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The boom in cross-border Merger and Acquisitions (M&A) has given new urgency to
understanding and managing the complex tax consequences of international expansion. There
are very little globally accepted norms regarding tax law legislations. With India occupying
an increasingly important place on the world stage, there is a need for India to mature in
relation to administration of tax laws. This paper explore the available tax laws that govern
the cross border deals involving India. The debate over a couple of taxation issues has led to
few amendments by virtue of Finance Act of 2008. This would have a major impact on deals
with a country with which india does not have Double Tax avoidance Agreement (DTAA.
The major legal battles including the Vodafone dispute which would decide the fate of large
chunk of FDI into India is much awaited and the challenges lies in the balancing the interest
of the investor and the revenue authorities.
RESEARCH DESIGN
RESEARCH OBJECTIVES:
1. To study and understand Cross border Merger and Acquisitions, from an Indian perspective .
2. To understand the complex tax issue and necessary legal framework.
3. To suggest if necessary changes in Indian legal system to support cross-border merger .
RESEARCH METHODOLOGY:
Primary source:
1. Journalists
2. Public
Secondary source:
1. Internet
2. Newspapers
Journals and Books
Chapter: 1
INTRODUCTION
Merger and Acquisition (M&A) play a major role in the materialization of globalization.
With the increasing importance on globalization of businesses, cross-border transactions have
become the quickest way of achieving the objective. Except for purely domestic legislation in
some countries, there is little tax law point and no globally accepted norms. The market fro
these transactions, however, has expanded beyond the regulatory reach of any single country.
Tax law should better accommodate cross-border M&A. in endeavour to geographically
expand the utilization, M&A allow the firms to do so in a fast , effective and supposedly
cheap manner1
Many countries have some tac rules that grant certain benefit to M&A transactions, usually
allowing some deferral of the tax otherwise imposed on the owners of the participating
parties upon the transaction On the other hand M&A activity is a cress the border, countries
are much less enthusiastic to provide tax benefits to the involved parties, understanding that,
in some cases, relief of the current taxation practically means exemption science such
countries may completely lose jurisdiction to the tax transaction.
Cross-border M&A , although, presenting many of the same issue as domestic deals, are
usally more complex and rife with surprises and other pitfalls, more so when the number of
geographies involved in the transaction increases. The share range of concern has expanded
as the speed and volume of international deals(M&A) have increased2. Domestic M&A are,
generally and on average, socially desirable transaction3. In many countries, they enjoy tax
(deferral) preferences, but only to the extent to which stock compensate target corporations or
their share holder.
The boom in the cross-border M&A has given a new urgency to understanding and managing
the complex tax consequences of international expansion. The legal frame work for business
consolidation in India consist of numerous statutory provisions for the tax concessions and
tax neutarality for certain kinds of reorganizations and consolidations. With Indian rapidly
globalising economy growing and showing positive results, a sound tax policy is a must have.
Tax is an important business cost to be considered while taking any business decision,
particularly when competing with the global players. The new Direct Tax Code that the govt
1 The united Nations World Investment Report 2000, Cross-border mergers and
Acquisitions and development (UNCTAD, 2000), PP 140-144
3 Yariv Brauner, A good habit or just an old one?Preffential tax treatment for
reorganizations, 2004 B.Y.U L.Rev (2004).
has just introduce and planning to replace the old IT act of 1961, is more transparent and
taxpayer -friendliness4
Chapter: 2
4 Uday ved Head of Tax and regulatory Servicees, KPMG india, “Issues that tax
companies”, Saturday, saptember 13, 2008 Business Line
An Emerging Phenomenon: Cross-Border Merger and
Acquisitions
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A
deals cause the domestic currency of the target corporation to appreciate by 1% relative to the
acquirer's. For every $1-billion deal, the currency of the target corporation increased in value
by 0.5%. More specifically, the report found that in the period immediately after the deal is
announced, there is generally a strong upward movement in the target corporation's domestic
currency (relative to the acquirer's currency). Fifty days after the announcement, the target
currency is then, on average, 1% stronger.
The rise of globalization has exponentially increased the market for cross border M&A. In
1996 alone there were over 2000 cross border transactions worth a total of approximately
$256 billion. This rapid increase has taken many M&A firms by surprise because the
majority of them never had to consider acquiring the capabilities or skills required to
effectively handle this kind of transaction. In the past, the market's lack of significance and a
more strictly national mindset prevented the vast majority of small and mid-sized companies
from considering cross border intermediation as an option which left M&A firms
inexperienced in this field. This same reason also prevented the development of any
extensive academic works on the subject.
Due to the complicated nature of cross border M&A, the vast majority of cross border actions
have unsuccessful results. Cross border intermediation has many more levels of complexity
to it than regular intermediation seeing as corporate governance, the power of the average
employee, company regulations, political factors customer expectations, and countries'
culture are all crucial factors that could spoil the transaction.[3][4] Because of such
complications, many business brokers are finding the International Corporate Finance Group
and organizations like it to be a necessity in M&A today.
