India

5 Chapter M&A

    • Trends of M&A in India

       Strong vigilance and strict regulations were imposed on the inflow of the foreign capital to the country which is clear from the historic background of India when India became independent from the British after a long colonial rule.

       

      However the stubborn foreign capital exclusion policy was internationally isolated and economically stagnant for a longer time.

       

      ■M&A case of Japanese Companies

      There were 189 cases of purchase of the Asian enterprises by Japanese enterprises in 2012 and 202 cases in 2013.The purchase of Indian enterprises among those was 22 cases in both the years (according to MARR). The following table of M&A 2012 on the India case study from Japan has been done in 2013.

       

       [Brief History of M&A in India] 

      The history of Indian M&A can be divided into three large points.

      ①After Independence the economy has adopted a socialist economic policy from the economic opening which gradually advanced since 1991.

      ②The economic liberalization progressed rapidly and the M&A environment developed from 1992-2003

      ③The foreign investment to Indian domestic enterprises began more actively from 2004 till now.

       

      ① to ③ are briefly described below.

       

       

       [After independence since 1991]…① Government of India adopted a socialist economic policy after independence which is their second five year plan.

       (From 1956 to 1961) Most of the key industries were nationalized. In trade policy to regulate the import, the Import Substitution Industrialization Policies were introduced to protect and nurture the domestic industries. On the other hand the Industrial Licensing System was adopted to strictly regulate the Foreign Direct Investment.

       

      Then in the Indian economy during the economic downturn which sustained for a longer period of time under the influence of the socialist-oriented economic policy, the
      World Bank helped to overcome the economic crisis during the tenure of Indira Gandhi. However in 1969 during the Indo-Pak war, Vietnam War problems, conflict with the Western Capitalist countries with the Soviet Union, the nationalized commercial banks and foreign exchange regulations were strengthened to gain economic control.

       

      Rajiv Gandhi took over the government in 1984 after the assassination of Indira Gandhi for economic reconstruction to introduce the modernization of foreign capital in the private electronic industry. This promoted the economic liberalization such as relaxation of import restrictions. However it was a gradual and partial liberalization to maintain the framework of the socialist society.

       

      During this period the movement for the corporate restructuring was seen in India for domestic companies. In 1981 Maruti Udyog Ltd. and Suzuki of Japan signed an agreement (now Maruti Suzuki India Ltd.) which eased the automotive industry investment and Technological alliance with foreign companies and the domestic automobile production in India also increased profoundly.

       

      But on the other hand it is very hard to get the industrial licenses for many companies to expand their business. Close-up of acquisitions as companies grow got the industrial licensing which started in India and the famous conglomerate of Caparo group and Jumbo group began the acquisition of Indian domestic companies.

       

       [1992 to 2003]……②

       

      The Government of India announced the New Industrial Policy Statement in July 1991 and approved the Foreign Direct Investment (FDI) and technical co-operation in the specific field of sale of the shares of public companies. Taking this opportunity the foreign companies developed a well-equipped environment to advance India. While direct investment in India of multinational companies increased significantly, the Indian domestic companies were not able to tolerate the competition by selling non-core business which concentrated the resources of management. TATA Conglomerate, sell of Hindustan SOAP sector and the ethics of the cement company of Gujarat Ambuja Cement were promoted to review significant business portfolio by corporate restructuring.

       

      M&A is actively carried out in area such as software and telecommunication Industries. Technology and IT services sector made aggressive investments including the foreign capital inflow.

       

       [From 2004 till present]……③

       

      In 2008 the market reduced due to the temporary accident of the sudden collapse of Lehman Brothers but after that and till now the current M&A market has been steadily expanding. After the recession, the western companies faced deterioration in earnings and restructuring. Then the foreign investment in India increased, as many of the Indian companies bought the western companies and the multinational corporations faced large acquisitions such as iron and steel's giant group TATA Steel and acquisitions of America Ford by TATA Motor's Jaguar and Land Rover.

       

      On the other hand in recent years the acquisition of Indian domestic companies by Japanese companies such as the acquisition of Anchor Electrical by Matsushita Electric Industrial Co., Ltd and Ranbaxy Laboratories by Sankyo are some of the examples. 

       

      The number of most recent pairs of Indian companies and Japanese companies according to M&A track record are 13 in 2008, 9 in 2009, 14 in 2010, 21 in 2011 and 22 in 2012 and 2013 each have shown trends to increase.

    • The Laws and Regulations of M&A

      ■Investment Regulations

       

      If Japanese companies, subsidiaries and branches want to start a business launch or joint venture in India, then all investments are classified as Foreign Direct Investment (FDI) and are regulated by the following laws and regulations which are increasing.

       

       Since India's independence in 1947, the protection of the domestic industry has continued since 1991 which opened up the market for the movement of the foreign capital. The foreign capital regulations are eased now slowly.

       

       Determine the regulations described above there are several laws and institutions to enforce and new notification has been frequently published. The latest information should be obtained to consider the contents of the regulations. The contents of the latest regulatory India Commerce Engineering was posted on the Ministry of Industrial Policy Promotion Bureau (DIIP: Department of Industrial Policy Promotion) to circulate the FDI regulatory notice within the website.

