Mergers & Acquisitions Newsletter - September 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 - September 2011

  1. 1. TRANSACTION ADVISORS MissiveVolume VI – September 2011
  2. 2. Dear Patron Topics Page No Corporate Law 1Here we are with the Sixth successive issue of our monthly ‘Missive’. FEMA 2 SEBI 3In what should have been a welcome move, market regulator SEBI put out a concept Direct & International 5note last month detailing a regulatory framework for alternative investment funds. TaxationBut, if implemented in its current form, it could choke the investment activities of Transfer Pricing 5domestic private equity (PE) and venture capital (VC) funds. Recent Transactions that 6 made headlinesWe trust you will enjoy reading this Missive, even while soaking in the contents. Wewould very much appreciate your feedback which consistently helps us in improvingand upgrading the contents.Thanks and regards, “The duck moves smooth & calm on the surface of theAkhil BansalEditor, Knowledge Management Team water…….but under that there is restless pedaling…... Nothing is worth it without a struggle in real life.”
  3. 3. Corporate Law New Companies Bill – Government proposes to further strengthen theCompany Law Settlement Scheme, 2011 for companies who defaulted Serious Fraud Investigation Office (SFIO)in filing Annual Returns with ROC [General Circular No. 59/2011 &60/2011] Besides, powers such as treating its investigation report as a report filed by a Police Officer, giving SFIO power to issue letter of requests (letterPursuant to various companies not filing their statutory e-forms with Rogatory) in cases involving companies having business/interest outsideROC within the stipulated time period, MCA has introduced the the country and definition of the term ‘fraud’ along with its punishment“Company Law Settlement Scheme” which gives an opportunity to the are also proposed to be included, subject to due approvals, in thedefaulting companies to file e-forms with the ROC. revised Companies Bill for strengthening its enforcement framework.The Scheme has already come into force from August 12, 2011 and shall Impact: In its present form, SFIO hasnt got much teeth and theremain valid upto October 31, 2011. The Scheme is applicable to such proposed measures will help to strengthen the SFIO and streamline itsdefaulting companies who have not filed e-forms with the ROC till June functioning with a view to making it more effective. Letter Rogatory30th, 2011 are written requests made by a judge to the judge in another country to take testimony of a witness in that country in connection with theThis Scheme will be applicable to: (a) Form 20 B – for filing annual case.return by a company having a share capital; (b) Form 21 A – for filingannual return for the company not having share capital; (c) Form 23AC& 23ACA –for filing Balance Sheet and Profit & Loss account; (d) Form MCA introduces new feature to track the Companies in which a person66 - for filing compliance certificate with the ROC and (e) Form 52 - is/was a directorannual accounts by a foreign company Recently, MCA has released the Defaulters list. As a development toThe defaulting company shall pay prescribed filing fees along with 25% this, MCA has now introduced a welcome feature for the registeredof the actual additional fee payable on the date of filing of each belated users of MCA21 to track not only the details of all the Companies indocument; which a person is/was a director but also his designation, date of appointment /cessation and defaulting status of that company. TheImpact: The orders issued to this effect are in order to give an details can be accessed by visiting the MCA websiteopportunity to the defaulting companies to enable them to make theirdefault good by filing such belated documents and to be regularlycompliant in future.1|P ag e
  4. 4. MCA has placed cap on salaries of CEOs FEMAMCA has set a ceiling on the total remuneration to be paid to CEOs. The Investment in the units of Domestic Mutual Funds [AP (DIR Series)total managerial remuneration to be paid to a board-level CEO of a Circular No. 08 dated 9th August, 2011]company that has only one whole-time director would be capped at 5%of the total net profit of the company. Further, those firms that have In consultation with the Government and the SEBI, it has now beenmore than one whole-time director, the total remuneration of its entire decided, to allow non- resident investors (other than SEBI registeredboard of directors should not exceed 10% of the net profit. However, if FIIs and FVCIs) who meet the KYC requirements of SEBI, hereinaftera company chooses to pay more it would require the ministry’s called ‘Qualified Foreign Investors’ (QFIs), to purchase on repatriationapproval. basis rupee denominated units of equity schemes of domestic MFs issued by SEBI registered domestic MFs in accordance with the termsImpact: The development is significant since corporate houses would and conditions as stipulated by the SEBI and the RBI from time to timenow be required to seek MCA approval if they choose to shell out over in this regard.5% of the net profit for remunerating their CEOs or 10% of the