Project Main

EXECUTIVE SUMMARY 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 2 Amit Khandelwal, “Due diligence in cross-border deals”Monday, September 24,2007, Business Line 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 Rank Year Acquirer

Target

Transaction % Value (in Mil. USD)

1

Time Warner

164,747

2000 Merger : America Online Inc.

21.83

(AOL) 2

2000 Glaxo Wellcome Plc.

SmithKline Beecham Plc. 75,961

10.06

3

2004 Royal Dutch Petroleum Co.

Shell Transport & Trading 74,559

9.87

Co 4

2006 AT&T Inc.

BellSouth Corporation

72,671

9.62

5

2001 Comcast Corporation

AT&T Broadband &

72,041

9.54

60,243

7.98

59,974

7.95

Internet Svcs 6

2004 Sanofi-Synthelabo SA

7

2000 Spin-off : Nortel Networks

Aventis SA

Corporation 8

2002 Pfizer Inc.

Pharmacia Corporation

59,515

7.89

9

2004 Merger : JP Morgan Chase &

Bank One Corporation

58,761

7.79

Endesa SA

56,266

7.45

754,738

100

Co. 10

2006 Pending: E.on AG Total

5 Source: Institute of Mergers, Acquisitions and Alliances Research, Thomson Financial

Table: 1.1 and fig.1.1 show the ten largest M&A deals worldwide since 2000. Table and figure reflects that the largest M & A deal during last 6 year was between American Online Inc and. Time Warner of worth $ 164,747 million during 2000, which account 21.83% of total transaction value of top ten worldwide merger and acquisition deals. While second largest deal was between Glaxo Wellcome Plc. & SmithKline Beecham Plc. Of US $ 75,961 million which was also occurred during 2000, which was 10.06 % of total transaction value of top ten worldwide M & a deals & third largest deal was between Royal Dutch Petroleum Co. Shell Transport & Trading Co of worth US $ 74,559 million, it is 9.87 % of total transaction value of top ten worldwide M & A deals.6 Cross-border Merger and acquisition: Trend in India 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 6 http://www.indianmba.com/Faculty_Column/FC720/fc720.html visited on 3/09/09

Indian companies in the world markets, and particularly in the US, is not only an indication of the maturity reached by Indian Industry but also the extent of their participation in the overall globalization process. Table1.2: The top 10 acquisitions made by Indian companies worldwide: Acquirer

Target Company

Country targeted

Deal value ($ Industry ml)

Tata Steel

Corus Group plc

UK

12,000

Steel

Hindalco

Novelis

Canada

5,982

Steel

Videocon

Daewoo Electronics Corp. Korea

729

Electronics

Dr. Reddy's

Betapharm

Germany

597

Pharmaceutical

Belgium

565

Energy

500

Oil and Gas

Labs Suzlon Energy Hansen Group HPCL

Kenya Petroleum Refinery Kenya Ltd.

Ranbaxy Labs Terapia SA

Romania

324

Pharmaceutical

Tata Steel

Natsteel

Singapore

293

Steel

Videocon

Thomson SA

France

290

Electronics

VSNL

Teleglobe

Canada

239

Telecom

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. Graphical representation of Indian outbound deals since 2000. Figure 1.2

Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion in 2005 , and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in India's corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments. 7

Table 1.3: Cross-border Merger and acquisition: India8 (US $ Million)

Year

Sales

Purchases

2000

1219

910

2001

1037

2195

2002

1698

270

2003

949

1362

2004

1760

863

2005

4210

2649

Total

10873

8249

7 Super note5

8 . Source: UNCTAD world investment report 2006

Table 1.3 & figure 1.3 exhibit Cross –border merger and acquisition in India for the period 2000 to 2005. Table shows the cross border sales deals during 2000 were 1219 US $ million while purchase deal were 910 US $ million. But during 2005, these have been increased to 4210 US $ million and 2649 US $ million. While overall sales are 10,873 US $ million and purchase deals were 8249 US $ million during last five years. So table clearly depicts that our cross border merger and acquisition sales deals are more then purchase deals.

