1 tax issues in business re-organisation by mr. dileep c. choksi 12 november 2005

1

Tax issues in Business Re-organisation

by

Mr. Dileep C. Choksi

12 November 2005

• Income-tax issues of business re-organisations such as -

• Amalgamation

• De-merger

• Succession of partnership firm by a company

• Succession of a sole proprietary concern by a company

• Relevant provisions of -

• Co. Act

• SEBI Regulations

• Listing agreement

• FEMA

2

Index

Amalgamation / Demerger / Succession of PF

3

• Provisions relating to amalgamation / demerger / succession of PF by company seem to have been introduced on the assumption these re-organisation would otherwise lead to taxation

• Provisions ill conceived

• Rule of construction – Court must disregard the assumption of the legislature on the basis of which the provisions were inserted

4

Income-tax issues of Amalgamation

Amalgamation

5

A Co.

+

=

C Co.

• Amalgamation defined in S.2(1B) of the ITA

B Co.

A Co. Shldrs.

B Co. Shldrs.

A Co. Shldrs. B Co. Shldrs.

A Co.

+

=

B Co.

B Co.

A Co. Shldrs.

B Co. Shldrs.


Scenario 1 Scenario 2

Amalgamation …

6

Hold Co.

+

=

Hold Co.

Sub. Co.

A Co. Shldrs.

Hold Co.

A Co. Shldrs.

Hold Co.

=

Hold Co.

Sub. Co.

A Co. Shldrs.

A Co. Shldrs.

Assets distributed to Hold Co. on winding

up of Sub. Co.

Scenario 4Scenario 3

Circular No. 5P (LXXVI-63) dated 9 October 1967

Amalgamation …

7

Undertaking of A Co.

+

=

B Co.

B Co.

A Co. Shldrs.

B Co. Shldrs.


‘demerger’

Foreign Co.

+

=

C Co.

B Co.

A Co. Shldrs.

B Co. Shldrs.


Indian entity


Indian entity

Amalgamation …

8

• Appointed Date v. Effective Date

• Marshall Sons & Co. 223 ITR 809 (SC)

• Implications for the amalgamating company

• Transfer of the capital assets disregarded for S.45 of the ITA – refer S.47(vi)

• Benefit available only if the amalgamated company is an Indian Company [defined in S.2(26) of the ITA]

Amalgamation …

9

A Foreign Co.

+

=

Indian Co.


Shldrs.

B Foreign Co.

X %

Indian Co.

B Co. Shldrs.

Shldrs.

B Foreign Co.

X %

A Co. Shldrs.

≥ 25% sh.

No Capital Gains tax liability in India in the hands of A Foreign Co. – provided conditions satisfied - refer S.47(via) of the ITA

Amalgamation of foreign companies, one of which holds shares of an Indian Company

Amalgamation …

10

• Capital gains tax exemption provided -a) 25% of the shareholders of the amalgamating foreign

company continue to remain shareholders of the amalgamated foreign company; and

b) such a transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated

• Merger of a WOS into the parent or vice versa will not satisfy requirement (a) – can one take recourse to the definition as contained in S. 2(1B) of the ITA?

• Meaning of the words ‘continue to remain shareholders’? For what period?

Amalgamation …

11

• Implications for the amalgamated company

• Block of assets of the amalgamated company to be increased by the WDV of the assets of the amalgamating company – Expln. 2(b) below S.43(6) of the ITA

• Depreciation allowance to be apportioned between the entities on the basis of number of days assets used by each entity – 5th proviso to S.32 of the ITA

• Cost of acquisition of non-depreciable assets = cost to previous owner – S.49(1)(iii)(e) of the ITA

• Period of holding = period of holding of previous owner – Expln. 1(i)(b) below S. 2(42A) of the ITA

Amalgamation …

12

• Deduction from profits as was available to the amalgamating company prior to the amalgamation would be available to the amalgamated company – relevant provisions S.10A / 10 AA / 10B / 80-IA / 80 - IAB / 80 – IB, etc.