Table 1.1 Largest M&A deals worldwide since 2000:5
Until up to a couple of years back, the news that Indian companies having acquired
American-European entities was very rare. However, this scenario has taken a sudden U turn.
Nowadays, news of Indian Companies acquiring a foreign businesses are more common than
other way round.
Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly
found dynamism in Indian businessmen have all contributed to this new acquisition trend.
Indian companies are now aggressively looking at North American and European markets to
spread their wings and become the global players.
The Indian IT and ITES companies already have a strong presence in foreign markets,
however, other sectors are also now growing rapidly. The increasing engagement of the
If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than
double the amount involved in US companies' acquisition of Indian counterparts.
7 Super note5
oil and gas sectors, the number of firms acquired by Indian firms were 27 firms, 19 firms, 17
firms, 15 firms and 14 firms respectively.
Chapter: 3
Structuring the Cross-Border Transaction
A number of important issues arise in structuring a cross-border M&A deal to ensure that tax
liabilities and cost will be minimized for the acquiring company. The first step is to explore
leveraging local country operations for cash management and repatriation advantages.
Moreover, the companies should be looking at the availability of asset-basis set up structures
for tax purposes and keeping a keen eye on valuable tax attributes in M&A targets, including
net operating losses, foreign tax credits and tax holidays11.
9 Super note 7.
10 Ibid.
As per the provisions of the IT Act, capital gains tax would be levied on such transactions
when capital assets are transferred. From the definition of ‘transfer’ 12, it is clear that if
merger, amalgamation, demerger or any sort of restructuring results in transfer of capital
asset, it would lead to a taxable event.
1. Sale of Shares
a) Capital gains and security transaction tax - The sale of shares is subject to capital gains
tax in India. Additionally, Securities Transaction Tax (STT) may be payable if the sale
transaction for equity shares is through a recognized stock exchange in India. The STT
has to be paid by the purchaser/seller of securities. In case of shares held for a period of
more than 12 months, the gains are characterized as long-term capital gains or otherwise
as short-term capital gains (less than 12 months). If the transaction is not liable to STT,
resident investors are entitled to the benefit of an inflation adjustment when calculating
long-term capital gains; the inflation adjustment is derived from the inflation indices
produced by the Government of India. Non-resident investors are entitled to benefit from
currency fluctuation adjustments when calculating long-term capital gains on a sale of
shares of an Indian company purchased in foreign currency. In case the transaction is
liable to STT, long-term capital gains arising on transfer of equity shares are exempt
from tax.
b) Transfer taxes - The transfer of shares (other than those in dematerialized form) is
subject to transfer taxes, that is, stamp duty.
1. Sale of assets
a) Slump sale - The sale of a business undertaking is on a slump-sale basis when the entire
business is transferred as a going concern for a lump-sum consideration; cherry-picking
assets are not possible. Consideration in excess of the net worth of the business is taxed
as capital gains13.
11 Fay Hansen, ”Tax efficient Cross-Border M&A”, Business Finance, Penton Media Inc.
13 If the business undertaking of the transferor –company is more than 36 months the
undertaking, to be treated as long term capital assets otherwise as short term capital
assets
b) Transfer taxes - The transfer of assets by way of a slump-sale would attract stamp duty.
Stamp duty implications differ from State to State. Depending on the nature of the assets
transferred, appropriate structuring of the transfer mechanism may reduce the overall
stamp duty cost.
c) Itemized sale - This happens when individual assets or liabilities of a business are
transferred for separately stated consideration. The assets of the business can be
classified into three categories:
i) Capital assets - The tax implications for the transfer of capital assets (including net
current assets other than stock-in-trade) would depend on whether they are eligible
for depreciation under the Act or not. In the case of assets 14 on which no
depreciation is allowed, consideration in excess of the cost of acquisition and
improvement is chargeable to tax as capital gains. In the case of assets on which
depreciation has been allowed, the consideration is deducted from the tax written
down value of the block of assets, resulting in a lower claim for tax depreciation
subsequently. If the unamortized amount of the respective block of assets is less
than the consideration received, or the block of assets ceases to exist (that is, there
are no assets of that category), the difference is treated as short-term capital gains.
If all the assets in a block of assets are transferred and the consideration is less than
the unamortized amount of the block of assets, the difference is treated as a short-
term capital loss and could be set off against capital gains arising in up to eight
succeeding years. The question of whether depreciation on goodwill acquired can
be claimed has yet to be tested in the courts, but the chances of such depreciation
of goodwill being allowed appear remote.
ii) Stock-in-trade - Any gains or shortfalls on the transfer of stock-in-trade are
considered as business income or loss. Business losses can be set off against
income under any head of income arising in that year. If the current year’s income
is not adequate, business losses can be carried forward to be set off against
business profits for eight succeeding years.
iii) Intangibles (goodwill and brands, among others) - The tax treatment for
intangible capital assets would be identical to that of tangible capital assets, as
already discussed. The question of whether depreciation on goodwill acquired can
14 ibid
be claimed has yet to be tested in the Courts, but the chances of such depreciation
of goodwill being allowed appear remote.