Table 1.4: Foreign acquisition by Indian firms 2000-2006

Table 1.4: Reflects the foreign acquisition by Indian firms during last 6 years. Table clearly depicts that % of foreign acquisition by Indian firms was highest in IT/Software and BPO sector, i.e., 29.4% while foreign acquisition by Indian firms in pharmaceuticals & healthcare sector was 20.3% during last 6 years 9Which was second highest. Number of foreign acquisition is also highest in IT/Software and BPO sector i.e., 90 firms while pharmaceuticals & healthcare sector and other sectors are in second number with 62 foreign acquisition. While in the automotive, chemical & fertilizers, Consumer goods, metals and mining and

10

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. 12 Section 2(47)IT Act 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 shortterm 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 : •

The merger should be pursuant to a scheme of amalgamation.

•

All the assets and liabilities of the amalgamating company should be included in the scheme of amalgamation.

•

No prescribed time limit exists within which the property of the amalgamating company should be transferred to the amalgamated company.

•

The requirement that the shareholders holding 75 per cent in value of the shares in the amalgamating company to be shareholders in the amalgamated company applies to both preference and equity shareholders. However, it does not prescribe any minimum

15 Section 2(18) of the IT Act defines amalgamation as “1B Amalgamation” in relation to (one or more ) companies, means the merger of one or more companies with another company or the mergerof two or more companies, to form on e company (The companies or companies where so merge being referred to as amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner thata) That all the property of the amalgamating company or companies imidately before the amalgamation become the property of the amalgamated company by the virtue of the amalgamation; b) All the liabilities of the amalgamating company or companies immediately before amalgamation becomes the liabilities of the amalgamating company by the virtue of amalgamation; c) Shareholder holding not less than three fourth in value of the shares in the amalgamating company or companies (other than share held therein immediately before the amalgamation by or a nominee for, amalgamated company or its subsidiary ) become share holders of the amalgamated company by virtue of amalgamation otherwise then as a result of the acquisition of the property of one company by the another or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company

holding in the amalgamated company, nor does it stipulate for how long they should continue being shareholders in the amalgamated company. •

The consideration to the shareholders of the amalgamating company can be a combination of cash and the shares in the amalgamated company.

It is possible to issue even redeemable preference shares as consideration to qualify as amalgamation.16

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.

a)

Capital gains tax liability on the shareholders of the amalgamating company18 - In the case of a merger, the shareholders of amalga-mating company would be allotted shares in amalgamated company as a result of the amalgamation. This process

16 Delhi High Court in tele sound (India) ltd., In re (1983) 53 comp. cas 926 17 Section 47(vi) (a) 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. a)

Computation of capital gains tax on disposal of the shares of amalgamated company 21- This section contemplates a situation in which shareholders of the amalgamating company, having acquired the shares in the amalgamated company as a result of the amalgamation, now elect to sell off such amalgamated company’s

19 [2001] 248 ITR 323/115 taxman 326 20 Section 47(vii) 21 Section 49(2) IT act

shares. Accordingly, when these shareholders sell their shares in the amalgamated company, for computing the capital gains that would accrue to them as a result of the sale, the cost of acquisition would be the cost of their shares in the amalgamating company. Also the period of holding for determining long-term or short-term gains would begin from the date the shares were acquired by the shareholders in the amalgamating company. b)

Availability for set-off of unabsorbed losses and other tax benefits - In case of amalgamation of a company owning an industrial undertaking, the amalgamated company would be able to get the benefit of carry forward of losses and depreciation to set off against its future profits, provided some conditions are fulfilled.22

c)

Availability of carry-forward and set-off of losses by certain companies - Where there is a change in the shareholding of a company in which public are substantially interested, such a company would not be allowed the carry-forward or set-off of accumulated losses if shareholders carrying 51 per cent of voting power of the company on the last day of the year in which the loss is sought to be set off are not the same as the shareholders carrying 51 per cent of voting power on the last day of the year in which the loss was incurred.23

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. 22 Section 72A, 35AB, 42 and 115 AC, IT Act 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: a)

The shareholders holding at least three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

b)

Such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

Since such a demerger would not be in India and, hence, the provisions of the Indian Companies Act would not be applicable in respect thereof, the proviso to this clause has waived the application of sections 391 to 394 of the Companies Act, 1956 to such a demerger.

