Mergers & Acquisitions Newsletter - April 2011


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Attached Newsletter is an attempt to cover monthly issues relevant in the context of transactions - covers SEBI, Companies Act, Income Tax, Stamp duty and other regulatory changes

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Mergers & Acquisitions Newsletter - April 2011

  1. 1. TRANSACTION ADVISORS MissiveVolume I – April 2011
  2. 2. Dear PatronWith India becoming a cornerstone for future growth, global corporations are ferociouslycompeting with each other to have their footprints in India while the Indian business houses, Topics Page Noflushed with funds, are now looking global. In this exciting and changing scenario, it Competition Act 1becomes imperative for us to evaluate our client’s needs vis-a-vis the tax and regulatory FEMA 2environment. And so here we are with our first newsletter. SEBI 3 Companies Act 3The month of March has witnessed some significant tax and regulatory changes, particularly Accounting 5in the backdrop of Union Budget 2011, which had laid down a constructive road map for Direct Taxes (including 6Economic growth and has taken steps to align the existing tax structure with the proposed International Tax)GST & DTC framework. Regulatory News 7 Indirect Taxes 8While India is now witnessing the merger controls, scheduled to be effective from June 2011, Transfer Pricing 9at the same time MCA is taking steps to step next generation of reforms by simplification and Recent News in Transactions 10automation of procedures. With implementation of IFRS underway, revised schedule VI that made headlinesbeing issued and XBRL reporting being introduced, accounting in India is going a whole newchange. The move is surely to align Indian financial reporting with international standards.For any queries on the issues captured by this newsletter, you can contact Akhil Bansal We shall be pleased to assist you.Thanks and regardsManoj NagrathDirector
  3. 3. Competition Act § A “Group” exercising less than 5o% of voting rights in the other enterprise is also exempt from the provisions of section 5Competition Commission of India gets power to approve big M&As Competition Commission of India issued draft regulations in relation toMinistry of Corporate Affairs issued notifications relating to Combinations the transaction of business relating to Combinationswhereby§ June 1st, 2011 has been appointed as the date on which the Further, Draft regulations have been issued – some key features are provisions relating to Combinations would come into force; § Consultation prior to filing notice of proposed combination: Parties§ Threshold limit prescribed in section 5 for an acquisition or merger to to a proposed combination may make written request seeking constitute a Combination requiring mandatory notification to the informal and verbal consultation with the CCI about filing notices. Competition Commission of India (CCI) has been raised by 50%, on However, CCI would not be bound by any opinion or view expressed the basis of the wholesale price index. Revised limits are as follows during consultation § Forms of notice - Regulations prescribe 3 formats of pre- merger Parties to the In India Assets worth INR 15 Or Turnover of INR 45 notification Forms for obtaining approval § Liability to file notice - In case of merger or amalgamation, the Combination (INR) billion billion liability to file pre-merger notifications is on the parties to jointly file jointly have Worldwi Assets worth USD Or Turnover of USD notice. In case of acquisition or acquiring of control, the liability is on de(USD) 750 million, (of which 1500 million, (of the acquirer. atleast INR 7.50 which atleast INR 15 § Filing Fees –Filing fees ranges from INR 1 to 4 million depending on billion in India) billion in India). the nature and value of acquisition Acquiring In India Assets worth INR 60 Or Turnover of INR 120 § Prima facie view: Upon filing of the pre-merger notification, the CCI group and (INR) billion billiob to form its prima facie opinion on the proposed combination within target jointly Worldwi Assets worth USD Or Turnover of USD 3o days of filing of notice. have de (USD) 3000 million (of 9000 million (of § Time period for review: CCI to endeavour to pass an order or issue which atleast INR 7.5 which atleast INR directions within 18o days of filing of the notice. The Act however billion in India) 22.50 billion in India) currently prescribes a period of 210 days within which the CCI has to pass order or issue directions; otherwise the combination would be§ If an enterprise whose control, shares, voting rights or assets are deemed as having been approved. being acquired, has assets of not more than INR 2.5 billion or § Appointment of independent agencies to oversee modifications: turnover of not more than INR 7.5 billion, it is exempt from the The draft regulations give power to CCI to appoint independent provisions of section 5 agencies if it is of the opinion that modifications proposed by it and 1