• Deduction of expenditure also available to the amalgamated company (illustrative)• Capital expenditure on scientific research – S.35(5) of the

ITA

• Capital expenditure incurred before 1 April 1998 for acquisition of patent rights or copyrights – S. 35A(6) of the ITA

• Amortisation of VRS expenditure – S.35DDA(2) of the ITA

Amalgamation …

13

• ‘industrial undertaking’ defined to include an undertaking engaged in mfg. of ‘computer software’ • IT enabled services covered? – Can one apply definition

contained in Ss.10A / 10B / 80 HHE read with Circular of CBDT

• ‘accumulated loss’ means loss under the head ‘profits and gains of business or profession’

Losses of amalgamating company – S.72A of the ITA

Amalgamating Co. ownsan industrial undertaking / ship / hotel or amalgamation of banking co.

Business loss Unabsorbed depreciation

Speculation loss Capital loss House Property loss

Lapses

Lapses

Lapses

Amalgamation …

14

• Conditions to be satisfied for availing the benefit of S. 72A of the ITA by –

• Amalgamating company should –• own an ‘industrial undertaking’ or a ship or a hotel or

should be a banking company

• have been engaged in the business in which the loss was incurred or depreciation remains unabsorbed for atleast 3 years

• have held continuously as on the date of amalgamation at least 3/4th of the book value of fixed assets for 2 years prior to the date of amalgamation

• Start ups (between 2 to 3 years) will not be able to satisfy these requirements

Amalgamation …

15

• Amalgamated company should –

• hold continuously for a minimum period of 5 years from the date of amalgamation at least 3/4th of the book value of assets of the amalgamating company

• Stringent – will impair the ability of amalgamated company to replace old machinery

• continue the business of the amalgamating company for at least 5 years from the date of amalgamation

• Amalgamating company in business of manufacture of chocolates –post amalgamation machinery used by amalgamated company for manufacture of biscuits – whether condition satisfied?

Amalgamation …

16

• fulfill such other conditions as may be prescribed to ensure revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose

• Subjective test i.e. determination whether amalgamation is for genuine business purpose – once Scheme sanctioned by Court can Income-tax authorities conclude otherwise?

Amalgamation …

17

• Rule 9C of the IT Rules requires amalgamated company to • achieve at least 50% of installed capacity within 4 years of

the date of amalgamation

• Same machinery for different outputs has different installed capacity – how does one determine the installed capacity and satisfy this test

• Indicate installed capacity in the Scheme for each product that is capable of being manufactured

• Maintain 50% capacity for the 4th and 5th year

• Submit accountant’s certificate

• Non-compliance of conditions results in loss or depreciation allowance allowed earlier being taxed as income of the year in which conditions are not complied with – S.72A(3) of the ITA

Amalgamation …

18

A Pvt. Co. + =

A Family Shldrs. B Family Shldrs.

B Pvt. Co.

B Family Shldrs.

B Pvt. Co.

A Family Shldrs.

• S. 79 applies only to companies other than ‘company in which the public are substantially interested’ – S.2(18) of the ITA

• Does not affect the ability to carry forward unabsorbed depreciation

• Shri Subhulaxmi Mills Ltd. 249 ITR 795 (SC)

• Whether S. 72A overrides S. 79

Amalgamation of closely held companies – position of losses – S. 79

100% 100%

Surviving entity - has losses

70% 30%

S. 79 could apply

Amalgamation …

19

• Applicability of S. 79 to Indian Sub. of foreign company

• S.79 will not trigger provided 51% of shldrs. of foreign amalgamating company continue to be shldrs. of the foreign amalgamated company – proviso to S.79 of the ITA

Amalgamation …

20

• Implications for the shareholders of amalgamating company

• Transfer of shares of the amalgamating company and receipt of shares of the amalgamated company disregarded for S. 45 of the ITA – refer S.47(vii) of the ITA and accordingly no capital gains tax liability.