25 Section 47(vi)(c)

Chapter: 4

Indian Tax regime vis-a-vis Cross-border Mergers TAX REGIME: Though mergers and acquisitions provide a substantial upside, yet shareholders will have to bear the brunt of the taxman. The revenue authorities are exploring the possibility of generating tax from cross-border M&A resulting in the transfer of beneficial interest of the Indian company. This is on the basis of the substance theory that the country has a right to claim tax on the profit generated from the business carried out in India, which itself is a debatable subject. The current tax legislation does not provide for the concept of levy of tax on transfer of beneficial ownership in a cross-border transfer. The Hutch-Vodafone and a spate of other overseas deals involve taxability of transfer of shares of a holding company (having an Indian operating subsidiary company) outside India. Present position of law – 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. The legal battles – In line with this approach, the revenue authority recently issued notices to some 400 companies who were engaged in cross-border M&A deals in the recent past. Let us discuss some of the major deals. A. Hutch-Vodafone deal: Hutchison International, a non-resident seller and parent

company based in Hong Kong sold its stake in the foreign investment company CGP Investments Holdings Ltd., registered in the Cayman Islands (which, in turn, held shares of Hutchison-Essar - Indian operating company, through another Mauritius entity) to Vodafone, a Dutch non-resident buyer. The deal consummated for a total value of $ 11.2 billion, which comprised a majority stake in Hutchison Essar India. In light of this, the revenue issued show-cause to Vodafone asking for an explanation as to why Vodafone Essar (which was formerly Hutchison Essar) should not be treated as an agent (representative assessee) of Hutchison 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

Legal compatibility vis-a-vis Cross-border M&A The Companies Act, 1956 on the statute book is the largest legislation in India but still probably inadequate in terms of dealing with cross border mergers and acquisitions. Corporate Restructuring has been provided for in six sections from Section 390 onwards. Therefore an important question arises as to what kind of law India requires in order to deal with such a situation. Cross border mergers have become an ever increasing phenomenon in the global commercial marketplace. Thus what happens when an Indian company wants to invest abroad or a foreign company wants to invest in India. The legal regime in India provides no answer to such an important question and is therefore in constant search for answer to such a question. Globalization has enabled third world countries to become global giants, and they have been competing with western MNCs like never before. A strong legal regime dealing with cross border mergers is required if there has to be a more equitable spread of world economic power. This is because western MNCs are and will continue to remain global leaders in certain industries but the resurgence of third world MNCs cannot be ignored if one looks at the rise of MNCs from third world countries. Third world MNCs are gaining ground in various industries, for example, India, in the IT sector. Global commercial activity is occurring at a fast pace in today's world due to the ICT revolution which has resulted in significant growth for the economies of many countries worldwide. The phenomenon of global commercial activity has been enhanced and is dependent on the legal or regulatory mechanism in any country. There are commercial activities of various kinds and one amongst them is the buying and selling of business corporations all over the world. Domestic as well as transnational corporate restructuring involves host of legal issues and the parties choice of carrying out the transaction becomes easy when there are well codified laws guiding their conduct. For India, corporate restructuring is not a new phenomenon and it has

been further boosted by takeovers of foreign firms by large Indian multinationals abroad. This augurs well for our country but an important question that arise here is whether India has sufficient laws to deal with cross border mergers and acquisitions. Surely there are provisions in the Indian Companies Act, 1956 dealing with domestic mergers and acquisitions, but is there any legislation or part of it which is concerned with cross border mergers and amalgamations exclusively. The answer is no. The solution to this problem is sought to be proposed is discussed latter . A business firm can grow organically as well as inorganically. National economic growth in contemporary times is driven by corporate restructuring of which mergers and acquisitions form a part. Thus the need of efficiently regulating this phenomenon. An effective law on the point could be regarded as an antidote which may allay all fears related to creation of monopolies and its consequential adverse effect on competition. Global commercial activity demands effective regulation which in turn depends on the domestic legal mechanism influencing the international nature of transactions. Indian law on the topic is scarce as well as scattered in the form of various provisions here and there and does not offer much promise in the long run when the Indian sector in terms of transnational corporate restructuring would start to grow. Corporate Restructuring entails a diffusion of cultures at various managerial levels. Integration of management presents an onerous task before the merged entity, more so in the era of cross border mergers and acquisitions. Therefore mergers lead to a situation which could be effectively termed as acculturation and has to be dealt with in an effective and productive manner. Contemporary commercial world requires a well codified law with respect to cross border M&As for India as often it could be seen that companies going in for mergers are not possessed of the same financial weight and therefore the target company may well land up in an awkward situation whereby it may have to take legal recourse to get things in order for itself. However cross border mergers do not necessarily imply the traditional method of merging one entity with the other and can also occur in the form of integration whereby same policy can be followed by two different legal entities implementing a common decision structure. The Indian Companies Act, 1956 which is called a carbon copy of the English Companies Act proves its effectiveness in providing immense flexibility both in the conceptual as well as procedural aspects of amalgamation. It is easy to say that Indians can globalize easily by following the seven sections of the Indian Companies Act, 1956 but is it really enough? An analysis of the position prevalent in other countries proves that Indian law will not find