       

       By industry and its activities the regulatory content for FDI Is different. Divided into industry as a whole image, FDI is a prohibited and acceptable industry (see P.15-31)

       

       The FDI industry is further divided into two.

       

       ·         Prior to that approval of the industries of Government of India is required.

       ·         Expansion of business in India is possible with automatic approval route.

       

      The approval of the India Foreign Investment Promotion Board (FIPB: Foreign Investment Promotion Board) is required for the industry and is listed in negative list for industries whose prior approval is required and those who are not included in the list are without a 100% allowance of the FDI.

       

      ■ Negative List

       The FDI in India has multiple regulations such as the investment ratio for each industry. The applicable FDI regulations are defined in the negative list and have set the regulations for each individual case.

       

      However in April 2010 a document was published that integrates the regulation of FDI. Regulated by the said directive it is updated now in every six months and integrating FDI means integrating FDI regulations with regulatory documents.

       

       [Industries that are reserved to the state owned enterprises]

       

      ·         Nuclear business

      ·         The business about the railway and

       

       

      [Industries Foreign Investment is prohibited]

      ·         Business related to gambling

      ·         Business about the lottery

      ·         2008- Real Estate Development construction and Real Estate Business.

      ·         Retail (other than a single brand)

      ·         Chit Fund industry

      ·         Transferable development rights of trading industries.

      ·         Cigars, cigarettes and tobacco substitutes.

       [Industry licensing is mandatory] compulsory licensed specified industry.

      ·         Any electronic equipment for aviation and for space defense.

      ·         Detonators, fuses, gunpowder, nitro cellulose, including industrial explosive materials.

      ·         Risk chemical products

      ·         Some of the chemicals and pharmaceuticals for which licensing Is required.

       

      More than 24% stake and manufacturing of specific 20 items are reserved to the activities of small business.

       

      In addition, acquisition of the product industry license and export of 50% or more are required for the production of 20 lists of items which are reserved for small-scale enterprises.

       

      Plant establishment from the center of the specified 23 cities within 25km

       

      Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Bangalore, Ahmadabad, Pune, Kanpur, Nagpur, Lucknow, Surat, Jaipur, Koch, Coimbatore, Vadodara, Indore, Patna, Madurai, Bhopal, Visakhapatnam Putnam, Varanasi, Ludhiana.

       

       [NOC deregulation]

       

      The continuation of the government became troublesome because of the quick business formation which was impossible and dissatisfaction has also risen from the foreign companies. But in April 2010, for the Indian Government this existing partner agreement (NOC: No Objection Certificate) abolished the regulations.

       

       [Another FDI regulation industries]

       

      According to the following table, for industry/activity FDI is granted to the maximum value under certain conditions which has been described here.

       

      Investment in infrastructure development

       

      Product Procurement from small local business

       

      Before the flexible regulation, the product procurement amount of 30% has been procured from the local business for plant and equipment investment of 1 million.

       

      Site selection of Stores

       

       Relaxation of regulations for communication, tea leaves and test marketing.

       

      The investment limit has been pulled up by 100%, and further deregulation for the tea industry and investments to test marketing has been done. (P. 34 see table)

       

       

      According to the conventional method, individual approval of the FIPB for the investment of test marketing has to be taken but 100% investment by foreign companies needed no approval by the current deregulation.

       

      ■ Regulations on Financing

      When the funding method of foreign companies operating in India is broadly divided then there comes four ways of borrowing in India. They are capital increase (issuance of shares), the issuance of preferred stock, and borrowing from the parent company. Companies considering about interest rates and fund expenditure limitation must select the appropriate funding methods.

       

      ■Capital Increase (Issuance of Capital Stock)

      The most common method of financing of Indian subsidiaries is the Capital Increase (Issuance of Capital Stock). In order to carry out the Capital Increase, there must be a procedure for the provisions of the Indian Companies Act. There is time when resolution of general meeting of shareholders becomes necessary but if it is a 100% subsidiary company then the resolution of the general meeting of the shareholders becomes much easier.

       

      If an Indian company is 100% owned subsidiary without any regulation of the different business areas of FDI then there is not much disadvantage of raising funds through the issuance of capital stock. Since there are no restrictions on interest expense or expenditure compared to other methods so this is the best way for funding.

       

      ■ Issuance of Preferred Stock

      Preferred stock refers to the dividends and shares that can be received in priority in comparison to the normal stock.

       

      However for the regulation of FDI in the case of Indian subsidiary it is not possible to use the funds raised by the issuance of preferred stock as working capital. Basically the foreign currency borrowing which is being adapted to does not correspond to the FDI (ECB: External Commercial Borrowing).

       

      The ECB for example cannot use funds for repayment of loans for general business purposes existing in India and there is a limit to use the funds to be raised unless certain conditions are met. In India the domestic Industry sector, the infrastructure sector and the hotel sector will be able to use the funds only for those investments related to the specific service sector industry like the software.