• Exempting provision whether necessary?• Rasiklal Maneklal – 177 ITR 198 (SC)

• Meaning of ‘transfer’ as contained in the 1922 Act interpreted and held no ‘transfer’

• Mrs. Grace Collis – 248 ITR 323 (SC)

• S.2(47) of the 1961 Act … ‘extinguishment of any rights therein’ – rights in shares get extinguished

Amalgamation …

21

• Benefit of S.47(vii) available provided –• transfer is made in consideration of the allotment of share

or shares of the amalgamated company;

• Issue of debentures or bonds in addition to shares

• CIT v. M. Ct. M. Corporation Pvt. Ltd. 221 ITR 524 (Mad)

• CIT v Gautam Sarabhai Trust 173 ITR 216 (Guj.) – contrary

• amalgamated company is an Indian company

• Non satisfaction of conditions amalgamation could result in capital gains tax liability in the hands of the shareholders • Fair value of shares of amalgamated company could be

regarded as consideration accruing for computing Capital Gains

Amalgamation …

22

• Cost of acquisition of shares of amalgamated company = cost of shares of amalgamating company – S.49(2) of the ITA

• Period of holding to include the period for which the shares of the amalgamating company were held – Expln. 1(c) below S.2(42A) of the ITA

• Implications for employees who have been granted stock options under a qualifying ESOP

• New plan to be formulated by amalgamated company

• Fresh stock options to be granted

23

Income-tax issues in a demerger

Demerger …

24

A Foreign Co.

+

=

Result B Co. + India branch of A Co.

B Co.

A Co. Shldrs.

B Co. Shldrs.


Undertaking of A Co.

+

=

Result B Co. + Undertaking of A

Co.

B Co.

A Co. Shldrs.

B Co. Shldrs.



• Demerger defined in S.2(19AA) of the ITA – w.e.f.1 April 2000

India Branch

Demerger to satisfy requirements contained in S.2(19AA) of the ITA

A Co. Foreign Co.

Demerger …

25

A Co.

+

=

A Co.


B Co. Shldrs. A Co. Shldrs.

Scenario 3

Demerger to satisfy requirements contained in S.2(19AA) of the ITA

B Co.

Div. X Div. Y

C Co.C Co. Shldrs.

Div. QDiv. X

Result C Co.

C Co. Shldrs.

B Co.Div.P Div. Q

D Co.Project 1 Div. ZSale of

Project

D Co. Shldrs.

Div. Y Project 1Div. P

D Co. Shldrs.

D Co.Div. Z

Demerger …

26

• ITA recognises transfer of one or more ‘undertakings’ as a ‘demerger’ provided it is carried on in the manner prescribed in S.2(19AA) of the ITA

• What is an ‘undertaking’? – defined in Expln. 1 below S.2(19AA) of the ITA, to include

• any part of an undertaking;

• a unit of an undertaking;

• a division of an undertaking;

• a business activity taken as a whole

excludes individual assets or liabilities or any combination thereof not constituting a business activity

Demerger …

27

• Would these constitute an ‘undertaking’

• Accounting department of a company – may not have revenue streams - could be transferred to another entity

• IP rights of a company

• Retail customers (bank accounts / loans, etc.) of a banking company

• Project under construction – no revenue streams flowing

• Should demerged company have at least two undertakings to be able to demerge one of them

Demerger …

28

• Conditions to be satisfied for a qualifying ‘demerger’

• Transfer of the undertaking should be pursuant to a scheme of arrangement under Ss.391 to 394 of the Co. Act

• All property and liabilities of the undertaking immediately before demerger become property and liabilities of resulting company

• All property and liabilities of the undertaking are transferred by the demerged company at values appearing in its books of accounts immediately before demerger – revaluation to be ignored• Can the resulting company record the assets of the

undertaking at fair values?

