Why Does The Hutch and Vodafone merger have problems -

with respect to FEMA and tax?

Vodafone(Briton)A Foreign company

HTIL(Whampoa group of Li-Ka Shing.

Hong KongA foreign company

Hutchison EssorIndian Company

67%

Takes over

Asim Ghosh-12%A.Singh and other companies

(Minority)

Essor group

Mergers and Acquisitions-Tax impact

By Prof. Augustin Amaladas

M.Com.,AICWA.,PGDFM., DIM., B.Ed

For

TASMAC

25/07/08

Provision of income tax act

• THE AMALGAMATED CO. IS AN INDIAN CO.

EXCEPTION

1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO.

2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.

? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. AMALGAMATING CO.(OLD CO.)

• The Court has also sent notices to the Hutchison Essar's Managing Director, Mr Asim Ghosh, and the Chairman of Max Group, Mr Analjit Singh. The two individuals hold 12 per cent of Hutchison Essar, which is the bone of contention.

• The stake is being held indirectly by the two individuals on behalf of Vodafone. The sale-breached India's Foreign Exchange Management Act and the licensing conditions for providing telecommunications services in India,

• What is the maximum holding possible by a foreign company in telecom in India?

TYPES OF MERGERS

• HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY

• as Ford announced the sale of the two British iconic cars to Tata Motors Ltd.

• Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

The First wave

• 1897-1904-horizontal Mergers• Monopolistic Market structure• Mega merger between US Steel and

Carnegie Steel.It also merged with 785 separate firms-75% of Steel production of US.

As a result: ???? What happened to Standard Oil?

Standard Oil(SO)

• Divided in to 30 Companies.

• SO of New Jersey named EXXON

• SO of New York named MOBIL

• SO of California renamed CHEVRON

• SO of Indiana renamed AMOCO

• What is ANTI TRUST Act? What is known in India?

Who plays an important role in merger?

• Investment Bankers.

• Can you name some of the investment bankers?

• What are the other firms involved in merger and acquisitions?

When did Management principles used in merger in

USA?• Merger activity reached its highest level

during 1965-69• Booming of economy• Conglomerate merger period-80%• Management principles were applied in

industries.• Management graduates were employed

to manage conglomerate mergers.

M&A IN INDIA

• License era-Unrelated diversification• Conglomerate merger• Friendly take over and hostile bids by buying equity

shares• Example: Swaraj paul attempted to raid on Escorts

Ltd.and DCM Ltd but could not succeed.• The Hindujas raided and took over Ashok leyland

and Ennore Foundaries.• Chhabria Group acquired stake in Shaw Wallace,

Dunlop india and Falcon Tyres.

• Goenka group from culcutta took over Ceat tyres.

• The Obroi-Pleasant hotels of Rane group.

• 1989- Tata Tea acquired 50% of the equity shares of Consolidated Coffee Ltd from resident shareholders.

• merged to form HCL Ltd??.

HCL

• Hindustan Computers, Hindustan Reprographic, Hindustan Telecommunications and Indian Software Ltd.

Basic concept behind capital gain tax?

• Separate legal entity• What do you mean by capital gain?• Transfer of capital asset• If company transfers without fulfilling

Income tax provision does it attract capital gain tax?

• Is it taxed on company?/shareholders?/debenture holders?

INCOME TAX RELATED ISSUES FOR AMALGAMATION

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B)

1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.

2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY

EX. NO. OF SHARES OF Altd CO. 1,00,000 NO. OF SHARES HELD BY Bltd IN Altd IS 20,000 NOMINAL VALUE OF SHARE IS RS.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 =

60,000 TO BE THE SHARE HOLDES OF B CO.NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE

HOLDERS

EXAMPLE

A LTD AMALGAMATES WITH B LTD AS ON 2007

PARTICULARS DOES NOT SATISFY SEC 2(1B) & 72 A

SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A

SATISFIES BOTH 2(1B) & 72 A

A MERGES WITH B (A GOES OUT)

NO BENEFIT TO A & B

DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B

NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD

• NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT

? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION

SEC 72 A TO BE FULFILLED1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR

MORE YEARS2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS

BEFORE AMALGAMATION3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF

BOOK VALUE ATLEAST FOR 5 YEARS4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED

CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS

Tax Concession To Share Holders Of Amalgamating Co.

• No capital gain tax provided new co. is an Indian co.& Shareholders are acquired everything in shares

EXERCISE

PARTICULARS CO. A CO. B

EAT 1,40,000 37,500

NO. OF SHARES

20,000 7,500

EPS 7 5

MARKET PRICE

70 40

P/E RATIO 10 8

• Co. A is acquiring co. B Exchanging one share for every 1.5 shares of B ltd & p/e ratio will continue even after merger

? Are they better or worse of than they were before in merger

? Determine the range of minimum & maximum ratio between the two firms

? A is an Indian co. ? A is a foreign co.? A merges with T & formed a new co. AT ltd? What are the tax planning required before &

after merger

Conclusion

• Fulfill section 2(1B) of Income tax act by transferor company• Amount to be in the form of shares• No cash to be received• Foreign Direct investments in selected sector can not exceed 74%

by foreign company• Fulfill section 72A of the IT act so as to reap the benefit by

transferee company• Shareholders can not transfer their holdings with in 5 years.• Sales tax at the rate of 8% can not be avoided.• Set off and carry forward of losses is possible.• What are the losses can be carried forward and set off? How

many years?

Thank You