       

      Preferred stock does not have the regulation of FDI and is without the burden of the interest but there are restrictions on the use of the funds by the regulations of the ECB.

       

      ■ Borrowing from the Parent Company

      Between the affiliated companies for the operating funds, debt from the parent company is taken but such debts are not recognized in India. Therefore if funds are necessary for the Indian subsidiary then it will be remitted through the Capital Increase method. According to the Foreign Exchange Management Act (

       

      In the past the use of ECB loan was limited to funds for equipment investment and for the purpose of working capital which are not recognized now. However as per the notification of September 4, 2013, it is possible to meet certain requirements which are now recognized for the use of working capital. For certain requirements all the following three requirements must be met.

       (1) If a person who has taken loan resides outside India then that person possess 25% of the borrower's equity.

       

       (2) It does not violate the prohibitions which are established by the ECB such as prohibition of subletting to a group of company.

       (3) According to ECB, the average lending period is for seven years and the repayments are done latter.

       

      Automatic approval route for specific ECB loans which has been observed are three or less.

       

       (1) Manufacturing of infrastructure, hotels, hospitals, companies each belonging to the software industry do the ECB from the indirect shareholders and group of companies.

       (2) When the service provider is getting ECB from the shareholders, indirect shareholders and group of enterprises.

       

      ※ The part of the service providers refers to the infrastructure surrounding industry (except for the educational institutions) like the Human Resource Development and Research & Development. Trade industry, transportation industry, financial services and consultancy are not included in this.

       (3) For the manufacturing industries, infrastructure, hotels and hospitals and software companies the ECB is done direct from the shareholders for the purpose of raising working capital.

       

       [Borrowing Period]

       

      Borrowing period has been defined below with the amounts.

       

       

      ·         2,000 US dollar: average borrowing period is 3 to 5 years

      ·         20 million to 7.5 million US dollar: average borrowing period is 5 years.

       

      ■Borrowing in India

      It is also possible to carry out the borrowing from Bank of India and there are no regulations such as the FDI regulations and foreign currency borrowings. However inflation due to the rapid development turned out to be a disadvantage as the interest rates became high. In 2014 the interest rate on deposit exceeded 10%.

       

      ■ Downstream Investment Regulations

      Foreign companies investing directly to Indian companies and investing through subsidiaries and joint ventures of foreign companies in India are referred to as indirect investment. The investment method by indirect investment in the latter Is known as downstream investment and there are certain regulations as well.

       

      Provisions relating to downstream investment are described in the press note of 2009 No.2 and 4, 1997 No.3 and 1999 No.9.

       

      Until then the prior approval of the Indian Foreign Investment Promotion Board (FIPB) is necessary. In the provision of 1999 No.9 an exception has been establish to simplify the investment process which is applicable only if the requirements are met to make the automatic approval possible. But that exception applies to those companies which is vague to redefine that was published in 2009 in No.2 and 4.

       

      ■ Investment in pure business company

      If investment is done in pure business company (Only Operating Company) regardless of whether they are indirect investment or direct investment, if the upper limit regulation of usual FDI is followed then the advance approval of the FIPB becomes unnecessary.

       

      ■ Investment in companies and investment companies

      Therefore if the view that restrictions on foreign investment do not matter but the company is owned by foreign capital or have been ruled virtually by foreign capital then the India domestic corporation's other investments will be charged with FDI regulations.

       

      ■ Investment in net investment companies

      Investment companies that invest only in foreign company i.e. net investment company

       

      (Investment Company) If a foreign investment is being done then regardless of the amount or range of foreign investment, prior approval of FIPB needs to be obtained.

       

      ■ Investment in non-business and the investment company

      The non-business and non-investment company is the company (non-investment and Non-business Company) is the company where business has not been performed. Why to invest in companies where business or investment has not been performed or have been regulated? To prevent this from happening, net investment company regulations need to be provided for investments in non-business and Non-investment Company.

       

      It is focused on the investment company and focused on those who have the traditional investing.

       

      ■ Method of calculating the foreign investment ratio

      Here how the investment ratio of the foreign capital for the sub-subsidiary is calculated becomes an important point. From subsidiaries of foreign companies to invest in the Indian companies the foreign investment ratio is calculated according to certain requirements.

       

      ·         Company owns 50% of the stock of the Indian subsidiaries.

      ·         Company possesses the right to appoint a majority of the Board of directors of the Indian subsidiary.

       

      However when there is an exception that the investment ratio from the subsidiary company to the sub-subsidiary company is 100%, which is known as the re-investment, then the investment ratio to the subsidiary company is calculated from the parent company as foreign investment ratio of the sub-subsidiary company.

       

      ・Below the foreign investment ratio has been verified by case

       

      In this case the joint venture company D does not consider a foreign investment in order to classify with the original Indian residents.

       

      In this case the investment ratio for Company C which is treated as the foreign company, investing to Company D which is an Indian company will be a foreign investment ratio. And the foreign investment ratio will be 100%.  