Demerger …

29

• Resulting company issues, in consideration of the demerger its shares to the shareholders of the demerged company on a proportionate basis• Only equity or preference or combination of equity and

preference?

• In addition to shares can the company issue debentures, etc.?

• Shareholders holding not less than 3/4th in value of the shares of the demerged company become shareholders of the resulting company or companies• If liabilities of the undertaking exceed its assets – should

shares be issued? – could result in goodwill in the books of the resulting company or utilisation of its reserves for issue of shares

• Demerger of undertaking by WOS to Hold Co. – no shares may be issued – is it necessary to desubsidiarise?

Demerger …

30

• Demerger to satisfy conditions, if any, notified by the Central Government

• ‘Liabilities’ of the undertaking to include – • Liabilities which arise out of the activities or operations of

the undertaking

• Specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertakings; and

• in case, other than those referred to above i.e. the general or multipurpose borrowings to be split in the proportion of assets transferred and retained by the demerged company

• Need for relaxation – lenders may not agree

• Position if only own funds were utilised for the undertaking that is being demerged?

Demerger …

31

• Implications for the demerged company

• Transfer of the capital assets disregarded for S.45 of the ITA – refer S.47(vib) – provided the resulting company is an Indian company [defined in S.2(26) of the ITA]

• Block of assets of the demerged company to be reduced by the WDV of the assets of the undertaking transferred to the resulting company – Expln. 2A below S.43(6) of the ITA• Computation of WDV of each asset of the demerged

undertaking – separate accounts to be maintained?


Demerger …

32

• Issue of shares by resulting company – not regarded as dividend – clause (v) of S.2(22) of the ITA• Exclusion unnecessary

• No release of assets by demerged company to its shareholders

• Non-qualifying demerger i.e. one of the requirements of S.2(19AA) not met• ‘undertaking’ transferred to resulting company – whether

shares issued by resulting company can be regarded as consideration accruing to demerged company?

Demerger …

33

• Issue of shares by resulting company – can this be regarded as dividend to the extent of ‘accumulated profits’ – requirement to pay ‘dividend distribution tax’ in terms of S.115-O of the ITA

• ‘accumulated profits’ whether includes ‘securities premium account’

• Bharat General Fire Insurance Co. Ltd. 53 ITR 108 (SC)

• Consideration due to demerged company discharged by resulting company by issue of its shares to the shldrs. of demerged company

• Release of assets to the shareholders of the demerged company – S.2(22)(a) of the ITA

• Consequent to reduction of capital - S. 2(22)(d) of the ITA

Demerger …

34

• Implications for the demerged company

• Transfer of the capital assets disregarded for S.45 of the ITA – refer S.47(vib) – provided the resulting company is an Indian company [defined in S.2(26) of the ITA]

• Block of assets of the demerged company to be reduced by the WDV of the assets of the undertaking transferred to the resulting company – Expln. 2A below S.43(6) of the ITA• Computation of WDV of each asset of the demerged

undertaking – separate accounts to be maintained?


Demerger …

35

• Implications for the resulting company • Block of assets of the resulting company to be

increased by the WDV of the assets of the undertaking of the demerged company – Expln. 2B below S.43(6) of the ITA


• Cost of acquisition of non-depreciable assets = cost to previous owner ?

• Period of holding = period of holding of previous owner ?

• Harmonious construction

Demerger …

36

• Deduction from profits as was available to the undertaking of the demerged company prior to the demerger would be available to the resulting company – relevant provisions S.10A / 10 AA / 10B / 80-IA / 80 - IAB / 80 – IB, etc.

