions of the applicablelaws and regulations as on the date of our comments; they are not binding on anyauthorities / regulators and there can be no assurance that the authorities / regulatorswill not take a position contrary to our comments.