Project Marge (1)

8/19/2019 Project Marge (1)

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PROJECT REPORT

ON

NON BANKING FINANCIAL COMPANY w.r.t MERGER OF

ACQUISITON OF VODAFONE

M.COM – I BANKING & FINANCE

20!"20#

SUBMITTED BY

KUNAL S$ANKAR K$AIRE

ROLL NO –B%2

PROJECT GUIDE

PROF. AMIT PRAJAPATI

SUBJECT' St()* O+ M,r-,r O A/(11t13+ 3 V3)43+,

P,356,7 E)(/4t13+ S3/1,t*7

DR. AMBEDKAR COLLEGE OFCOMMERCE AND ECONOMICS

8ADALA9 MUMBAI" :00 0;.


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ACKNO8LEDGEMENT

I hereby acknowledge all those who directly or indirectly helped me to draft the project report. It would not have been possible for me to complete the task without

their help and guidance. It is my great privilege to thank Dr. Ambedkar College of

Commerce and Economics.

First of all I would like to thank the principal Dr. .! "amble and the coordinator

#rof. anjay $. "haire who gave me the opportunity to do this project work. %hey

also conveyed the important instructions from the university from time to time.econdly& I am very much obliged of #rof. !ahul hah for giving guidance for

completing the project.

I am thankful to all those persons who co'operated with me. %hey not only

rendered time out of their busy scheduled but also answered my (ueries without

hesitation.

I must mention my hearty gratitude towards my family& other faculties and friends

who supported me to go ahead with the project.

P64/,' MUMBAI

D4t,'


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P,356,7 E)(/4t13+ S3/1,t*7

DR. AMBEDKAR COLLEGE OF COMMERCE AND ECONOMICS

8ADALA9 MUMBAI" :00 0;.

CERTIFICATE

%his is to certify that& )r. K(+46 S>4+?4r K>41r, of ).Com ' I

*anking and Finance emester I +,-/',-01 has successfullycompleted project on N3+ B4+?1+- F1+4+/146 C3@54+* w.r.t R(r46

E6,/r11/4t13+ C3r53r4t13+ L1@1t,) under the guidance of #rof. Amit

#rajapati.


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DECLARATION

I )r. K(+46 S>4+?4r K>41r, the student of Dr. Ambedkar College of

Commerce 2 Economics& studying in ).Com 3 I *anking 2 Insurance

+emester I1& hereby declare that I have completed the project report on

N3+ B4+?1+- F1+4+/146 C3@54+* w.r.t St()* O+ M,r-,r A+)

A/(11t13+ O V3)43+, in the academic year ,-4 3 ,-5.

%he information submitted is genuine and practical to the best of myknowledge.

#lace6 77777777777777

"unal hakar "haire

+ !oll 8o.*9,:1

Date677777777777777777


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Index

SR. NO CONTENTS PAGENO.

INTRODUCTION "2

2 $ISTORY ;":

; FACTS OF T$E CASE "0

: PRODUCT AND SERVICES "2

! LEASE FINANCING ;"#

# MUTUAL FUNDS "2

TREASURY MANAGEMENT 22";

LOAN SYNDICATION ;2";:

REC % $B LEASING AND FINANCE COMPANY ;!";

0 CONCLUSION ;";

RECOMMENDATIONS :0":


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INTRODUCTION

In an increasingly open global economy& where old prejudices against foreign ;predators< and oldfears of economic coloni=ation have been replaced by a hunger for capital& )ergers and

Ac(uisitions +)2A1 are welcome everywhere.

In human aspects of )2As we used a not'too'original distinction between mergers& ac(uisitions

and joint ventures. )2As represented a ;marriage


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to its revenue .?hile India


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$ISTORY'

Hutchison-Essar

Y,4r 4+) E,+t

: $utchison )a@ %elecom imited +$)%1& a joint venture between $utchison and )a@&

wins the licence to provide cellular services in )umbai. C. ivasankaran sells 4G stake in

Delhi


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200 $utchison puts in the bid to provide cellular licences in Chennai& Andhra #radesh&

"arnataka and )aharashtra. It wins all e@cept )aharashtra.