• Deduction of expenditure relatable to the undertaking available to the resulting company (illustrative)• Capital expenditure incurred before 1 April 1998 for

acquisition of patent rights or copyrights – S. 35A(7) of the ITA

• Amortisation of VRS expenditure – S.35DDA(3) of the ITA

Demerger …

37

• ‘accumulated loss’ means loss under the head ‘profits and gains of business or profession’

• Central Government has power to specify conditions as it considers necessary to ensure that demerger is for a genuine business purpose• No conditions specified as yet

Losses directly relatable to the demerged undertaking – S.72A of the ITA

No requirement that the undertaking should be an industrial undertaking / ship / hotel or amalgamation of banking co.

Business loss Unabsorbed depreciation

Speculation loss Capital loss House Property loss

Demerger …

38

• Quantum of ‘Accumulated loss’ and unabsorbed depreciation deemed transferred to resulting company

• Directly relatable – the entire amount

• Not directly relatable – apportioned between demerged company and resulting company in the proportion of assets of retained undertakings v. assets of demerged undertaking

Demerger …

39

Undertaking of A Pvt. Co.

+ =

A Family Shldrs. B Family Shldrs.

B Pvt. Co.

B Family Shldrs.

B Pvt. Co. + Undertaking of A Pvt. Ltd.

A Family Shldrs.

• S. 79 applies only to companies other than ‘company in which the public are substantially interested’ – S.2(18) of the ITA

• Does not affect the ability to carry forward unabsorbed depreciation

• Shri Subhulaxmi Mills Ltd. 249 ITR 795 (SC)

• Whether S. 72A overrides S. 79 (this being a latter provision in the ITA)

Demerger of closely held companies – position of losses – S. 79

100% 100%

Resulting co. - has losses

70% 30%

S. 79 could apply

Demerger …

40

• Applicability of S. 79 to Indian Sub. of foreign company

• S.79 will not trigger provided 51% of shldrs. of foreign demerged company continue to be shldrs. of the foreign resulting company – proviso to S.79 of the ITA

Demerger …

41

• Implications for the shareholders of demerged company

• Receipt of shares of the resulting company not regarded as dividend – clause (v) of S.2(22) of the ITA• Exempting provision whether necessary?

• Non-compliance of S.2(19AA) – whether dividend distribution tax payable by demerged company where shares issued by resulting company?

• On what amount – face value or book value or market value?

• In case demerger does not satisfy the requirements contained in S.2(19AA) can it result in any tax liabilities in the hands of the shareholders

Demerger …

42

• Cost of acquisition of shares of resulting company

= Cost of shares X Net book value of assets transferred

Net worth of demerged co. before

demerger

• Cost of acquisition of shares of demerged company = actual cost less cost attributable to share of resulting company

• Period of holding to include the period for which the shares of the demerged company were held – Expln. 1(g) below S.2(42A) of the ITA

Demerger …

43

• Implications for employees who have been granted stock options under a qualifying ESOP

• New plan to be formulated by resulting company

• Taxation may not be deferred to the point of sale as shares would be allotted to employees of the demerged company

44

Succession of partnership firm by a company

Succession of PF by a Co.

45

AB Co.

ITA

A , an individual

A, an individual .

Scenario 1 Scenario 2

B Co.

PSR:50:50

Capital: 10:90

AB

B Co.

10% 90%

Co. Act – Part IX min. 7 partners

ABCD Co.

Partners 1 to 7

AB

50% 50%

Partners 8 to 14

CD

Partners 1 to 7 Partners 8 to 14

Succession of PF by a Co. …

46

• Conversion of PF into a Co. in terms of Part IX of the Co. Act – does not trigger taxation

• Texspin Engineering and Manufacturing Works 263 ITR 345 (Bom.) – AY 1996-97

• Transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm is disregarded for S.45 of the ITA – refer S.47(xiii) inserted in the ITA vide Finance Act (No.2), 1998 – w.e.f. 1 April 1999

• Whether amendment necessary?


47

• Benefit of S.47(xiii) available provided –

• All assets and liabilities of the PF relating to the business become assets and liabilities of the company• PF carrying on two businesses – only one is proposed to be

housed in a company – possible?