       

      In this case, according to the exception provision, the foreign investment ratio of Indian companies D will be the same as the foreign investment ratio of the Indian domestic investment company which is the parent company. Therefore the foreign investment ratio will be 60% in this case.

       

      By applying this exception provision, if a business sector is established with investment limit as per the foreign regulations, then it is possible to exceed the investment limit by a sole owned subsidiary.

    • M&A Basic Scheme

      ■ Considerations of India foray

      As the investment in India has become principle free, the multiple agencies must comply with various laws, regulations and guidelines issued by the company. Since the additional investments in listed companies are subject to regulations for registration and rise in pricing etc., so it is important to firmly plan in advance. To acquire the assets of the target company and t6o acquire the shares of the target company each outline and points should be discussed.

       

      The point when the advance to India is treated as the advance method is when such acquisition and the advance establishment of the joint venture with 100% German resources of the Indian enterprise are due to some of their investment.

       

      ■ Foreign investors to invest in Indian corporation

      Under the current foreign direct investment regulations (FDI Policy), foreign investors will be able to invest in Indian corporation through the following financial instruments.

      ·         Common stock

      ·         Mandatory convertible preferred stock (CCPS)

      ·         Mandatory convertible notes (FCD)

       

      In India, all is not forced to be converted into capital stock, preferred stock, and convertible bonds in order to correspond to the foreign currency borrowing (ECB), which will not be subject to FDI regulations.

       

      However investment is not free of restrictions, there are still some restrictions with respect to the investment limit which is determined by the regulations of the FDI.

       

      As far as regulation is not applied, the principle foreign investment ratio is 100% which does not require a prior approval of the Government and is approved automatically.

       

      For more information about the industry type there are regulations which have been specified in the integrated FDI regulations. For example the communication industry, broadcasting industry, insurance industry, defense industry, retail etc. are prohibited of maximum foreign direct investment.

       

      India, receiving investment as foreign capital usually in the form of shares, mandatory convertible preferred shares and mandatory convertible bonds from the date of transfer need to report to the designated financial institution (Bank AD) through the Reserve Bank of India (RBI) within 30 days. Reported overseas bank will sent a copy of the advance report in the form of Foreign Inward Remittance Certificate (FIRC) and such reports will contain the details of the compensation amount with overseas investors which are there in the customer check (KYC) report.

       

      In addition, the issuance of shares, through the AD Bank within 30 days makes the FC-GPR (Foreign Collaboration General Permission Route) eligible to Part A style and the stock issuance to have automatic approval when meets all requirements like ① documents proving that it Is eligible for issuance of shares by automatic approval meets all requirements of the Companies Act ② the stock must be reported to the Reserve Bank of India.

       

      In addition the direct investment which has been made in the last fiscal year need to be submitted before 31st July of every year. The annual report of foreign investment for all investments such as portfolio investment needs to be made as per the FC-GPR, Part B style.

       

      ■The acquisition by stock acquisition.

      If non-residents want to get the stock from Indian corporation (those are resident of India) need to comply with the integrated FDI regulation. Acquisition Target Company is limited in sectors that are determined by the integrated FDI regulations. IF foreign ownership is regulated by the industry and the shareholding ratio then it should be looked after that the acquisition does not exceed the investment limit.

       

      As per the guidelines of India Securities and Exchange Commission (SEBI: Securities and Exchange Board of India), the Reserve Bank of India will determine the transfer price that is required. That is if the direct investment or transfer of shares is performed from abroad between Indian resident and non-resident then the free price cannot be determined by the parties which must comply with certain regulations.

       

      Namely, the stock transfer from the Indian resident to the non-resident and from the non-resident to the Indian resident is the same side of a coin and in any case the Indian residents are kept in favor of the provisions.

      （RBI / 2009-10 / 445 A.P.（DIR Series）Circular No.49）。

       

      In 1995, the foreign national investors have registered with SEBI, the India Securities and Exchange Commission in accordance with the rules of (FII) which makes them free to buy and sell shares of listed and unlisted companies. However if the foreign institutional investor conducts buying and selling of stock in the previously issued security market then it is necessary to do it through the stock company which is registered as a general rule in SEBI. Also, further stock transfer is granted through the venture funds. Foreign Venture Capital Funds that performs investment in India by registering in the India Stock Exchange will receive the benefits of such tax.

       

      ■ Acquisition due to the acquisition of listed stocks (If the non-resident is subject to stock transfer from Indian resident)

      The acquisition of shares that are listed in the stock exchange are transferred by the sale of existing shares and acquired by the subscription of new shares. If it is less than the stock issue price of third party allocation shares which are transferred by sale price then it requires prior approval of the Reserve Bank of India.

       

      Also required, if India domestic companies listed on the stock exchange of India stock gets above a certain percentage by the transfer of shares in the tender offer (2011- public tender offer rules).

       

       [If acquisition of shares by the tender offer is required]

      A person with one share holding or joint share holding is a person who has a stock with voting rights of a listed company who owns less than 25% or more than 75% to further get the voting rights in excess of 5% in one fiscal year and this is to receive the new shares through third party allotment or to perform a market in the acquisition or relative trading of existing shares.