Transfer taxes - The transfer taxes with respect to an itemized sale would be identical to
those under a slump-sale.
1. Liabilities –
Gains on transfers of liabilities are taxable as business income in the hands of the transferor.
2. Merger or amalgamation –
For a merger to qualify as ‘amalgamation’ under the provisions of the IT Act, the
definition15 highlights that the following conditions need to be satisfied :
a) Capital gains tax implication for the amalga-mating (transferor) company - Section
47(vi) of the IT Act specifically exempts the transfer of a capital asset in a scheme of
amalgamation by the amalgamating company to the amalgamated company, provided
the amalgamated company is an Indian company. It is essential that the merger falls
within the definition of ‘amalgamation’ as given under section 2(1B), if the
exemption hereunder is to be availed of.
b) Exemption from capital gains tax to a foreign amalgamating company for transfer
of capital asset, being shares in an Indian company17 - In a cross-border scenario,
when a foreign holding company transfers its shareholding in an Indian company to
another foreign company as a result of a scheme of amalgamation, such a transfer of
the capital asset, i.e., shares in the Indian company would also be exempt from
capital gains tax in India for the foreign amalgamating company if it satisfies the
following two conditions :
i. At least 25 per cent of the shareholders of the amalgamating foreign
company continue to be the shareholders of the amalgamated foreign
company.
ii. Such transfer does not attract capital gains tax in the country where the
amalgamating company is incorporated.
16 Delhi High Court in tele sound (India) ltd., In re (1983) 53 comp. cas 926
18 Section 47 (vii)
presupposes the relinquishment of shares in amalgamating company held by
shareholders thereof. It is important to determine whether this constitutes a transfer
under section 2(47), which would be liable to capital gains tax. According to judicial
precedents in this regard, including decisions of the Supreme Court till recently, this
transaction did not result in a ‘transfer’ as envisaged by section 2(47).
In the case of CIT v. Mrs. Grace Collis19 , the Supreme Court has held that
“extinguishment of any rights in any capital asset” under the definition of ‘transfer’
would include the extinguishment of the right of a holder of shares in an
amalgamating company, which would be distinct from and independent of the
transfer of the capital asset itself. Hence, the rights of shareholder of the
amalgamating company in the capital asset, i.e., the shares stand extinguished upon
the amalgamation of the amalgamating company with the amalgamated company and
this constitutes a transfer under section 2(47).
However, a transfer20 by the shareholders of the amalgamating company is
specifically exempt from capital gains tax liability, provided the following conditions
are satisfied :
1) The transfer is made in consideration of allotment to the shareholder of shares in
the amalgamated company.
2) The amalgamated company is an Indian company.
The issue addressed by Mrs. Grace Collis’ case (supra) would arise in situations
where the amalgamation does not satisfy all the conditions under section 47(vii)
and section 2(1B) and is, therefore, not exempt from the capital gains tax. In view
of this decision, the present position of law seems to be that such a merger would
result in capital gains tax to the shareholders of the amalgamating company.
20 Section 47(vii)
1. Demerger –
Under a demerger, all the assets and liabilities of the undertaking of the demerging company
are transferred to the resulting company and, in consideration for this, the resulting company
issues its shares to the shareholders of the demerging company.
The recognition for the need for reorganization and restructuring of businesses for growth
and optimization of resource allocation has also resulted in the Government reducing the tax
cost of such transactions. In furtherance of this purpose, the IT Act provides certain tax
beneficial provisions in the case of a demerger. If the demerger fulfils the conditions listed in
the definitions under section 2(19AA) and 2(19AAA), the transfer of assets by the demerged
company to a resulting company has been exempted from capital gains tax.24 To qualify for
the exemption, the resulting company should be an Indian company.
23 Section 79
24 Section 47 (vi)(b)
When a demerger of a foreign company occurs, whereby both the demerged and resulting
companies are foreign but the assets demerged include or consist of shares in an Indian
company, any transfer of these shares is exempt from capital gains tax in the hands of the
demerged company.25 The following conditions need to be complied with for availing of this
exemption:
25 Section 47(vi)(c)
Chapter: 4
The current legislation provides for taxation of gains arising out of transfer of the legal
ownership of the capital asset in the form of sale, exchange, relinquishment or
extinguishment of any rights therein or compulsory acquisition under any law. Section 9 26of
the IT Act deems gains arising from transfer of a capital asset situated in India to accrue or
arise in India. In a cross-border transfer involving transfer of shares, normally the situs of the
capital asset provides the safe guide to decide as to which of the contracting states has the
power to tax such income subject to the relevant tax treaty. The concept of levy of tax on the
transfer of beneficial ownership in a cross-border transfer is not provided for in the current
tax legislation, but the revenue authorities are of the view that in a cross-border transaction
the valuation of the transaction includes valuation for the Indian entity as well and,
accordingly, the overseas entity which has a business connection in India.