• Revaluation of assets?

• all partners become shldrs. of company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession• Fixed v Current account

• Equity – voting v non-voting

• Equity v Preference


48

• partners not to receive any consideration or benefit directly or indirectly, in any form or manner, other than by way of allotment of shares in the company• Bonds, debentures, etc. not possible

• aggregate shareholding of partners in the company should not be less than 50% of the total voting power and should continue for a period of 5 years from the date of succession

• Non-compliance of conditions triggers taxation – chargeable profits and gains taxed in the hands of the successor company in the year of contravention - S.47A(3) of the ITA


49

• ‘Accumulated loss’ and unabsorbed depreciation allowance of PF transferred to successor company – S.72A(6) – no separate conditions to be complied with• Non-compliance of conditions contained in S.47(xiii)

will result in the loss and depreciation amount set off earlier being regarded as income of the year in which contravention is made

• Period of holding shares of the successor company for partners = date of allotment or date from which the partner joined partnership?

• Cost of acquisition of shares of the successor company = capital account immediately before the date of succession?

50

Succession of a sole proprietorship by a company

Succession of sole proprietorship concern by a Co.

51

• Sale or transfer of a capital asset or intangible asset by a sole proprietorship concern to a company as a result of succession of the sole proprietorship concern by a company in the business carried on by the sole proprietorship concern is disregarded for S.45 of the ITA – refer S.47(xiv) inserted in the ITA vide Finance Act (No.2), 1998 – w.e.f. 1 April 1999

Succession of sole proprietorship concern by a Co. …

52

• Benefit of S.47(xiv) available provided –

• All assets and liabilities of the sole proprietorship concern relating to the business being succeeded become assets and liabilities of the company• Revaluation of assets?

• shareholding of the sole proprietor in the company should not be less than 50% of the total voting power and should continue for a period of 5 years from the date of succession

• sole proprietor not to receive any consideration or benefit directly or indirectly, in any form or manner, other than by way of allotment of shares in the company


53

• Non-compliance of conditions triggers taxation – chargeable profits and gains taxed in the hands of the successor company in the year of contravention - S.47A(3) of the ITA

• ‘Accumulated loss’ and unabsorbed depreciation allowance of PF transferred to successor company – S.72A(6) – no separate conditions to be complied with

• Non-compliance of conditions contained in S.47(xiv) will result in the loss and depreciation amount set off earlier being regarded as income of the year in which contravention is made


54

• Period of holding shares of the successor company for sole proprietor = date on which business commenced ?

• Cost of acquisition of shares of the successor company in the hands of sole proprietor = net book value of assets transferred or intrinsic value of business transferred?

55

Indian Companies Act, 1956 – some relevant provisions

Relevant provisions under Co. Act

56

• S. 391 of the Co. Act allows a company to make an application to the Court where a ‘compromise’ or ‘arrangement’ is proposed between a company and –

• its creditors or any class of them; or

• its members or any class of them

• S.391 is a complete code by itself

• Court convened meeting to be held for seeking views of stakeholders

• Compromise or arrangement binding on all stakeholders if a majority in number representing 75% in value of each class of stakeholder agree to the compromise or arrangement

Relevant provisions under Co. Act …

57

• Court to sanction scheme of compromise or arrangement after hearing all affected parties

• Fairness of the Scheme• Miheer H. Mafatlal v. Mafatlal Industries Ltd. 87 CC 792 (SC)

• Shri Ambica Mills Ltd. 59 CC 368 (Guj.)