  4. 4. accepted by the parties needs supervision. Such independent Consolidated FDI Policy has been released (Circular 1 of 2011) agencies may include an accounting firm, management consultancy, any professional organisation or independent practitioner of repute. Policy laid down in Consolidated Circular has the following key changesImpact: Even though the Competition Regulations have provided for § Pricing of Convertible instruments - Instead of specifying the price oftarget thresholds, the transaction thresholds are still missing which can convertible instruments upfront, companies will now have theresult in certain transactions getting caught under the purview of the option of prescribing a conversion formula, subject to the FEMA/legislation even if it was not the intent to cover it. SEBI guidelines on pricing. This would help the recipient companies in obtaining a better valuation based upon their performance.FEMA § Inclusion of fresh items for issue of shares against non-cash considerations - The existing policy provides for conversion of onlyIntroduction of Annual return on Foreign Liabilities and Assets reporting ECB/lump-sum fee/Royalty into equity. Government has nowby Indian Companies and discontinuation of the Part B of form FC-GPR decided to permit issue of equity, under the Government route, invide A.P. (DIR Series) Circular No. 45 dated March 15, 2011. the following cases, subject to specific conditions:RBI has notified a revised procedure for reporting of all FDI, both inward ü import of capital goods/ machinery/ equipment (includingand outward. RBI has replaced Part B of Form FC-GPR (annual filing by second-hand machinery)Indian companies with regard to foreign investment) by “Annual Returnon Foreign Liabilities and Assets” (the Return). ü Pre-operative/ pre-incorporation expenses (including payments of rent etc.)The Return should be submitted by all Indian companies which havereceived FDI and / or made FDI abroad (i.e. overseas investment) in the § Removal of the condition of seeking prior approval in case ofprevious year including the current year. Indian companies have to existing joint ventures/technical collaborations in the ‘same field”furnish audited balance sheet for the reporting year along with theReturn. The first Return will be due by 15 July 2011 and then annually by § Guidelines relating to down-stream investments- The earlier15 July each year. For the purposes of the Return, RBI has also provided categorisation of ‘investing companies’, ‘operating companies’ andthe methodology for valuation of foreign liabilities and foreign assets. ‘investing-cum-operating companies’ has been done away with. 2
  5. 5. Impact: Amendments in the Circular would go a long way in improving Recent Newsthe FDI flows in the country – removal of condition of obtaining priorapproval from the Indian partner will help in genuine cases where § SEBI is planning to regulate the wealth management business ofsometimes foreign venture is held to ransom by Indian counterpart and large financial institutions (at present the same is not regulated)may demand unreasonable considerations. § SEBI has stated that the coordination among various financial market regulators needs to integrate at the operational as well asSEBI surveillance level to have a greater oversight and thereby prevent frauds in the financial markets.SEBI Circular on Listing Agreement for Securitized Debt InstrumentsWith a view to enhance information available in the public domain on Companies Actperformance of asset pools on which securitized debt instruments areissued, it has been decided to put in place a Listing Agreement for Amendment to Companies Name Availability Rulessecuritized debt instruments. The Listing Agreement provides fordisclosure of pool level, tranche level and select loan level information. As Some salient features of the Rules areper SEBI, the move would help improve the secondary market liquidity forsuch instruments. § While applying for a name, the applicant has to certify that he has searched the website of the Ministry of Corporate Affairs forBudget 2011: Foreign Investors to be allowed direct investment in checking the resemblance of the proposed name with companiesMutual funds already registered. § Option available to certify the name by CA, CS or CWA, the name willAt present, only FIIs and sub-accounts registered with SEBI and NRIs are be made available by the system online to the applicant withoutallowed to invest in mutual fund schemes. To liberalise the portfolio backend processing by the Registrar of Companiesinvestment route, it has been laid down by FM in the Budget Speech topermit SEBI-registered mutual funds to accept subscriptions from foreigninvestors who meet the KYC requirements for equity schemes which willenable Indian mutual funds to have direct access to foreign investors andwiden the class of foreign investors in Indian equity market 3