Changes in the Indian Law –
26 Section 9(2)””Explanation: for the removal of doubts, it is here by deleared that for
the purpose of this section where income is deemed to acquire or arise in India under
clause (v), (vi) and (vii) of subsection (1), such income shall be included in the total
income of the non- resident, whether or not the non resident has a residence or place of
business or businesses connection in India”
The Finance Act, 2007 has brought amendment to section 9 with retrospective effect. This is
with a clear view to increase tax revenues from cross-border M&A transactions. Further,
amendments have been brought to sections 19127 and 20128 with retrospective effect by the
Finance Act, 2008 to remedy the mischief and ensure that the tax due and payable is not
evaded.
27 Section 191:”Explanation: For the removal of doubts, it is hereby declared that if any
person refered to in section 200 and in the case refered to in section 194, the principal
officer and the company of which ha is the principal officer does not deduct the whole or
any part of the tax and such tax has not been paid by the assesse direct, then, such
person, the principal officer and the company shall without prejudice to any other
consequence which he may or it may incur, be dammed to be an assesse in default as
refferd to in subsection (1) of section 201 in respect of such tax”
28 In section 201 of the income tax Act for subsection (1) the following subsection shall
be substituted and shall deemed to have been substituted with effect from june 1 2002,
viz.
“Consequences of failure to deduct or pay –(1) Where any person, including the principal
officer of a company,
a) Who is required to deduct any sum in accordance with this Act or
b) Referred to in subsection (1A) of section 192 being a employer does not pay or does
not deduct, or after so deducting fails to pay, whole or any part of the tax, as
required under the Act, than such person without prejudice to any other
consequences which he may incur, be deemed to be an assesses in default of such
tax:
Provided that no penalty shall be charged under section 221 from such person,
unless the Assessing Officer is satisfied that such person, without good and sufficient
reason, has failed to deduct and pay such tax”
International and asked Vodafone Essar to pay $ 1.7 billion as capital gains tax.
The whole controversy in the case of Vodafone is about the taxability of transfer of
share capital of the Indian entity. Generally, the transfer of shares of a non-resident
company to another non-resident is not subject to tax in India. But the revenue
department is of the view that this transfer represents transfer of beneficial interest
of the shares of the Indian company and, hence, it will be subject to tax.
On the contrary, Vodafone’s argument is that there is no sale of shares of the
Indian company and what it had acquired is a company incorporated in Cayman
Islands which, in turn, holds the Indian entity. Hence, the transaction is not subject
to tax in India.
However, the revenue authorities are of the view that as the valuation for the
transfer includes the valuation of the Indian entity also and as Vodafone has also
approached the Foreign Investment Promotion Board (FIPB) for its approval for
the deal, Vodafone has a business connection in India and, therefore, the
transaction is subject to capital gains tax in India.
The much awaited Bombay High Court order in the case of Vodafone deal will be
an eye opener for the taxation of cross-border deals in India, involving Indian
entities.
B. The Genpact deal : Genpact originally was established in 1997 as a GE Capital
International Services, a captive subsidiary of GE Capital. At the end of 2004, GE
invested 60 per cent of the firm to US based private equity investors for $ 500
million dollars. GE did not pay any capital gains tax on such sale. Notices have
been sent to the company following the deal. This matter is also pending before the
Court.
Based on the above, the CBDT has reopened about 400 cases of large and midsized
transactions that took place during the past six to seven years.
Chapter: 5
29 This makes it aptly clear that at any stage, cross border mergers remains far more complicated & difficult to
implement than their domestic counterparts in relation to investor skepticism of issues specific to cross border M&As.
important. In This discussion we will go through the provision prevailing in the other legal
system like , U.S. law and U.K inclusive of the securities regulations and would try to make a
suggestion as to the path which Indian legal regime could adhere to.