200; Essar %eleholdings sells its operations in !ajasthan& Jttar #radesh +East1 and $aryana to

$utchison Essar. Essar was running these operations through group company& Aircel Diglink

India td. $utchison ac(uires licence to provide cellular services in #unjab. %his is bought from

Escotel.

200: Essar picks France %elecom


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FACTS OF T$E CASE

In 200& odafone Broup bought the Indian telecom assets of $ong "ongMs $utchison

%elecommunications International td. It paid JL billion for a 5G stake in $utchison Essar.

%he latter was the operating company in India for what is now the third'largest operator with

million users. odafone was the buyer. $utchison& the seller& made huge capital gains. Ket since

then& odafone has been battling it out in the courts against the Indian Income %a@ +I%1

department& which has saddled it with a JL,. billion ta@ claim. $utchison& which pocketed the

capital gains& is nowhere in the picture.

%he transaction was e@ecuted through a $utchinson company located in the Cayman Islands

Round 1: began in S,5t,@,r 200& when the %a@ Department issued a show cause notice to

odafone that said odafone was liable to pay withholding ta@ on the purchase amount.

Round 2: odafone filed a writ at the *ombay $igh Court disputing the ta@ departmentMs

jurisdiction in an overseas transaction. *ut the petition was dismissed and odafone then

appealed to the upreme Court marking the third round of hostilities.In J4+(4r* 200& the upreme Court sent the case back to the %a@ Department to decide on the

jurisdiction issue.

$utchison held call options over companies controlled by Asim Bhosh and Analjit ingh as also

over )) Investments #vt. td. aggregating to appro@imately 4G of the shareholding of

$E. %he benefit of these options enured in favour of a corporate entity called / Blobal ervices

#rivate td.& a company registered under the CompaniesM Act& 45.

)any important documents relevant to the deal have never been made public& so it is unclear if

the ta@ claim is a result of odafoneMs overlooking a key issue or overconfidence. In such

transactions& the buyer is supposed to deduct ta@ at source +or withholding ta@1 and pay that to

the government. %his is a transaction involving foreign companies and the seller can easily

disappear once the money is in the bank. %he buyer& on the other hand& has the Indian assets and&

in a worst case scenario& those can be attached if there is any default.


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VODAFONE

odafone is a mobile network operator with its head(uarters in 8ewbury& *erkshire& England&J". It is the largest mobile telecommunications network company in the world by turnover and

has a market value of about N4 billion +August ,--:1. odafone currently has operations in ,4

countries and partner networks in a further 0, countries. %he name odafone comes from oice

data fone& chosen by the company to Oreflect the provision of voice and data services over

mobile phones.

odafone Essar is owned by odafone 4,G& Essar Broup //G& and other Indian nationals& 4G.

n February & ,--& odafone agreed to ac(uire the controlling interest of 5G held by i "a

hing $oldings in $utch'Essar for JL. billion& pipping !eliance Communications& $induja

Broup& and Essar Broup& which is the owner of the remaining //G. %he whole company was

valued at JD :.: billion. %he transaction closed on )ay :& ,--.

As of 8ov ,--: odafone Essar has 4:5050 or ,/.4G of total ,0/00/5 B) mobile

connections in India. odafone India


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$UTC$"ESSAR

$utch Essar was a leading Indian telecommunications mobile operator with ,/./ million

customers at / December ,--5& representing a 5.0G national market share. $utch Essar

operates in 5 circles and has licenses in an additional si@ circles. In the year to / December

,--4& $utch Essar reported revenue of JL&,:, million& E*I%DA of JL04 million& and

operating profit of JL// million. In the si@ months to /- Hune ,--5& $utch Essar reported

revenue of JL-: million& E*I%DA of JL, million& and operating profit of JL,,5

million.

Jp until Hanuary ,--5& $utch Essar had licenses in / circles& of which nine have -- )$=

spectrum. In Hanuary ,--5& $utch Essar ac(uired *#& thereby adding three circles& each

operating with -- )$= spectrum. In ctober ,--5& $utch Essar ac(uired pacetel& adding si@

further licenses& with operations planned to be launched during ,--.