       

      In India in the tender offer regulation, while defining the so-called acquisition and direct acquisition to get the Indian listed company the same regulation are applied as an indirect acquisition. This is a company that conforms to the Indian law and does not matter that whether it is listed or unlisted. For example, if the acquisition target is not an Indian company and a subsidiary of that company is listed in the Indian government then the regulations will be implied.

       

      In addition, public offerings, and equity underwriting are based on the equity underwriting agreement so that when the stock due to reorganization of the share allocation, merger or demerger then the obligation to Tender Offer will be exempted.

       

       [Year 2011 Tender Offer Rules]

      As per the Tender Offer Rules, the number of planned acquisition of shares can be set. The scheduled number must be greater than or equal to 26% of all shares (or voting rights). This promotes the case for getting 25% or more from the shares directly (founder controlling share holder in the concept of the Indian Act). Therefore, it will be traded to perform the stock acquisition of shares acquisition.

       

      In addition the minimum number of applicants for the tender offer is subjected to as per the condition of the Tender Offer. In this case if the applicant number as per the Tender Offer is less than the minimum number of applicants then the purchaser will be able to withdraw the tender offer. However if more than half amount of money which is required to purchase a minimum number of applicants need to be withdrawn then it should be done from the cash account opened for the Tender Offer.

       

      In 1997 promoters were recognized in public tender offer rules to payments of up to 25% of non-competition fess which is now not allowed in the public tender offer rule of 2011. Therefore the stock purchase price of Tender Offer from all the shareholders in the future will probably be with a 25% increase.

       

      As per the Tender Offer rules, the Tender Offer price will be the highest price of the following.

       

       [In this case indirect acquisition is regarded as direct acquisition]

      ·         Price that was agreed between the parties.

      ·         During the past 26 weeks the joint purchaser paid high prices for the acquisition of shares which is to be paid before the date of Tender Offer notice.

      ·         Trade volume weighted mean market price of the past 60 business day which proceeded with the release of buying public notice when there is transaction very frequently.

      ·         For direct transactions and indirect transactions, the price of the companies is calculated with a certain method.

       

       

       [In the case of indirect acquisition]

      ·         Price agreed between the parties (if any)

      ·         Volume weighted average price is to be paid for the acquisition of the stock of the target company by a person or joint holders, either on the trading contract date or publication date or prior to the early days in past 52 weeks of the trading date.

      ·         The acquirer or the joint purchaser(if any) need to pay the best price for the acquisition of shares on the major trading date or publication date or prior to the early days in the past 26 weeks of the trading date.

      ·         The best price for the acquisition of company shares by the purchaser or joint holders is to be paid on the major trading contract date or publication date or during the early days of the date of publication.

      ·         Trading volume weighted average market price of the past 60 trading days need to be paid to the earliest date of any of the major trading date or a contract date or publication date (if often trades).

      ·         For direct transactions and indirect transactions the price of the target companies are calculated as per the fixed method.

       

      ■Acquisition due to the acquisition of the non-listed stock (if the non-residents of India are receiving stock transfer from the Indian residents)

      The price of the shares that is acquired by buying and selling by the merchant banker or Chartered Accountants who are registered in SEBI has to be decided on the basis of the DCF method like the same procedure which is there is P.47.and it should not be less than the principle price.

       

      In the below mentioned case the prior approval of the Reserve Bank of India is required s per the transaction. In addition, for the stock price the receipt of the certificate of the above mentioned merchant banker or the Chartered Accountants is required. It is similar to the issuance of new shares.

       

      Prior approval of the Reserve Bank of India is not required as long it is not less than the reasonable price. However the transfer price needs to be discussed during the time of the post-notification to the Reserve Bank of India.

       

      ■ The Business Income by Business Transfer

      As per the Income Tax Act, the business transfer (Slump Sale) is defined as, “as a result of the sale without the business transfer assigned to individual assets and liabilities separately, the payment is to be made for the entire one business or multiple business relocation" explained in (law 2 of article 42C section).

       

      To get the approval of the transfer business any one can be chosen from the restructuring plan concerning business against the High Court which has the jurisdiction on the address registration of the transferee company and also the agreement between the two parties. Since there is little tax benefits in the business transfer of the split between the mergers and corporate, so often the method performed between the parties is adopted without the permission of the court.

       

      If the public company makes a transfer business, then the company needs to go through a resolution of the Board of Directors and the ordinary resolution as per the shareholder's meeting (Indian Companies Act 293, paragraph 1 (a)).

       

      In addition if the transfer company is among the listed company then a resolution of the General Meeting of Shareholders will need to be done by the mail ballot (Postal ballot). If a non-listed company makes a transfer business then the resolution of the general meeting of shareholders is not required and the resolution can be determined by the Board of Directors. Because of the business transfer permits and business license relationship was held by the old company transfer does not occur in accordance with the business transfer and the application for transfer to each supervisor authority needs to be done by transfer of business separately.

       

      The compensation of business transfer becomes the business assessed amount.