Law in the U.S. is equally accommodating for the host as well as acquirer. The relevant
statutes with respect to acquisition of companies in the U.S. have been given in their
respective securities regulations. They are: Securities Act of 1933 and the Securities
Exchange Act of 1934 including the rules and regulations promulgated by the Securities and
Exchange Commissions under both the abovementioned laws30. The security laws in the U.S.
generally requires registration of any offer of securities to the residents. But there are certain
exemptions available as well which are the highlight of the Regulation concerning cross
border mergers in the U.S. The registration process is compulsory for public companies in the
U.S. but there are certain exemptions for non public companies when securities are offered
by way of private placement. These exemptions are provided under Regulation D31. These
are the exemptions when the U.S. companies are targets but there are provisions which
govern the conduct of companies which are listed on the Exchange. There are two primary
requirements under the regulations and they are: a company covered by the Exchange Act
may be duty bound to disclose the existence of acquisition negotiations and these apply
equally to a non U.S. company whose securities are publicly traded in the U.S. Secondly,
Insider Trading, is strictly prohibited under the Exchange Act and is made punishable by
imprisonment as well as heavy penalties. The Sec has recently adopted regulations which
provide that where a company is having its assets in the U.S and it’s a foreign company,
going for an acquisition of another foreign company, then the Act does not apply to that
company and all exemptions are provided. However certain conditions need to be followed
31 Regulation D -- Rules Governing the Limited Offer and Sale of Securities Without Registration
Under the Securities Act of 1933 (http://www.law.uc.edu/CCL/33ActRls/regD.html visited on
3/09/09)
by the company going in for a merger of foreign company whose assets are based in the
U.S32. With regard to competition issues, more properly termed as antitrust issues, the
Clayton Act is the primary U.S. statute governing the substantive competition issues arising
out of mergers and acquisitions. In addition to the Act aforementioned there is the popular
Sherman Act which prohibits unreasonable restraint of trade, attempts to monopolize and
monopolization. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 is the statute
governing the procedural aspects of the government’s right to review of mergers and
acquisitions. The HSR Act also ensures that no merger or acquisition results in restraint of
competition or creation of monopoly33. Further there are certain regulated industries like
telecom, energy, banking, transportation which must comply with special business
combination legislation with special reference to those industries.
The legal regime in the U.S. provides for tax treatment of cross border mergers in a
structured form. This means that nothing special is done and only certain categories have
been created for the tax treatment to be given to such mergers. These are: Asset Acquisition,
Stock Acquisition, Merger or Consolidation and Triangular Merger or Subsidiary Merger. 34
The Internal Revenue Code of the U.S. is the primary legislation influencing tax
considerations in cases of cross border merger in the form that it affects tax free
reorganizations. Section 351 and 358 of the IRC provides for certain tax free reorganizations.
The most commonly used forms are forward merger, forward triangular merger and stock
swap. In cross border transactions where a U.S. company is being acquired by a non-U.S.
company it has to comply with requirements in Section 367 of the IRC which states that the
U.S. shareholders of the target should not be in receipt of more than 50% of the total voting
32 Victor Thuronyi, Tax law design and drafting, Volume 2, published by, Google Books
(http://books.google.com/books?
id=19mdVW1W1zgC&pg=PA910&lpg=PA910&dq=conditions+need+to+be+followed+b
y+the+
+company+whose+assets+in+U.S+for+merger&source=bl&ots=gVUcLltkw8&sig=08S
B4IJIga0t8_AiXbV345cobp8&hl=en&ei=wBWmSqqGNpSIkAW_59SLCQ&sa=X&oi=book_re
sult&ct=result&resnum=2#v=onepage&q=&f=false) visited on 7/09/09
33 http://www.mergeracquisitionattorney.com/national-content.cfm/Article/71201/HSR-
Act-Helps-Monitor-Monopoly.html visited on 08/09/09
What can be done to further the process of cross border mergers is that specific and clearly
earmarked exemptions should be provided to the persons investing in an Indian company by
way of merger or acquisition. Taxation law in India is governed by the Income Tax Act, 1961
and the law specifically recognizes three major types of restructuring activities. They are:
merger or amalgamation, slump sale and demerger or spin off. The Indian law recognizes the
sale or purchase of business by way of the word ‘transfer’. Section 2(1B) of the Act defines
amalgamation and provides that a merger should be pursuant to a scheme of amalgamation.
The scheme should provide for the inclusion of all the assets and liabilities of the
amalgamating company, there is no prescribed time limit for the whole transaction and 75%
of shareholders in the amalgamating company should be given shareholding in the
amalgamated company as well. In a cross border merger in India where an Indian company is
being acquired, there is an exemption in the form of non payment of capital gains tax to the
Indian authorities for assets located within the country. The definition of amalgamation as
given under the Indian Income Tax Act, 1961 implies that an Indian company cannot
amalgamate into a foreign company without attracting capital gains tax.
The target as well as the acquirer company are subject to a range of laws and regulations
which affect not only the companies involved but also the directors, close advisers, and major
shareholders of those companies. The statute under which merger activity in the U.K. is done
is the Fair Trading Act, 1973 (hereinafter referred to as the Act). The Act specifically
provides for certain merger conditions that qualify for investigation. 35 There is a designated
body called the Monopolies & Mergers Commission to whom the Secretary of state for Trade
and Industry refers certain matters for decision. The advice of the Director General of Fair
Trading has to be taken into consideration while deciding on such matters. The merger which
qualifies for investigation are those as categorized by the Act36. There is a certain limit during
which the reference may be made to the mergers. This time limit may vary from four weeks
to four months depending upon the disclosure of the relevant statements to the public. It may
be useful at this stage to make a brief reference to the way the mergers commission works.