  6. 6. Some of the important guidelines for name selection as provided by Rules professional, the DIN will be approved by the system immediatelyare given below online. In other cases, the DIN cell will examine the application and same shall be disposed of within one or two days.§ The addition of an internet related designation, such as .COM, .NET, § Above procedure also apply to filing of DIN 4 i.e. changes in .EDU, .GOV, ORG, .IN does not make a name distinguishable from particulars of Directors. another, even where (.) is written as ‘dot’.§ Abbreviated name such as ‘ABC limited’ or ‘23K limited’ cannot be MCA simplified procedure of company incorporation and establishment given to a new company. However the companies well known in of principal place of business in India by Foreign Companies (Circular their respective field by abbreviated names are allowed to change 6/2011) their names to abbreviation of their existing name (for Delhi Cloth Mills limited to DCM Limited, Hindustan Machine Tools limited to Following recommendations have been made by the MCA HMT limited) after following the requirement of Section 21 of the Companies Act, 1956. § Only Form-1 shall be approved by the RoC Office. Form 18 and 32§ If the proposed name includes the word “State”, the same shall be shall be processed by the system online. allowed only in case the company is a government company. Also, if § There shall be one more category, i.e., Incorporation Forms (Form the proposed name is containing only the name of a continent, 1A, Form 37, 39, 44 and 68) which will have the highest priority for country, state, city such as Asia limited, Germany Limited, Haryana approval. Limited, Mysore Limited, the same shall not be allowed. § Average time taken for incorporation of company should be reduced to one (1) day onlyCircular Simplifying of DIN rules Impact: Ever since MCA project has been conceived and commissioned,MCA has simplified the process of obtaining DIN and recommended the simplification of procedures by way of automation and removal ofbelow mentioned procedure: unnecessary obstacles have been the underlying theme for Ministry of Corporate Affairs. In this backdrop, MCA has issued certain circulars§ Application for DIN will be made in DIN 1 eForm. No physical which will have the impact of reducing the number of days for certain submission of documents will be accepted and for this purpose procedures and getting it to international standards. scanned documents along with verification by the applicant will be attached with the eForm. Only online fee payment will be allowed.§ DIN 1 eForm can be digitally signed by the professional who shall also confirm that he has verified the particulars of the Applicant given in the application. Where the DIN 1 is verified by the 4
  7. 7. Payment of MCA filing fees through electronic mode made mandatory – MCA will implement the IFRS converged Indian Accounting Standards in a phased manner after various issues including tax related issues areFrom 27th March 11, compulsorily Payment of MCA fees online where resolved with the concerned departments. The date of implementation ofsame is less than INR 50,000; from 1st October’2011 all fee to be paid the IND AS will be notified by MCA Impact: However, Indian companies, which were to tap thePayment of commission to Non-Whole Time Directors of the company international capital market, will still have to prepare dual financialunder section 309(4) (b) of the Companies Act, 1956 (Circular 4/2011) statements to raise funds overseas as the newly-notified system for local companies is not compatible with global norms and would giveCompanies not require approval of Central Government for making parallel valuations. This in turn would defeat the purpose of migration.payment of remuneration by way of commission to its Non- Whole TimeDirector(s) in addition to the sitting fee if the total commission to be paid Format of Revised Schedule VI to the Companies Act 1956to all those Non-WTDs does not exceed 1% of the net profit of thecompany if it has a WTD(s) or 3% of the net profit of the company if does The revised Schedule VI introduces many new concepts and disclosurenot have a Managing Director or WTD(s). requirements and also