R,43+ 3r $(t/> S46,

%here are two main reasons which are responsible for i "a'shing to leave India. %hey are

P$utch'Essar6 )utual Distrust.

PA right time to (uit Indian operations to finance other operations i "a'hing was the -th

richest man globally in ,--5& is known as a businessman who spots an opportunity early& invests

in it and e@its at a neat premium. It is only after he e@its that the rush begins. In the early -s&

he sold his stake in tar % to !upert )urdoch for L:,4 million. %he $utch Essar deal has netted

him a neat L:.0: billion. ?hat could he do with that moneyQ i is a major player in the ports and

retail businesses. Betting access to the ports business in India is difficult& thanks to being from

China. $owever& with retail being the new mantra in India& i could be looking at a third entry.

$is retail outfits include ?atson


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Industry sources say that several incidents revealed the deepening rift between $utch and Essar.

%hey say that as telecom valuations in India started rising& Essar tried to increase its stake in the

joint venture. $owever& in December ,--4& rascom of Egypt bought a ./ per cent stake in

$utchison ?hampoa. %his indirectly gave it control of ,./ per cent stake in $utchison Essar.

%he stake sale decision was reportedly taken without Essar


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FINANCING T$E DEAL

DAF8E


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SYNERGIES CLAIMED

• odafone gets access to the fastest growing mobile phone market in the world that is e@pected

to touch 4-- million subscribers by ,--.

• Cellular penetration in rural India is below ,G& but 5G of India


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IMMEDIATE C$ALLENGES

$utch is going to be a tough battle ahead as the world


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S,,r46 6,-46 1(, 4r1, r3@ t>, /4,'

+i1 ?hether a non'resident seller +odafone International1 is liable to ta@ in India on sale of

shares of the foreign #Q

+ii1 Is a non'resident purchaser +$%I1 liable for deduction of ta@ on purchase of shares of the

foreign # while making payment to the non'resident sellerQ

+iii1 ?hether an Indian company can be treated as ;agent< of the non'resident purchaser and held

liable for deduction of ta@Q

+iv1 Can the law impose ta@ retrospectivelyQ


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S/35, 3 T446, I+/3@, 3 4 N3+"r,1),+t'

#ursuant to ection 4+,1 of the Act& the ta@able income of a non'resident includes income

Oreceived or deemed to be received in IndiaS and income that Oaccrues or arises or deemed to

accrue or arise in IndiaS. $owever& it does not include income that accrues or arises or is deemed

to accrue or arise outside India. #ursuant to ection +1 of the Act& income is deemed to accrue

or arise in India if such income is due to transfer of an asset situated in India or through or from

business connection in India.

#ursuant to ection 4 of the Act every person paying any sum& which is chargeable to ta@ in

India to a non'resident must deduct income'ta@ at source at the time of payment or credit. %he

liability to deduct ta@ applies to non'residents as well as residents. %he I% Department has argued

that this transfer represents a transfer of beneficial interest in the shares of the Indian company

and hence& any gain arising from it would attract ta@ in India.

In the case of transfer of shares in an Indian company by companies established in certain

countries such as )auritius& Cyprus and ingapore withholding ta@ on capital gains is not liable

to be levied in India pursuant to the relevant D%AA.

CB# +the company that was sold to odafone1 was a Cayman company and there is no India'

Cayman D%AA. It is an interesting (uestion as to whether the sale of )auritius # would

attract a similar ta@ notice or whether a )auritius intermediate # interposed between the

Cayman # and the Indian subsidiary would act as a successful blocker entity.

8>3 1 4+ A-,+tQ

According to ection 5-+1 of the Act& ;agent< of the non'resident is ;representative assessee


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P41+- 3 L4w R,tr35,/t1,6*6

In the 4 $industan )achine %ools case& the upreme Court held that the legislature could

pass laws retrospectively& with the e@ception that this power could be challenged if the law was

discriminatory. %his same principle was reaffirmed in in Arooran ugars td case& where

the upreme Court that if the law does not discriminate& it may be retrospective.

