Mergers and Acquisitions reforms essential to drive growth agenda

The Indian Finance Minister, Mr. Arun Jaitley, seems to be confident of pushing GDP growth upward and continuing the reforms agenda. At the recently concluded annual meeting of the World Economic Forum in Switzerland, he mentioned that one main reform, which is still work in progress, is “ease of doing business” in India and steps are under way.

India has finally taken on the mantle of the world’s fastest-growing economy with other emerging markets facing their own set of challenges. Emerging market investors are betting that growth will accelerate.

To sustain this interest level, it is essential that taxation laws are stable and simple to implement to achieve the objective of ease of doing business. The Indian Government has to consider several changes to reinstate investor confidence in the Indian taxation system even from an M&A perspective. Some of these could be:

Further clarity on indirect transfer taxation

Significant changes relating to indirect transfer taxation were seen in the last Budget. However, this has led to interpretational issues, which includes manner of determination of value of assets located in India and abroad, proportionate gains computation, etc.

The provision need to be simple and coherent to not lead to litigation due to different possible interpretations. Most companies have diverse assets bases; and, therefore, a valuation exercise that requires all assets to be individually valued could be highly impractical. Therefore, rules should provide for internationally accepted methodologies to be considered. Additionally, the law should clarify that fair value should be determined after taking liabilities into account, linking it with commercial realities.

While the last Budget exempted indirect transfer of Indian company shares pursuant to foreign mergers, no protection was provided to shareholders of such amalgamating foreign company. It is recommended that such exemption to the shareholder pursuant to domestic mergers should be extended to include such cases as well.

Encouraging corporate reorganizations

With a view to encourage the “Make in India” program, the restriction on loss carry forward (in the event of more than 49% shareholding change of unlisted companies) should be removed. This will enable the corporate entities to plan their strategies to revive these companies and therefore, be a continuing bread earner for several families.

Carry forward of losses pursuant to merger is permitted only to specific type of companies. It is high time that such benefit be extended to all types of companies irrespective of their nature of business. This will encourage more M&A as well as provide the necessary fillip to consolidations of businesses across sectors. It will also help create big businesses to face global multinationals.

Currently, there are no specific provisions enabling transfer of MAT credit pursuant to merger, which should be introduced.

Earlier, shares of all companies were classified as long term if held for more than 12 months. After amendment in 2014, shares of unlisted company were considered as long term if held for more than 36 months. This amendment has resulted in undue hardships, since preferential rate is applicable to long-term assets. Hence, period for long term characterization should be reinstated to 12 months.

Key regulatory reforms:

Apart from the tax clarification, it may be necessary to also carry out reform in the regulatory space to make M&A transactions to be consummated with ease.

Stamp duty, one of the most important cost in transactions, is a dated regulation, as old as 1899! Currently, each state follows its own law. If the law is unified with a clear mechanism of claiming credit of stamp duty already paid will help buyers significantly in consummating transactions and help the exchequer in generating more revenues and reducing unnecessary litigation.

Companies Act and SEBI provisions both prescribe separate compliances on related party transactions. A listed company undertaking a related-party transaction needs to undertake differing compliances for the same transaction. It is likely to help if the processes are streamlined so that companies do not have to follow multiple approval processes from the same set of stakeholders for any one type of corporate action. Furthermore, multiple agencies are approving every corporate reorganization scheme pertaining to listed companies and that too sequentially. This is delaying the entire process and making it cumbersome for listed companies both from cost and compliance perspective. There is an immediate need to create exception for relatively simple cases such as merger of wholly owned subsidiary into parent, etc., like it has been done under the Competition Act.

While the Indian economy has shown positive signs vis-à-vis the global scenario, it is imperative that tax and regulatory reforms from an M&A perspective are implemented swiftly to enable “ease of doing business in India”. This will not only help India in attracting foreign investments but will also create opportunities for domestic players to flourish and grow.

Puneet Agarwal, Sr Professional from Transaction Tax at EY contributed to the article

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