does away with several existing requirements. Applicable for financial statements with period commencing on or afterRecent News: Govt plans to keep track of companies with common April 1st, 2011addresses and common directors Some key features of the new Schedule are as follows.Ministry of Corporate Affairs (MCA) plans to add two more parameters toits software-based fraud detecting system, called Early Warning § It requires that if compliance with the requirements of the Act and/System (EWS), which scans unusual developments in companies and or accounting standards requires a change in the treatment oralerts the Ministry of any possible wrongdoing. disclosure in the financial statements, the requirements of the Act and/ or accounting standards will prevail over the Schedule VI. This is a significant change in the approach since earlier the requirements ofAccounting Schedule VI were prevailing over accounting standards. § In the existing Schedule VI, break-up of amounts disclosed in mainConverged Indian Accounting Standard (Ind AS) notified by MCA balance sheet and profit and loss (P&L) account was given in the schedules. Additional information was furnished in the notes toMCA vide press release dated 25 February 2011 has notified 35 Indian account. The revised Schedule VI has eliminated the concept ofAccounting Standards converged with IFRS (henceforth called IND AS). 5
  8. 8. schedule and such information will now be provided in the notes to accounts. This is in line with the practice under IFRS Impact: Companies would have to incur additional cost for complying§ Current and non-current classification has been introduced for with XBRL. Nevertheless, XBRL would be beneficial for those who collect presentation of assets and liabilities in the balance sheet which is business data, including governments, regulators, stock exchanges, more in line with the concepts used under Ind-AS/ IFRS. financial information companies, economic agencies and the likes and§ Number of shares held by each shareholder holding more than 5% those who produce or use it including accountants, auditors, company shares now needs to be disclosed. managers, financial analysts, investors and creditors.§ Any debit balance in P&L account will be disclosed under the head “Reserves and surplus.”§ Below the line adjustments to be presented under “Reserves and Direct Tax (including International Tax) Surplus” in the balance sheet Budget 2011Impact: With implementation of IFRS underway, revised schedule VIbeing issued and XBRL reporting being introduced, accounting in India is § Dividends received by an Indian company from its foreign subsidiarygoing a whole new change. The move is surely to align Indian financial (wherein the Indian company holds 51% or above of the nominalreporting with international standards. value of share capital) will be taxable at the rate of 15 % of the gross dividend received. No deduction in respect of any expenditure orCertain Companies have to file financial statements in XBRL mode from allowance shall be allowed to the Indian company from suchJuly 2011 (General Circular No 9/2011 dated March 31st, 2011) dividend income.MCA has mandated following companies to file financial statements using § A non-resident having a liaison office in India set up in accordanceXBRL taxonomy from the year 2010-2011 with the guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act (FEMA) is required to prepare§ All companies listed in India and their subsidiaries, including and deliver the details of activities carried on by such liaison office to overseas subsidiaries; the AO having jurisdiction over such liaison office within 60 days§ All companies having a paid up capital of INR 5 crore and above or a from the end of such financial year. Turnover of INR 100 crore or above. § LLP subject to provisions of MAT (MAT rate increased to 18.5% ofXBRL is a language for the electronic communication of business and adjusted book profits)financial data. Going forward, government intends to cover morecategories of companies in the regime. 6