netprofit for remunerating the entire board of directors. The QFIs may invest under the two routes, namely: • Direct Route – SEBI registered Depository Participant (DP) route • Indirect Route – Unit Confirmation Receipt (UCR) route Impact: This move is expected to give further impetus to India’s economic growth. The scheme would enable QFIs to have direct access to the Indian Mutual Funds. It would widen the class of investors participating in the Indian capital market, help increase depth and reduce volatility in the market. The QFI scheme opens another avenue for global investors to participate in the equity markets and the infrastructure debt markets in India through Mutual Funds. This would increase the global investor interest in the Indian economy. The QFI scheme will make it easier for overseas investors to participate in the infrastructure sector projects in India, and therefore would provide an additional source of overseas long term debt funding.2|P ag e
  5. 5. SEBI § PIPE funds face a similar cap on their exposure to debtSEBI proposes norms for private equity, venture funds instruments, but are obliged to commit at least two-thirds of their capital to publicly listed equities. PIPE targets are to beSEBI had announced regulatory proposals that would tighten its control small-sized, and not part of any market indices in exchangesover alternative investment funds (AIFs), which include investors and having nationwide terminals.vehicles within the private equity, venture capital, PIPE, infrastructureand real estate spaces, among others. Some key considerations in the § SEBI notes that social venture funds must target socialdraft proposals are given below. enterprises such as microfinance firms, while strategy funds would be allowed to invest in derivatives and other structured § The draft defines AIF as a closed-end fund managing at least products, but must disclose their investment strategies to INR20 million ($4.5 million) in capital. Each AIF investment investors. tranche must account for more than 0.1% of the fund – or at least INR10 million – and the fund’s sponsor must contribute at The proposals, which will be open to for public comment until August least 5%. Additionally, an AIF would be prohibited from 30, are intended to improve AIF market coordination and transparency. investing more than 25% of its capital in a single company, and AIFs will only be permitted to have 50 limited-liability partners. Impact: Market regulator SEBI’s proposed regulations to monitor all Each fund’s tenure must be at least five years, though this may classes of AIF seeks to make major changes in the way private equity be extended by two years if approved by three-quarters of their firms operate in India. However, in terms of fundraising, disclosure shareholders. and the multiple registration requirements, the regulations seems to be a step backwards, in complicating the things. § Private equity funds, specifically, would be required to invest at least 50% of capital in unlisted companies and no more than 50% in companies that have made listing proposals. SEBI proposes to frame strict rules for research analysts and wants an independent oversight body for auditors § Venture capital funds (VCFs), meanwhile, are to be capped at INR2.5 billion, and are prohibited from investing in any company With an aim to shield investors from vested interests and potential that is backed, directly or indirectly, a top-500 domestically corporate scams, SEBI has proposed to frame a strict set of rules for listed company. At least two-thirds of VCF capital must be research analysts and wants an independent oversight body for invested in unlisted equity, and no more than one-third of a auditors. At the same time, the market watchdog is planning to VCJ’s investment can be allocated to unlisted debt instruments prescribe a fresh set of guidelines for dealing with conflict of interest of of portfolio companies. associated persons in the market. It would also set up a separate unit3|P ag e
  6. 6. for monitoring ‘Systemically Important Financial Institutions’ or very- system, SEBI Complaints Redressal System (SCORES) which waslarge market entities. operationalised in June to fast track the redressal of complaints against listed companies.SEBI has asked Promoters to disclose Initial Shareholding and Impact: Market intermediaries can view the complaints in the SCORESthereafter considerable changes in it system by logging in with their user ID and password, which will be communicated separately by the regulator. SEBI will also send a dailyAs per the SEBI board decision, it will be mandatory for the promoters alert on pending complaints at the e-mail ID registered with it forand those part of the promoter group of a listed company, to give the regulatory communications. SCORES facilitates online movement ofinitial disclosures relating to their shareholding at the time of becoming complaints to the concerned listed companies, by enabling onlinepromoter or part of promoter group. Besides, they will have to make upload of ATRs by these companies.continuous disclosures whenever there is a change in their holdingsexceeding Rs. Five lakhs in value or 25,000 