%his is perhaps the first time ta@ authorities are attempting to ta@ a transaction between two

foreign companies involving transfer of an Indian asset. If the ta@ liability is established& it could

result in a ta@ liability of appro@imately L. billion. Investors will be keeping a close eye on the

upcoming )umbai $igh Court verdict. Either way& the ne@t battle may be fought in the upreme

Court.


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$(t/> V3)43+, M,r-,r – A+ I(, 3 T4 P64++1+- U+),r I+/3@, T4 A/t9

#

It is a landmark case that will severely impact the )ergers 2 Ac(uisitions +)2A1 landscape in

India. 8o matter which way it goes& the odafone versus I% department ta@ case will have an

indelible impact on the )2A landscape of India. ast year *ritish %elecom giant odafone paid

$ong "ong based $utchison International over JD billion to buy $utchison


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because they paid income to $utch. %hose are the two different issues. %he case was mainly

about the second issue where the odafone was liable or not and in principleT it is possible that

the department is right on the first and yet not right on the second.


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involved was the transfer of one share of an upstream overseas company which was in a position

to e@ercise control over a )auritian company. %he transaction between I$ * and $%I was a

composite transaction which covered a comple@ web of structures and arrangements& not

referable to the transfer of one share of an upstream overseas company alone. %he transfer of that

one share alone would not have been sufficient to consummate the transaction. %he transaction

documents are ade(uate in themselves to establish the untenability of the #etitionerMs

submissions.

%he submission of I$ * that the transaction involves merely a sale of a share of a foreign

company from one non' resident company to another cannot be accepted. %he edifice of the

submission has been built around the theory that the share of CB#& a company situated in the

Cayman Islands was a capital asset situated outside India and all that was transferred was that

which was attached to and emanated from the solitary share. It was on this hypothesis that it was

urged that the rights and entitlements which flow out of the holding of a share cannot be

dissected from the ownership of the share. %he purpose of the discussion earlier has been to

establish the fallacy in the submission. %he transfer of the CB# share was not ade(uate in itself to

achieve the object of consummating the transaction between $%I and I$ *. Intrinsic to the

transaction was a transfer of other rights and entitlements. %hese rights and entitlements

constitute in themselves capital assets within the meaning of ection ,+01 which e@pression is

defined to mean property of any kind held by an assessee.

Jnder ection 4+,1 the total income of a non'resident includes all income from whatever source

derived which +a1 is received or is deemed to be received in India or +b1 accrues or arises or is

deemed to accrue or arise to him in India. #arliament has designedly used the words Uall income

from whatever source derivedU. %hese are words of width and amplitude. Clause +i1 of ection

e@plains the ambit of incomes which shall be deemed to accrue or arise in India. #arliament has

designedly postulated that all income accruing or arising whether directly or indirectly& +a1

through or from any business connection in India or +b1 through or from any property in IndiaT or

+c1 through or from any asset or source of income in India or +d1 through the transfer of a capital

asset situate in India would be deemed to accrue or arise in India. ?here an asset or source of

income is situated in India or where the capital asset is situated in India& all income which

accrues or arises directly or indirectly through or from it shall be treated as income which is

deemed to accrue or arise in India.


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I$ *s disclosure to the FI#* is indicative of the fact that the consideration that was paid to

$%I in the amount of J L .- *illion was for the ac(uisition of a panoply of entitlements

including a control premium& use and rights to the $utch brand in India& a non'compete

agreement with the $utch group& the value of non'voting non convertible preference shares&

various loan obligations and the entitlement to ac(uire subject to Indian foreign investment rules&

a further 4G indirect interest in $E.