  9. 9. § Levy of MAT introduced on developers of Special Economic Zones § Payments received for leasing of transponder capacity and (SEZS) as well as units operating in SEZs. Also, DDT applicable on SEZ bandwidth cannot be taxed as ‘royalty’ under the Section 9(1)(vi) of Developers. However, there has been news that SEZ Developers the Act [Delhi ITAT] Weigh Legal Action against MAT Decision. § Views expressed by smaller bench of a SC in case of Azadi Bachao§ In order to discourage transactions by Indian residents with persons Andolan on tax avoidance are binding on the HC. Also in Quippo located in any country or jurisdiction which does not effectively case, AAR goes against Vodafone by relying on Azadi Bachao Andolan exchange information with India, anti-avoidance measures have [AAR] been proposed. These includes applicability of transfer pricing regulations, non-allowability of deduction unless assesse furnishes § Benefit of set off of brought forward losses could not be denied to requisite authorization and maintain prescribed documentation, the amalgamated company since there was no change in control and receipt considered as deemed income unless satisfactory management of amalgamated company pre and post-merger [Delhi explanation provided about source of money, minimum withholding ITAT] tax rate on payments to be 30%, etc).§ Companies managing the retirement savings of their employees Regulatory News through own provident fund trusts have been given more time to seek licences that make them eligible for tax exemption on Progress on establishment of a strong IT infrastructure for GST on track contributions FM announced that significant progress on the GST network (GSTN) hasSignificant decisions been made. The key business processes of registration, returns and payments, was told to be in advanced stages of finalization. NSDL has§ Interest paid by a branch of a Foreign Bank to its Head Office is been selected a technology partner for incubating the National deductible in the hands of the branch [Calcutta high court] Information Utility that will establish and operate the IT backbone for GST.§ Transfer of an undertaking under slump exchange is not liable to capital gains tax [Mumbai ITAT] Indian Income Tax offices in other nations§ Non-Compete Fee Not Taxable [Supreme Court] Government is planning to put up Income Tax Overseas Units in countries like France, Germany, the Netherlands, Cyprus, US, Britain, United Arab Emirates, and Japan in the upcoming fiscal. Income tax offices are already 7
  10. 10. operational in Singapore and Mauritius. The major motive behind this Indirect Taxesidea is to keep track of people who evade tax and flee to foreign nations. Goods transported to out-of-state depots otherwise than as a result ofCharities, trusts to come under one law for more transparency direct sale which would attract tax under Section 6 of the Central Sales Tax Act- SCThe intent is to smoothen their running in India and overseas, but withstrict checks on the flow of tainted money. Job of drafting a model law is Supreme Court laid down an important principle in the context of Centralin progress that will replace myriad central and state laws on societies, sales tax wherein an agreement to sell occasioning movement of goodstrusts, endowments and charitable institutions. from head office to branch was considered to be taxable under CST and not be considered as branch transfer.Income Tax department tells EPFO to tax premature PF withdrawals Introduction of Constitution Amendment Bill in Lok Sabha forThe Income Tax department has asked Employees Provident Fund implementation of GSTOrganisation (EPFO) to tax all withdrawals by workers with less than fiveyears of PF savings. Employers who run their own PF trusts have already The Bill seeks to amend the Constitution to authorise both the Centre andbeen deducting tax for premature withdrawals. the States to levy taxes on supply of goods and services. The proposed Article 279A empowers the President of India to constitute a GST CouncilCabinet approves PFRDA Bill which would examine issues relating to GST and make recommendations. The newly proposed Article 279B provides for establishment by theUnion Cabinet gave its nod to the long-awaited Pension Fund Regulatory Parliament of a GST Dispute Settlement Authority to adjudicate anyand Development Authority Bill (PFRDA) that aims to grant statutory dispute that results in a loss of revenue to a State or the Centre.status to the pension regulator and open up the sector for FDI. The Bill will now be referred to a Standing Committee of the ParliamentBudget 2011: Stamp Act all set for a makeover for scrutiny and recommendations. Post this; the Bill will be taken up for discussion and voting in the ParliamentAs proposed by Finance Minister in his Budget speech, the governmentwould soon amend the Stamp Act. To start with, an amendment would bemade to prune the list of items on which stamp duty is levied. FM alsoproposed to launch a new scheme with an outlay of INR 300 crore toprovide assistance to states to modernise their stamp and registrationadministration and roll out e-stamping in all districts in the next 3 years. 8