• Valuation of shares – swap ratio• Miheer H. Mafatlal v. Mafatlal Industries Ltd. 87 CC 792 (SC)

• Hindustan Lever Employees Union v. Hindustan Lever Ltd. 83 CC 30 (SC)

• Court has power to supervise the carrying out the compromise or an arrangement (S.392 of Co. Act)


58

• Amalgamation of a Foreign Company or an ‘undertaking’ of a Foreign Company into an Indian Company

• Moschip Semiconductor Technology Ltd. In Re. - 120 CC 108 (AP) – merger of a foreign company

• Bank Muscat S.A.O.G., In Re. - 120 CC 340 (Kar.) – merger of a branch of a foreign company

• Scheme designed with the objective to avoid tax

• Wood Polymer Limited 47 CC 597 (Guj.) – against

• Indo-Continental Hotels and Resorts Ltd. 69 CC 93 (Raj.) – in favor – tax exemption a consequence

• McDowell and Co. Ltd. 154 ITR 148 (SC)


59

• Amalgamating company to liquidate without being wound up

• Reduction of capital – S. 100 of Co. Act – separate procedure laid down

• Buy-back of shares – can be part of S.391 scheme

• SEBI v. Sterlite Industries (India) Ltd. 113 CC 273 (Bom.)


60

• Components of a S. 391 Scheme

• Parties to the Scheme

• Rationale / Objective

• Business of the entities

• Proposal • Amalgamation / demerger

• Issue of shares, debentures, etc.

• Other obligations – guarantees, employees, etc.

• Accounting treatment in the books of transferor and transferee companies

• Modifications to the Scheme

61

SEBI Regulations – some relevant provisions

SEBI Regulations

62

• SEBI (Disclosure & Investor Protection) Guidelines, 2000

• Clause 8.3.5.1 – listing of the unlisted company issuing shares to shareholders of the listed company pursuant to a Scheme approved by the Court. Conditions to be satisfied (amongst others)

• Listing is in terms of the Scheme of arrangement sanctioned by the High Court

• At least 25% of the paid up share capital, post scheme, of the unlisted transferee company comprises of shares allotted to public holders of shares in the listed transferor company

• No warrants / instruments / agreements outstanding which gives right to any person to take the shares at any future date

• Lock-in-period for promoter holdings

SEBI Regulations …

63

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

• Apply with relation to acquisition of shares of a listed company by an ‘acquirer’ above a prescribed ceiling

• Acquirer to make open offer

• Requirement to make open offer does not apply where shares have been acquired pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign

• Whether only schemes approved in terms of S.391 of the Co. Act covered – would this make reference to “foreign” law or regulation otiose ?

64

Listing agreement – some relevant provisions

Listing agreement

65

• Requirements contained in listing agreement to be complied with – particularly sub-clauses (f), (g) and (h) of clause 24 of the Listing Agreement

• Scheme to be filed with the Stock Exchange for approval at least a month in advance before it is presented to the Court

• Company agrees to ensure that the Scheme does not violate, override or circumscribe securities law or the stock exchange requirements

• Explanatory statement to disclose pre-and post-arrangement or amalgamation capital structure and shareholding pattern

66

FEMA – some relevant provisions

FEMA

67

• FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000

• General permission granted to transferee company to issue its shares to the shareholders (being persons resident outside India) of the transferor company provided –

• FDI in the transferee company does not exceed the limits prescribed;

• Transferor company or the transferee or new company shall not engage in agriculture, plantation or real estate business or trading in TDRs; and

• Pre and post issue information and confirmation that conditions stipulated in the Scheme have been complied with

• CBDT – Central Board of Direct Taxes• Co. Act – Companies Act• Eq. Sh. – Equity Shares• FCCB – Foreign Currency Convertible Bonds• FDI – Foreign Direct Investment• FEMA – Foreign Exchange Management Act• Hold Co. – Holding Company• ITA – Income-tax Act• PF – Partnership firm• RBI – Reserve Bank of India• Shldr. – Shareholder• WOS – Wholly Owned Subsidiary

Glossary of Terms

68

Thank You !

69

1 tax issues in business re-organisation by mr. dileep c. choksi 12 november 2005

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