       

      As per the income Tax in case of business transfer since the individually assigned assets and liabilities make up the business so specific provisions are there in determining the tax book value of each asset that make up the business. The value of each asset should be evaluated by the appropriate method (such as the proper valuation of the report by the expert and the transferee company recognizes its price as tax book value of the asset.

       

      ■Net operating loss brought forward with the continuation of the unabsorbed depreciation and amortization.

      Not only the transfer of mere assets but the net operating loss brought forward is to be transferred in the transfer way of business and unabsorbed depreciation and amortization will not be the continuation of the transferee company.

       

      ■ Value-added Tax and Central Sales Tax

      VAT (Value Added Tax) is imposed only on goods sold within a particular state, which essentially means that the buyer and the seller needs to be in the same state. VAT is imposed on tangible goods and products are sold.CST (Central Sales Tax) is imposed only on goods sold from one state to another state, which particularly takes into account that the buyer and the seller needs to be in two different states

       

      ■ Certificates of the net assets from the Chartered Accountants

      Transfer company at the time of a tax return, need to submit a report on tax of net assets of the transferred business which is known as the 3CEA to prove that it is properly calculated.

       

      ■ The business income from asset transfer

      Business acquisition by transfer of business (Asset Transfer) is regarded as acquisition of individual assets and liabilities that make up the business. In 1 9 7 2 Toshido production applied the method of buying and selling for the acquisition of personal property. The procedures for the acquisition of shares and corporate bonds had been established in the Companies Act. In addition, in 1882 for the acquisition of real estate, the real estate transfer method had been applied. Copyright, patent rights, the acquisition of intellectual property rights such as trademark rights, are specified in the laws and regulations in accordance with the type of each intangible property rights. India Contract Law with respect to underwriting of debt was applied in 1872.

       

      As per the laws of the Companies Act for Business Transfer: by (AOA Articles of Association), and according to the principle approval by the Board of Directors and the shareholders' meeting especially in case of a public company, the transfer of business requires the approval of a majority in the shareholders' meeting. In addition, if a foreign company acquires business in India, then according to FDI regulations, the prior approval of Reserve Bank of India is required. Other things such as the registration tax, stamp duty, capital gains tax and transfer tax etc. are necessary to examine the transaction cost.

       

      ■ Tax book value of Assets

      The price paid as consideration of each asset for the asset transfer will be the tax book value of the asset for the transferee company.

       

      ■ Net operating loss brought forwarded followed by unabsorbed depreciation and amortization.

      Because it is not only buying and selling of mere assets, for net operating loss brought forwarded and unabsorbed depreciation, it will be inherited from the transferee company.

       

      ■ Stamp Duty

      Stamp duty is the same in case of business transfer (see P.5 5).

       

      ■ Value-added Tax and Central Sales Tax

      Unlike the business transfer since it is regarded as the buying and selling of mere assets.VAT (Value Added Tax) is imposed only on goods sold within a particular state, which means that the buyer and the seller needs to be in the same state. Only when tangible goods and products are sold, VAT can be imposed.CST (Central Sales Tax) is imposed only on goods sold from one state to another state, which particularly takes into account that the buyer and the seller needs to be in two different states.

       

      ■ Merger

      Merger (Amalgamation) is the accumulation of one or more companies merged into another company, or two or more companies merged to form a new company is, but all of the assets and liabilities are carried over to the new company from the surviving company. And the shareholders holding more than three-quarters of the old company will be the shareholder of the surviving company, as defined in 1961 income Tax Article 21 section B of India.

       

      ■ Involvement of the Court

      As per the articles of incorporation (MOA), the merger must be authorized by the State High Court to further jurisdiction over the head office registration for the location of the surviving company.

       

      To finish the procedure of approval it takes usually 6 to 8 months. In addition the legal framework is defined in the Companies Act 391-39 Article 4 of the merger.

       

      Specifically, a procedure is followed which is as per(1956 Indian Companies Act Article 391).

       

      ① Will have to submit a reorganization plan for the merger to the High Court (High Court).

      ②After the acceptance of the court's application, then the respective shareholders' meeting and each of the creditors' meeting of the merger company merged with the surviving company will be convened.

      ③In these general meeting of shareholders and creditors, if three or more in favor, then the merger resolution is satisfied.

       

      ■ Consideration of merger

      The newly merged company issues the allotted shares for the old company to the old company as a compensation for the merger. In addition, Japan has not recognized a more flexible way than only stocks concerning to the compensation of the merger.

       

      The newly formed company will succeed all the assets and liabilities of the old company.

       

      ■ Tax book value of Assets

      The newly formed companies will inherit the assets in the tax book value from the old company.

       

      ■ Succession of Workman

      Workman of the old company will be succeeded in the newly formed company. Now the non workmen do not comes under the protection of the Indian labor law.

       

      Definition of workman and non-workman is as follows.

       

      Workman: essentially persons who are employed with business.

      Non-workman: A person who falls under the following provisions.

      ·         Those who belong to air force, army and navy.

      ·         Those employed in police.

      ·         Those who are managers or business administrator.