shares or 1 % of totalshareholding or voting rights, whichever is lower. Similar, disclosures SEBI allows infrastructure finance firms to float long term bondare at present required to be made by the directors and officers of thecompany. SEBI has allowed Infrastructure Finance Companies (IFCs) to raise funds overseas through long-term corporate bonds. It was decided that NBFCsImpact: Till date, Promoters of Companies were outside the purview categorised as IFCs by the RBI shall also now be considered eligibleof Disclosures under Insider Trading law unless they held some issuers for the purposes of FII Investment under the corporate debtmanagerial position, on the ground that they were not necessarily in long term infra category. This fund raising tool was so far limited tothe know about the day-to-day business of their company, unless they companies in the infrastructure sector.held some positions with the company. This was a big anomaly andinclusion of Promoters into the class of person is a welcome change. Investments in such bonds shall have a minimum lock-in period of three years. However, during the lock-in period, FIIs will be allowed to trade amongst themselves. During the lock-in period, the investments cannot,SEBI direct brokers to redress investor complaints within a month of however, be sold to domestic investors.receiving them Impact: This measure along with the recent enhancement of FII limitSEBI has directed stock brokers and sub-brokers to redress investor from USD 5 billion to USD 25 billion for corporate bonds, issued bycomplaints within a month of receiving them, failure to do so would companies in the infrastructure sector, with a residual maturity ofmake them liable for penal action. The direction comes after it over five years is seen as a bid by the government, to facilitate fundannounced that all investor complaints should be forwarded to it flow in the infrastructure sector.electronically through recently established, centralised database4|P ag e
  7. 7. Direct & International Taxation Transfer PricingSignificant Decisions Significant Decisions § Payment made for accreditation not covered by the definition § Comparables have to be compared on similar standards (ITAT of ‘royalty’ under Article 13(3) of India UK tax treaty (ITAT Bangalore) Mumbai) § No Transfer pricing adjustment is necessary when period and § Payment for software cannot be treated as a payment for basis of computation of royalty is different from comparable ‘process’ liable to be taxed as royalty (ITAT Mumbai) transactions (ITAT Vishakhapatnam) § Fees paid to a foreign company for rendering testing and § Comparable transaction prices obtained from customs certification services cannot be treated as income deemed to authorities can be used for Arm’s Length Pricing (ITAT Chennai) accrue or arise in India under Section 9(1)(vii) of the Income-tax Act (ITAT Delhi) § Internal comparability to be given preference over external comparables (ITAT Delhi) § Income of non-resident attributed to its PE in India taxable as business profits; balance income not to be taxed as fee for technical services – (ITAT Mumbai) § Provisions of Section 72A would be applicable only when ‘amalgamating company’ and not ‘amalgamated company’ has accumulated losses (ITAT Delhi) § Liaison Office of non-resident taxpayer would qualify as business connection PE in India if the activities of the LO not confined to purchase of goods in India for the purpose of export (ITAT Bangalore) § When the assessee does not get exclusive right over the technical knowhow and the trade mark, the royalty paid is revenue expenditure (Delhi High Court)5|P ag e
  8. 8. Recent Transactions that made Headlines IndiaAround the world ï BP and Reliance commence strategic alliance for India ï Indias GVK reaches $2.2 billion Hancock mines deal ï US private equity house Bain Capital pays $1.3bn for MYOB ï GVK buys Siemen’s Bangalore Airport (BIAL) stake ï Hewlett-Packard in £7bn takeover of UK software firm ï Mahindra Satyam opens a new delivery center in Netherlands ï Fosters rejects £6.2bn hostile bid from SABMiller ï NIIT acquires Spanish firm Proyecta for $ 7 million ï Google pays $12.5bn for Motorola Mobility. Also acquires ï GMR infra buys 30% stake in Indonesian coal asset DealMap. ï Piramal Healthcare acquires 5.5% stake in Vodafone for 2,856cr ï AT&T,T-Mobile left in dark about antitrust lawsuit ï Sesagoa acquires 51% stake in Western Cluster for $90 million ï Manchester Uniteds IPO to be two-tier ï Hinduja Global acquires Canadian firm in all cash deal ï Lehman seeking creditor vote on $65 billion payout ï Siam Cement eyes $1.1 billion in Indonesian acquisitions ï Bank of America to sell China bank stake for $8.3 billion ï Bloomberg to buy legal research firm for $990 million ï Samsung says not interested in HPs PC business ï Eurobank, Alpha Bank to announce merger ï GE Announces $100 Million Joint Venture in China ï HP to acquire Enterprise Information Management software company Autonomy Corp PLC ï Hitachi Ltd and Mitsubishi Heavy likely to merge – in talks ï Mphasis to acquire Wyde in an all cash deal6|P ag e
  9. 9. ©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