favour with the foreign community if it is implemented within the length and breadth of the cross border mergers scenario. In case of any cross border merger or acquisition, a host of legal issues are involved touching upon subjects of corporate taxation, the applicable company law and the relevant competition regime. Different securities laws are yet another issue to be dealt with. Amongst all the above mentioned issues and points, one basic thing that needs to be stressed here is that the rationale behind cross border mergers and acquisitions remains to be the same as that behind domestic mergers. Globalization, maturing markets, industry consolidation and a zest to be global in scale and scope to compete and thrive could be termed as the primary reasons to consolidate in a transnational manner.29 In today’s commercial world, cross border M&As involve merging companies in different legal jurisdictions. There are problems presented before the acquirer in the form of a flow back where the target company shareholders are unwilling to hold foreign domiciled equity of the acquirer. Still, there are other aspects of politics and antitrust issues that may hamper the efficient implementation of cross border M&As. Buyers and sellers of firms generally expect an increase in wealth as a result of mergers by way of rise in the market value of the assets of the combined firms and the resultant valuations of the of buyers and sellers with an expectation of gaining from the transactions. There may be gains from a reduction in competition and achievement of business synergies. Cross border M&As involving large listed corporations have become a salient feature of economic globalization. While some M&As could be termed as an economic necessity, others could be viewed as large economic opportunities for even larger global business firms. Cross border mergers may involve a clash of different capital market cultures with differing analyst philosophies which in turn may influence stock market prices. A merger may receive favorable accounting and tax treatment when its goal fulfils the requirements of a balanced pooling or uniting of interests and is not a one sided reorganization of a target company under the interests of the acquiring company. The varied actors in an M&A market like investment banks, the boards of acquiring or merging companies, the boards of target companies, the share holders, the accounting firms carrying out due diligence process, etc. Therefore what should the Indian law be? The solution to the problem lies in drawing example from the laws of other countries and thus, an analysis of the legal position in other countries becomes 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.

A. Legal Regime In The US:

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 30 Securities Act of 1933 and the Securities Exchange Act of 1934

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/HSRAct-Helps-Monitor-Monopoly.html visited on 08/09/09 34 www.securitieslawinstitute.com/m&a.html visited on 08/09/09

power and the total value of the stock of the acquirer. The law provides for further exemption in the form of Section 338 Election. It’s a procedure by which the acquirer while acquiring the stock of the target, can be treated as a single taxable transaction. However this is subject to the acquirer taking at least 80% of the stock of the target company. Thus it comes easy on the target in the manner that the whole transaction even if carried out in different stages is termed as a solitary one thus lessening the burden of payment of tax on the target on the incomes which he makes by selling away his business. This provision is useful when the target has Net Operating Losses and gains on deemed sale of assets is likely to be offset by the losses. Therefore what should India do? Not much with respect to taxes, it seems as there are already enough laws in place to handle situations of cross border mergers & acquisitions. 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.

B. Position In UK: A Practice Religiously Followed:

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: •

maintenance and promotion of effective competition within the country

•

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

•

maintenance and promotion of balanced distribution of industry and employment in the U.K.

•

maintenance of competitive activity in overseas markets

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 he+City+Code+on+Takeovers+%26+Mergers&hl=en visited on 08/09/09

executive, it should notify the panel executive in writing as soon as possible and at the latest within one month of the executive ruling. The proceedings before the panel are relatively informal and normally the panel does not allow to have a barrister representing them. There are no formal rules of evidence. There is a right of appeal from panel rulings. This has been provided where a panel executive believes that there has been a breach of the Code, the offending person will be informed in writing of the nature of the alleged breach and of the matters to be presented before the full panel and that person will be invited to appear with his advisers and any witnesses before the full panel. Punishment to the offender may involve private reprimand, public censure or temporary suspension from operating in the securities markets.