      ·         A director's position holding more than 10,000 rupees per month.

       

      However to inherit automatically the following three conditions has to be entirely satisfied automatically.

      ・  Workers of the old company are not affected by the merger.

      ・  Not to disadvantage the working conditions of the workers that they used to have before the merger.

       

      If these conditions are not followed then the old company will have to pay the severance pay for workers as per Industrial Dispute Act Article 75 of 1947.

       

      ■ Stamp Duty

      If asset transfer and mergers takes place between the parent company and its wholly owned subsidiaries then they are subject to exemptions according to certain conditions.

       

      ■ Value-added Tax and Central Sales Tax

      Transfer of assets related to the merger is not considered as a transfer of individual assets and hence the value-added tax and the central sales tax are not imposed.

       

      ■ Registration, licensing, business license etc.

      After the merger the registration, licensing, business license etc. will move from the old company to the newly formed company. However, as per the notifications and procedures based on the governing law the licenses are followed of the surviving company after the merger. Normally this is done in the court after the court receives an application for reorganization.

       

      ■ Capital tax gains of Merger Company

      As per the Income Tax Act, in case of surviving company of India domestic company, the capital tax gain is imposed on the old company (asset transfer method 1882 Article 47 Section 4).

       

      In addition the shareholders holding the shares of the old company are all transferred to the newly formed company. If the old company is the domestic company of India then capital gain tax is not imposed on the old company. The requirements of capital gains tax are almost the same as compared to operating loss brought forward and the requirements are described as follows.

       

      ■ Net operating loss brought forward followed by unabsorbed depreciation and amortization

      As per the income tax method, if the old company was operating fixed business and if the conditions mentioned below are satisfied then the net operating loss and the depreciation will be brought forward into the account of new company.

       

      ■ Write offs and deductible merger related cost

      The domestic company of India which has the burden for the merger and which is amortized to five (5) years from the taxable year within which there was a merger, that cost is deductible.

       

      ■ Foreign Exchange Regulation

      Certain conditions will have to be met where the merger plan will be approved by the High Court. The approval of Indian stocks from Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India will be unnecessary if it is from the residents of the old company of India to the non-residents of the newly formed company.

       

      ■ Stock Exchange Regulation

      If at least any one company of the merger parties is a listed company, then prior approval of the Stock Exchange is required. However, as long as the surviving company is not listed in the Exchange then the approval of the Stock Exchange is not required after the merger.

       

      ■ Indian Company Law for 2013

      On 29th August, 2013, the new bill of Indian Companies act was enacted. The revision of the entire act has been done for the first time in about half a century. While there is no change in the amendments of M&A for acquisition of stocks and reorganization.

       

      ■ The revision of the acquisition of shares

      In the new Companies Act, the agreement between the parties on the restrictions of stock transfer of public companies has been stated to be legally valid. This point got attention in the new Companies Act as there were doubts regarding this point in the previous act.

       

      Previously the issue of new shares was possible by public company if they get the approval from the Board of Directors. But in the new Companies Act a special resolution must be obtained in the shareholder's meeting for performing a third-party allocation of new shares regardless of the public or the private company. In addition, the issuance of shares unless the Merit Stock (Sweat Equity Shares) is issued has been prohibited. Sweat equity shares means such equity shares, which are issued by a Company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

       

      ■The revision of the reorganization

       According to the new Companies Act if prior permission of the Indian Central Bank can be obtained can now merge with the a foreign company according to the national law as specified by the Indian Act of the Indian Central Government. However in Japan the merger with the Japanese subsidiary and foreign corporation is not allowed according to the Companies Act.

       

      Scheme of Arrangement: In the previous Company Act for SOA (Scheme of Arrangement) the permission of the court was required to execute the SOA.  However according to the new acts this method has been changed and now it is required to take permission from the National Company Law Tribunal. In addition for the merger between the small companies and between the Parent Company the approval is necessary.

       

      ■The revision of squeeze-out

      In accordance with the Companies Act 3 9 Article 5, in order to squeeze out the minority shareholders, has the following requirements.

       

      According to the Companies Act 39, Article 5 the following requirements are to be followed to squeeze out the minority shareholders.

       

      ① The approval of the shareholders who hold shares that make up the 910 minutes of share value of all shareholders is required to be taken.

       

      These two points requirement in the new Companies Act has been abolished.

       

      ■Registered Appraiser System

      The registered appraiser system has been newly defined in the new Companies Act.

       

      ■ Insider Trading

      Although insider trading was prohibited in the previous Companies Act but the new Companies Act does include the insider trading. Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to nonpublic information about the company. In various countries, trading based on insider information is illegal. This is because it is seen as unfair to other investors who do not have access to the information as the investor with insider information could potentially make far larger profits that a typical investor could not make.

    • Challenges after Acquisitions

       ■Notes relating to the Company Management

       ●Resolution of the General Meeting of the Shareholders

      According to the Companies Act the Quorum of the Shareholders is decided by the court where it is decided that how many members are required to attend the meeting. In a General Assembly a resolution is passed when majority of the shareholders are in support of the resolution. The show of hands determines how many are in support of the resolution which means that the shareholders need to raise their hands and then by counting the numbers of hands it is decided that how many are in support of the resolution.

