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

CTC Training Presentation

► Modes of M&A in India

► Indian laws impacting M&A

► Case Studies

► IndAS 103 vs AS-14

Content


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


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


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


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


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


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


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?


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


Unit 2Unit 2Unit 2Unit 2Unit 1Unit 1

Hold Co

Overseas

India Co New Co

Demerger

India

SPV F CoIssue ofshares


Case Study 3: Cash repatriation through buyback


► 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


Buy-back ofshares

Public

India Co(publicly traded)

Non-residentpromoter

75% 25%

Buy-back ofshares


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



► 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


Case study 5: Cross border merger


► 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


Case study 6: Exit for Foreign Investor


► 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


Case study 7: Leveraged Business acquisition


► 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?


New Co

India

Overseas

Buyer Co

100%

Subscriptionof CCDS

Target Co

Seller Co

Shareacquisition

1

2

3

Merger


Case study 8: Dual residency


► 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%


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


Case study 9: Investment through instruments otherthan shares in Indian Unlisted Co (Post 31 March’17)


► 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



India Co

India

Mauritius

M Co

CCDs

Divestment of CCDs


Case study 10: Follow on funding structure


► 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


► Legal and commercial feasibility


India Co

India

Mauritius

M Co

X%

Divestment


Business CombinationIndian GAAP vs IndAS


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.



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.



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.


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.

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