The mergers commission has to deliver a report within six months and a further extension of
three months is allowed.42 Where a merger reference is made to the chairman of the
Monopolies Commission, he will appoint a group of members to deal with it. The companies
concerned are then asked to submit a written statement describing the reasons and
circumstances for the merger inclusive of other relevant details. The companies are invited to
attend a hearing with the Commission as soon as possible after receipt of their written
statements. The parties concerned are then examined on the public interest issues. The
commission may ask for further additional submissions to be made by the parties concerned
and they may also be asked to comment on any third party criticisms of the merger likely to
be affected. However the Commission cannot negotiate with the parties and they are not in a
position to disclose the information gathered from the parties. The Commission can ask for
any appropriate information from the parties in the form of evidence on oath and deviant
behaviour with the requests of the Commission may constitute an offence. The Commission
shall submit its final report to the Secretary of State and send a copy to the Director General.
The Report should be in reference to the following: a factual description of the companies,
their development and current activities; a description of the market in the U.K.; the case of
the merger as stated by the companies; the views of third parties; the Commission’s
conclusion.
35 http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1973/cukpga_19730041_en_1
visited on 08/09/09
36 ibid
During the preparation of the final report, making of the recommendations on the existing
situation, the mergers Commission may take into account the following factors:
• promotion of interests of consumers, purchasers and other users of goods and services
in respect of prices, quality and variety of goods and services supplied
• reduction of costs, development of new technologies and their use and facilitating the
entry of new customers into the market
Therefore after the preparation of the report, and presentation of it to the Secretary of state,
the secretary may exercise its statutory powers. 37
The Listing Rules made by the London
Stock Exchange Limited are a further important source of rules governing takeovers. They
apply only to listed companies provisions of the Yellow Book related to listed companies
have statutory effect as rules made by the competent authority pursuant to section 142 of the
Financial Services Act 1986. These rules and regulations while being discussed must make
one aware of the fact that more or less the same rules may apply when it’s a case of a cross
border merger or amalgamation. For domestic law purposes, there is a classification of
companies according to their size. Examples of domestic laws from England may provide
guidelines for us. This could be convenient as we follow the same legal system as that of
England ie: the Common Law System.
The principal rules and regulations affecting the participants in the bid are derived from the
City Code on Takeovers & Mergers. In addition to the Code companies whose securities are
listed on the London Stock Exchange or who in connection with a takeover propose to apply
for their securities to be listed on the LSE must comply with the listing rules made by the
London Stock Exchange. There is a Code dealing with the conduct of companies in U.K.
called the City Code on Takeovers & Mergers.38 The Code and the Takeover panel were
37http://docs.google.com/gview?
a=v&q=cache:qCsY5uH3CYMJ:www.sheffieldsafetynet.gov.uk/ip_manual/Part
%252034.pdf+Secretary+of+state,+statutory+powers%2BUK&hl=en visited 08/09/09
38http://docs.google.com/gview?
a=v&q=cache:_KPGsU5MhwQJ:www.freshfields.com/publications/pdfs/2006/15139.pdf+t
created in response to and following criticism in the Press and Parliament of the tactics of
bidders and defenders in a number of prominent bid battles. The Code is administered by the
Takeover Panel. Currently, in the U.K., an interesting fact can be noted which is reflected in
the coexistence of the City Code on Takeovers and Mergers and the Takeover Directive. The
Code was under threat from the proposed 13th Company Law directive which was finally
rejected. The Code covers companies which may include a listed public company, an unlisted
public company and a private company. The Code consists of 10 General Principles and 38
Rules together with a collection of notes and four appendices. The Code does not have the
force of law, therefore what does it hold for any prospective learner. The primary function of
the Code is to supplement the Companies Act, 1985 of the U.K. Therefore it could be said
that it strengthens the operation of law and in due course, gets implemented. What does it
holds for India? The answer to the question lies in the fact that India already has very less
provisions in its Companies Act, 1956 dealing with mergers and acquisitions and there are a
few scattered provisions here and there dealing with cross border mergers and
amalgamations. Therefore the enactment of such a Code could hold freat promise for a
country like India. The provisions of the City Code in the U.K. can be treated as a helpful
guide to the fairness which is to be deciphered while interpreting other laws. The highlighting
factor while observing the City Code on Takeovers & Mergers is that the panel constituted
under the Code is subject to judicial review. This shows that nothing is being taken away
from the courts. The idea behind the constitution of such a panel and such a code has been the
protection of the interests of the shareholders. The Panel has promulgated rules which are not
ultra vires of any law, and is based on the concept of doing equity between one shareholder
and another. One of the highlights of the Code is protection of shareholders of the target
company from the controllers of the offeror company or the company which has made the
bid. The English law provides protection to the shareholders in cases of oppression from the
target company but it does not say anything about the protection being offered to the
shareholders from the target companies. This is where the Code comes in and protects the
shareholders of the target company form the offeror’s tactics.