  11. 11. Budget 2011 – Concept of payment of service tax on “payment” Impact: The change in concept from ‘payment’ to ‘accrual’ for servicereplaced with “accrual” (except for certain specified services) tax is being seen as a run-up to the GST regime where taxation on both “goods” and “services’ will converge.Single most amendment in Service tax regime is to go from “payment” to“accrual basis”. The same involved amendment/introduction of following. Transfer PricingPoint of Taxation Rules 2011 have been framed vide notification18/2011-ST and made effective from July 1st, 2011 (though service Budget 2011provider may also opt for an earlier applicability i.e. from April 1st, 2011).The general rule will be that the time of provision of service will be the § Government to notify the tolerance level of variation between theearliest of the following dates: arm’s length price (ALP) and value of international transaction (Earlier it used to be 5%)§ Date when the invoice for the service provided or to be provided is issued or § Jurisdiction of TPO to extend to determination of ALP in respect of§ When the time of receipt of payment, to the extent of such payment. other international transactions, which are noticed by him subsequently, in the course of assessment proceedings.As regards the CENVAT Credit Rules, amendments have been made toprovide that the credit in respect of input services can be availed on or Significant decisionsafter the day on which the invoice, bill or challan is received except incases where the service tax is paid under reverse charge mechanism, § Internal benchmarking analysis under TNMM based on segmentalwhere it will be eligible upon payment of the tax. In case the payment of results prepared by using allocation keys is justified [Delhi ITAT]the value of input service and the service tax is not made within threemonths from the date of invoice, then the credit availed on the basis of § ITAT Delhi held that for TNMM, interest on surplus and abnormalinvoice or bill is required to be reversed. costs to be excluded [Delhi ITAT]Another change is with respect to the Service Tax Rules, 1994. The § Prior Years’ data cannot generally be relied upon to justify Arms-amendment now provides an option to a service provider to adjust the Length Price [Bangalore ITAT]excess service tax paid in a situation where the amount of invoice isrenegotiated due to a deficient provision of service or for a variation in § If Arms-Length Price determined by arithmetical mean, 5 percentthe terms of a contract. deduction allowable [Pune ITAT] 9
  12. 12. § Documentation is required to be maintained contemporaneously on an annual basis [Delhi ITAT]§ Tribunal provides guidance on recovery of pre-commencement costs [Hyderabad ITAT]Recent News in Transactions that made headlines§ International Paper to buy 75% in AP Paper for $423 mn§ Walmart in talks to pick up stake in Future Groups Big Bazaar§ DE Shaw, RIL in JV for financial services; shares of RIL down§ PE biggies (including Goldman Sachs) get together to set up India NBFC§ Blackstone to take control at Gokaldas§ Telenor to challenge Unitech stay on rights issue§ Vodafone seeks AARs opinion on tax liability in $5-bn Essar deal§ SEBI clears Sesa Goa open offer for Cairn India§ Beam, a mobile-commerce company, has sought the Reserve Bank of India’s permission to make Facebook Credits available in India§ Once valued at 2,200cr, Vishal Goes for 70 cr§ Three PE funds (including SBI-Macquarie and the PE arm of Standard Chartered PLC) set to invest Rs 1,440 crore in GMR Airport§ RIL will pay nil or negligible tax on the $7.2 billion it would receive from the proposed sale of its 30% interest in 23 oil and gas blocks to British Petroleum because sale proceeds would be treated as cost of hydrocarbon exploration already incurred, which is eligible for full deduction under the Income Tax 10
  13. 13. ©Copyright AMinds Advisors Private Limited , All rights reserved AMinds Advisors Private Limited specializes in the fields of Mergers & Acquisition, Valuations, Due Diligence, Pre-fund raising Structuring, Financial Re-structuring, Regulatory, Private Equity and other funding opportunities Our guiding philosophy is “To carry out every professional assignment effectively and efficiently, while upholding the virtues of independence and integrity, without compromising on the creativity and quality of work, so as to provide utmost satisfaction to our clients ” For any professional advice regarding alerts in this newsletter, we welcome your queries A-371, Defence Colony, New Delhi –110024 Tel: +91-11-4980-0000 Fax: 91-11-4980-0029 Email: TRANSACTION ADVISORSThis publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been preparedfor the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in thispublication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express orimplied) is given as to the accuracy or completeness of the information contained in this publication