Mergers and Acquisitions

The framework of mergers and acquisitions in India is facilitated through different ways, some transactions include business purchase, share purchase and amalgamations and debentures. Each has distinct characteristics and different ease of conducting deals. The share purchase component has various implications. The transfer of shares is taxable as capital gains and is subject to benefits of tax treaty that may be available. The Short Term Capital Gains are 30% for resident companies and 40% for non resident companies while at the same time the Long Term Capital Gains are 20% for resident companies and 10% for non resident companies. If the shares of a foreign company derive their value from assets in India, the transfer of shares is taxable in the hands of the seller, provided the assets are located in India. There is also exemption from Capital Gains Tax in case of merger or demerger of a foreign company, provided some prescribed conditions are fulfilled. There are certain implications for buyers too that include interest charged on a loan not being tax-deductible for the acquisition of shares. The control of a listed company requires the acquirer to make an offer to the remaining shareholders of the company, according to SEBI’s takeover code. The difference between FMV and sale consideration becomes taxable in the hands of the buyer once he receives a property without consideration or at a consideration less than FMV. FMV is calculated by specific guidelines and rules. RBI is responsible for the regulation of all share transactions between the resident and non-resident shareholders of a company in India. There are standard guidelines and methodologies that are shared by parties internationally.

There are multiple ways of acquiring business in India. One is the business purchase model in which the entire business undertaking is acquired by a buyer and there is a consideration on a going-concern basis. The business undertaking is acquired with all its assets and liabilities. The other model is the asset purchase model wherein the buyer the acquire selective assets and leave certain assets in the identity of the seller. In this model, the gains are calculated discretely for every asset and are taxable depending on the period in which they were held. GST is charged at prescribed rates for every specific state in case of movable property. The sale consideration for immovable property cannot be less than the value determined by stamp valuation authorities. The buyers are liable to pay stamp duty on transfer of immovable property on the rates according to the state in which the property is located. It is also chargeable on account of transfer of movable property. On the purchase of value of assets required, depreciation can also be acquired. In case of a business purchase model, transfers on a ‘going concern’ basis are usually not subject to GST. The capital gains are taxable at 30% for short term and 20% provided it was long term. There is a prescribed method by which capital gains are calculated by reducing the net worth of the business undertaking from the sales consideration. The interest on loans for acquisition of assets or business undertakings are generally tax deductible according to certain guidelines.

The procedure for integration of an acquired entity into the buyer’s group is governed by the prescriptions in the Companies Act and generally require the approval of the Tribunal. An amalgamation or demerger can be tax-neutral under certain conditions and does not require clearance from RBI or other bodies in most cases. The stamp duties are at the varying rates prescribed in state laws. However, merger of an Indian company with a foreign company or outbound mergers do require the approval from RBI. It is only permitted under certain conditions. MCA or The Ministry of Corporate Affairs has laid down the provisions for outbound mergers. The Companies Act 2003 allows both inbound and outbound mergers compared to the old act where only merger of a foreign company with an Indian company was allowed (inbound merger). The merger of two or more companies to form a single company is subject to some basic conditions that include that shareholders holding atleast 75% of the shares in value become shareholders in the transferee company. In case of a demerger too the shareholders holding atleast 75% of the shares become shareholders in the new company. Transfer is a ‘going on’ concern basis.

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