The practice of the Code is generally dealt with by the Panel where presentations are heard
orally with a member of the panel taking notes and decisions are most often transmitted to the
parties by phone. If a party to a takeover or merger wishes to contest a ruling by the panel
Chapter: 6
1. The existing tax benefits available to domestic companies going in for mergers should
be broadened so as to include cross border mergers
2. The acquisition of the shares of the target companies should be subject to a relaxed
regime and an option of issuing a varied nature of securities should be made available
in order to raise capital in the market.
3. There should be a separate body created for the purpose of supervising cross border
mergers and amalgamations in light of the effect on the prevailing competition in the
market. Simultaneously, the Competition Commission should be made operational so
as to scrutinize effectively any effect the cross border merger may have on the market
conditions in that particular industry.
39 An example in the form of multinational stock exchange could be seen in Europe, where the Euro removes other
obstacles to cross border trading, the establishment of a system that would allow U.S. firms to list in Europe and
participate in the major European indices, a widening of investment mandates and the speed of pan-European indices.
The same holds true for India as well, which could be seen with the creation of the proposed SAFTA (South Asian Free
Trade Agreement) which would greatly facilitate cross border mergers & acquisitions especially takeovers by Indian
firms in their neighbourhood. For more on the issue, Please See, SHARING A CURRENCY by Anupam Goswami as
appeared in BUSINESS INDIA dtd. Jan. 29, 2006 at pp. 40.
7. There should be specific conditions laid down as to when does a merger qualify for an
investigation by the appropriate authorities in India. The appropriate authority may be
any authority in the form of a merger commission like that prevalent in the U.K.
11. The law should specifically delineate the conditions with respect to the securities
market which are required to be complied. These may include direction from the
domestic capital markets in cooperation with the international bourses.
12. The law should provide detailed guidelines for the preparation of a bid and approach
of the offeror as well as offerree. This may include that the offer by the acquirer
company should be put across to the Board of Directors of the target company for
their perusal so that they can object in a timely manner. Re enunciated for domestic
mergers within the country. Subsequently the law may provide for the grounds on
which the active recommendation of the directors of the target company may be
sought. This is important as it may reduce any chances of corruption on the part of the
acquirer authorities in influencing the decision making activity of the target company
by its officials.
13. With regard to publicity campaigns of the offeror companies, there should be
stringent regulations governing it. This is a new aspect as far as cross border
regulations in the Indian context are concerned. There should be rules for advertising
an offer to the target company which should be limited to certain things. Generally,
the following should be allowed: non controversial advertisements which provide for
the nature of the offer, advertisements containing financial details of the company
which should generally be the acquirer company, information which is required to be
published in accordance with the rules of the Stock Exchange.
14. The law shall regulate further the profit forecasts which may be made by the acquirer
as well as target company as a result of merger or amalgamation. This is because such
representations may have an impact on the outcome of the offer. These are necessary
in order to deliver better models for strategizing for cross border mergers in future.
Under this, the financial advisers play an important role in determining whether the
forecasts which are of a financial nature have been prepared in a proper manner. In
any case, the companies (the acquirer as well as the target) should be able to satisfy its
stakeholders that under usual circumstances the earnings per share of the merged
entity shall be equal to if not greater than the earlier entity
15. The law could lay down guidelines for merging entities as to what should be the
nature of the documents being presented. These could take two forms namely: an
earnings enhancement statement and the other being the merger benefits statement. A
merger benefits statement could be in the form of a statement explaining the expected
financial benefits of a proposed takeover or merger. Such statements may provide
able guidance for the shareholders in reaching their decision. Sources of information
which support the statement must be published with an analysis and explanation of
constitutional elements. The earnings enhancement statement may indicate as to what
is the maximum achievable profits if the two entities are combined. This may include
the overall earnings of the combined entity as well as the dividends or returns on each
and every share in the hands of the resultant shareholders.
16. The law should contain separate chapters dealing with the duties of the directors of
the acquirer as well as target companies involved in a cross border merger or
amalgamation. There should be exclusive responsibilities placed on the directors of
the acquirer as well as the target companies with respect to providing information and
to make announcements in the course of a takeover bid. A code of conduct can be laid
down for the directors in the manner that they should act only in their capacity as
directors, and their decisions should not be influenced by their personal or family
shareholdings or to their personal relationships with the companies. They should take
into account only the interests of their employees, creditors, shareholders as well as
other stakeholders while determining matters advertisements issued to shareholders
by their company in connection with the offer.