%he manner in which the consideration should be apportioned is not something which can be

determined at this stage. Apportionment lies within the jurisdiction of the Assessing fficer

during the course of the assessment proceedings. Jndoubtedly it would be for the Assessing

fficer to apportion the income which has resulted to $%I between that which has accrued or

arisen or what is deemed to have accrued or arisen as a result of a ne@us within the Indian ta@ing

jurisdiction and that which lies outside. uch an en(uiry would lie outside the realm of the

present proceedings. *ut once this Court comes to the conclusion that the transaction between

$%I and I$ * had a sufficient ne@us with Indian fiscal jurisdiction& the issue of jurisdiction

would have to be answered by holding that the Indian ta@ authorities acted within their

jurisdiction in issuing a notice to show cause to the #etitioner for not deducting ta@ at source.

In assessing the true nature and character of a transaction& the label which parties may ascribe to

the transaction is not determinative of its character. %he nature of the transaction has to be

ascertained from the covenants of the contract and from the surrounding circumstances. In

8ational Cement )ines Industries td. vs. C. I. %.& +51 0, I%! 5 5 Indlaw C 4 )r.

Hustice H.C. hah speaking for the upreme Court emphasi=ed the principles of interpretation to

be adopted by the Court in construing a commercial transaction 6

U*ut in assessing the true character of the receipt for the purpose of the Income'ta@ Act& inability

to ascribe to the transaction a definite category is of little conse(uence. It is not the nature of the

receipt under the general law but in commerce that is material. It is often difficult to distinguish

whether an agreement is for payment of a debt by installments or for making annual payments in

the nature of income. %he court has& on an appraisal of all the facts& to assess whether a

transaction is commercial in character yielding income or is one in consideration of parting with

property for repayment of capital in installments. 8o single test of universal application can be

discovered for solution of the problem. %he name which the parties may give to the transaction

which is the source of the receipt and the characteri=ation of the receipt by them are of little

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moment& and the true nature and character of the transaction have to be ascertained from the

covenants of the contract in the light of the surrounding circumstances.U

T>, B3@4* >1-> /3(rt has affirmed the ta@ department


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jurisdiction to proceed against odafone.

?hile accepting the ta@ department


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transferred in law. Another issue is that it would be very difficult to (uantify the cost of

ac(uisition of the various rights identified by the ta@ department.

Further& under principles of private international law& the legal situs of many of these rights

cannot be said to lie in India and& hence& there may not be sufficient ne@us for the transaction to

be ta@ed in India. %hese legal aspects are likely to have a crucial bearing on the final outcome of

the case.

%his time& the I+/3@, T4 ),54rt@,+t has launched a / pronged attack against odafone. %he

first offensive is one that harks back to the first show cause notice of ,--.

%hen and now ' the ta@ department holds odafone as an assessee in default for not making its

withholding ta@ payments on time. %he department insists that whether an income is chargeable

or not& withholding ta@ must be paid. 8ow this argument has been tested in court (uite fre(uently

this past year.

peaking of ta@ liability& that brings me to the most important aspect of this case ' the one

regarding jurisdiction. %he ta@ department claims it is the actions of odafone itself that gives it

grounds to claim jurisdiction over the odafone'$utch transaction. %his change in brand& filings

with the FI#*& due diligence of $utch& a sale purchase agreement centered around $utch& and

disclosures to the stock e@changes. %he %a@ Department claims all these actions by odafone

prove that the subject matter of the transaction with $utch was an Indian asset& even if the

transaction was done offshore.

T>, B3@4* $1-> C3(rt has attempted a difficult distinction. n the one hand are the actual

shares +in the odafone case& just one share of Cayman Island registered CB# Investments

$oldings was transferred1. %his is not ta@able. *alanced against this are the assets& brand value&

goodwill and other intangibles owned by the company in India. %his is ta@able. %he problem is to

figure out how much it is worth. %he court has passed the buck on this and left the valuation

e@ercise to the I% assessing officer. %he court has also bounced the ball back to the upreme

Court. It has barred action by the ta@ation authorities for eight weeks& while odafone files an

appeal. %he company didnMt take that longT it went to the upreme Court on eptember 0. U%he


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appeal challenges the recent $igh Court judgment on the issue of jurisdiction. odafone remains

convinced that there is no ta@ to pay on the $utchison transaction and we will continue to defend

this position vigorously&U

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