Chapter: 6

Recommendation for Indian legal system Cross border M&As could be greatly facilitate by the formation of regional currency mechanisms which could then lead to the structuring of global stock markets which could

further lead to global shares and harmonization of global tax laws and securities regulations39. Now what kind of legal regime is suitable for India? Already there are suitable FDI limits in various sectors. This implies the need to look at the existing laws within the country. There are already certain laws governing domestic mergers and there are certain tax benefits in cases of mergers which are of a domestic nature. These benefits are in the form of deduction available in the form of investment allowance, expenditure on scientific know how and technology, acquisition of intellectual property, etc40. There are various options available before a country which does not have a law specifically dealing with cross border mergers and acquisitions in a fast paced economy. Where can a country progress if there are no legal or regulatory measures governing this emerging phenomenon of economic activity. Stricter regulatory regimes should not impede and must always further the process of economic development. Therefore in line with the thinking on the subject, the following points are proposed as a measure to formulate an efficient regulatory mechanism dealing with cross border mergers and acquisitions 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. 4. No relevant information should be withheld from the shareholders. This must be ensured by the officials of the company specifically involved in the merger. There 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.

40

from section 32 of the Income Tax, 1961 onwards

should be no oppression of shareholders who belong to minority in terms of their value of shareholding 5. The boards of the acquirer as well as target companies should be made bound by law to act in the best interests of the shareholders of the company. This could be achieved by extending the ambit of the domestic laws governing the conduct of directors 6. There should be specific responsibilities delineated for the offeror as well as offeree company 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. 8. Cross holdings by a foreign company in two or more companies may be brought under the scanner of the regulatory body on a regular basis. This could be true of any body having an asset base over and above a specified limit 9. Any proposed provision of the new law should take into account the aspect of concentration. This implies a check on the activities of a single dominant corporation of a foreign origin. A corporation may qualify for such a check by the Indian authorities when there is a weakening of competition in the relevant market resulting from the concentration and the economic activity in the sector predominantly gets threatened from the concentration. 10. Any merger between cross border entities should result in the preservation and

development of effective competition within the common market. For the abovementioned purposes, any statutory or supervisory body should be concerned with the following factors while looking at a merger: (a) the market position of the undertakings concerned and their economic and financial power; (b) the alternatives available to suppliers and users; (c) any legal or other barriers to entry 55; (d) supply and demand trends for the relevant goods and services; (e) the interests of intermediate and ultimate consumers; (f) the development of technical and economic progress, provided that it is to the advantage of consumers and does not form an obstacle to competition 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 Significantly, several multinational companies doing business in India, across a broad spectrum of industries, are saddled with ever-increasing number of tax audits and prolonged tax litigation in India on account of failure of our tax authorities to apply tax treaties or follow internationally-accepted standards in treaty interpretation and transfer pricing. 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. b.

taxman 326 [2001] 248

c. UNCTAD world investment report 2006 d. The united Nations World Investment Report 2000, Cross-border mergers and Acquisitions and development (UNCTAD, 2000), PP 140-144 News Paper: a. Bussinee line, Saturday December 15,2007 b. in BUSINESS INDIA dtd. Jan. 29, 2006 at pp. 40. c. Fay Hansen, ”Tax efficient Cross-Border M&A”, Business Finance, Penton Media Inc. d. Business Line, Saturday, saptember 13, 2008 Act: a. Income Tax, 1961 b. Securities Act of 1933 and the Securities Exchange Act of 1934 Website: a. http://docs.google.com/gview?

b.

c. d. e.

a=v&q=cache:_KPGsU5MhwQJ:www.freshfields.com/publications/pdfs/2006/15139 .pdf+the+City+Code+on+Takeovers+%26+Mergers&hl=en http://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 http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1973/cukpga_19730041_en_1 http://www.mergeracquisitionattorney.com/national-content.cfm/Article/71201/HSRAct-Helps-Monitor-Monopoly.html www.securitieslawinstitute.com/m&a.html