17. The law should also provide for defences to a takeover bid for a target company
which could be in the form of: conclusion of voting related to the cross border
merger. Directors of both the companies involved in the bid should bear full
responsibility for any information contained in documents or
18. agreements between shareholders, the creation of interlocking shareholdings between
the target and another company and series of companies, the issue of substantial block
of shares who is an outsider well disposed to the directors and who is willing to
maintain status quo when the bid or the offer is made, the introduction into the capital
structure of the target company non voting shares with restricted or weighted voting
rights, the disclosure of favourable information designed to maximize the market
prices of the shares of the target, selling key assets of the target or removing them
from the control of the shareholders and the conclusion of service contracts on terms
advantageous to the directors of the target
Chapter 7
Concluding remark
Tax laws in many countries tend to be complex, but with India beginning to occupy an
increasingly important place on the world stage, the benchmark for comparison has to be
changed. There is a need for India to mature in relation to administration of tax laws. Two
important dimensions are the need for laws that are clear and also for a mechanism to provide
taxpayers with upfront clarity and dispute resolution.41
At present, the dispute resolution mechanism in India moves slowly. Assessment proceedings
continue for more than two years from the date of filing of the tax return. Thereafter, the two
appellate levels take approximately two to seven years to dispose of an appeal. If the dispute
still continues, on a question of law, the matter gets referred to the High Court and the
Supreme Court which takes very long. This is worrying corporates as it takes a lot of
management time and effort.
There is a need to speed up the litigation procedure. There should be a limitation period on
disposal of appeals too. Two years ago, the National Tax Tribunal (NTT) was set up to speed
up the dispute mechanism. The NTT has, unfortunately, yet not been functional.
The new direct tax code that the Government is planning to introduce, to replace the current
Income-tax Act, is expected to emphasise on transparency and taxpayer-friendliness42.
The Indian tax authorities have been aggressively alleging that the Indian subsidiaries are
economically dependent on the foreign parent company and, therefore, constitute a
Permanent Establishment (PE) of the parent company. In claiming that the parent company
has a PE in India, the Indian tax authorities ignore that the rule only applies if the transaction
between the foreign company and the agent is not on arm’s length terms. The Indian tax
authorities have also been aggressive when asserting PE, based on their own interpretation of
41 Ketan Dalal,Executive Director, PWC, we need to mature in tax law Admin, Saturday
December 15,2007 Bussinee line
42 Supra note 4
the rules relating to place of business in India, provision of services in India, etc, rather than
relying upon internationally-accepted rules.
Transfer pricing regulations require all international transactions amongst group entities to be
priced on an ‘arm’s length’ basis, leading to the often-debated and vexed question of what the
best manner of determining the arm’s length price is. Internationally, too, a majority of tax
litigation is due to transfer pricing-related aspects.
In India, we find the litigation on transfer pricing increasing, so the corporates need to
manage these risks. Introduction of Advance Pricing Agreements (APAs) and safe harbour
provisions; further development of practice around Mutual Agreement Procedures (MAPs)
are key steps required to take the Indian transfer pricing regime to the next level.
Amendments brought about by the Finance Act, 2008 would have a major impact on transfer
of shares overseas, especially in a case where the seller of the shares is a tax resident of a
country with which India does not have a Double Taxation Avoidance Agreement (DTAA).
The amendment also brings the investors from countries like the US and UK within the tax
net in India, since India’s DTAA with such countries provides for taxation of capital gains in
accordance with the domestic tax laws of India.43
Currently, a large chunk of Foreign Direct Investments into India is coming from favourable
offshore jurisdictions. The tax laws shall face the challenge of balancing the interest of the
investors and the revenue authorities.
BIBLOGRAPHY
43 K.B.Girish and Himanshu patel, KPMG, ’Deals:Indian wanted more taxes from cross
border M&A ’ February, 19,2008. International Tax Review
Journals:
a. International Tax Review, February, 19,2008.
d. The united Nations World Investment Report 2000, Cross-border mergers and
Acquisitions and development (UNCTAD, 2000), PP 140-144
News Paper:
c. Fay Hansen, ”Tax efficient Cross-Border M&A”, Business Finance, Penton Media
Inc.
d. Business Line, Saturday, saptember 13, 2008
Act:
Website:
a. http://docs.google.com/gview?
a=v&q=cache:_KPGsU5MhwQJ:www.freshfields.com/publications/pdfs/2006/15139
.pdf+the+City+Code+on+Takeovers+%26+Mergers&hl=en
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a=v&q=cache:qCsY5uH3CYMJ:www.sheffieldsafetynet.gov.uk/ip_manual/Part
%252034.pdf+Secretary+of+state,+statutory+powers%2BUK&hl=en
c. http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1973/cukpga_19730041_en_1
d. http://www.mergeracquisitionattorney.com/national-content.cfm/Article/71201/HSR-
Act-Helps-Monitor-Monopoly.html
e. www.securitieslawinstitute.com/m&a.html