       

      ● Company Secretary

      Having a company secretary is mandatory. However the number of people registered as company secretary less than the number of firms. Japan generally without hiring a company secretary practice the secretary service in a full-time form with a normal working employment.

       

      Currently the Indian government is also aggressive to attract foreign capital. But it does not mean that if there is a violation of any rules or regulations then Indian government will not act accordingly.

       

      ● Recovered by Dividend

      In the case of common stock to shareholders of the company the distributable income (annual depreciation which is carried forward is calculated on the basis of amount of money) is given after incorporating the percentage in reserve and then the dividend is remitted.

      Percentage of necessary profit incorporated in dividends and reserves are as follows.

       

      In the case of mandatory convertible preferred stock (CCPS) dividends will be something that is based on the interest rate of the preferred stock. The year when the company recorded a net income then the payment of dividends will be executed. It does not provide dividend for the year in which a net loss is recorded but dividends for the year in which a loss is recorded on a cumulative basis of CCPS which is carried over to the next fiscal year. In the case of dividends with interest rate the upper limit of the interest rate (the most preferential lending rate of India + 3% of the bank) is determined.

       

      Also to add the interest rate on the preferred stock there is a method to calculate the profit dividend with preferred stock. In this case a certain amount which has been fixed as a profit dividend is paid in preference to common shareholders after a certain amount of dividend is paid to the shareholders who will be permitted to obtain additional dividend for the residual profits.

       

      For interest rates of mandatory convertible notes (FCD) which is dealt equivalently with the CCPS and as well as the dividend of CCPS is calculated as the most preferential lending interest rate of State Bank of India + 3% of the upper limit interest rate. 

       

      ●Recovered by interest borrowing from abroad

      For payment of interest rate based on the Foreign Currency Borrowing (ECB), as per the Foreign Exchange Management Act of India a certain upper limit has been fixed for the interest. If the loan agreement was signed on or after 1st January 2010 then the upper limit of payment will be as per the pre-approval route of ECB (including cost) that are listed in the following.

       [The average maturity period with highest interest rate]

      3-5 years and 6Month LIBOR + 3%

      More than five years 6Month LIBOR + 5%

      * LIBOR (London Interbank Offered Rate) interest rate in the case of inter-bank transactions

       

      ● Recovery of investment principal by shares of redemption

      As per the Indian Companies Act, funds were invested as equity in domestic companies unless the company is liquidated. In the case of redemption the purchase of treasury stock by the company is to be accepted or reduced (capital reduction with prior approval from the High Court).

       

      ● Recovery of interest principle due to acquiring of the treasury stock by the Indian domestic company (Indian Companies act 77, Article A)

      Since it involves the transfer of shares to the Indian domestic company (India resident) from a foreign company (non-Indian residents) then the regulations of the transfer price will be applicable. Also with respect to the acquisition of treasury stock the financial resources regulations are also established.

       

      Under these three following requirements India domestic company will be able to purchase treasury stock.

       

      ·         Any reserve (Free Reserves), securities premium account (Securities Premium Account), stock used as any of the funds coming from the benefits arising from other securities (Proceed of Any Shares / Other Specified Securities).

      ·         The upper limit of the amount of funds to purchase treasury stock is a two-five percent of the total amount of any reserves and paid Capital. The upper limit of the one-year treasury stock acquisition has been 25% of the paid-in capital.

      ·         After acquisition of treasury stock, the ratio of debt that the company will have to bear only if that does not exceed twice the paid-in capital and any reserve.

       

      In addition, the acquired treasury stock must be amortized within 7 days.

       

      In addition, six months after the acquisition of treasury shares, issue of the same stock is prohibited.

       

      ● Recovery of investment principal by capital reduction

      India domestic company does not meet the acquisition requirements of treasury stock. As per the provisions of the Indian Companies Act and through the process of the court the shareholders will be able to redeem the capital.

       

      Capital reduction requirement are as follows

       

      ·         There is a provision that capital reduction can be done as per the law.

      ·         Going through a special resolution of the shareholder's meeting.

      ·         To obtain the permission of the court (the Companies Act 101-105 Article)

       

      In addition for the capital reduction, firstly the consent of the creditors is required and then the permission from the High Court. And if there are too many creditors opposing for the capital reduction then the capital reduction becomes really tough.

       

      ■ Exit Strategy

      If the foreign companies completely want to withdraw investment from the Indian domestic companies then they will face some problems in completely withdrawing their investment.

       In case of the foreign companies who wants to withdraw investment from the Indian domestic companies they need to follow a specific exit strategy through the sale of shares, company liquidation, sale of business through the transfer of business etc.

       

      ● Sale of Shares

       [The sale of shares from a non-resident to an Indian resident]

      "Stock acquisition" is stated at (P.47 reference) as per the Indian Stock Exchange in case of transfer of shares from a non-resident to an Indian resident.

       

      It is the price that does not exceed the allocation price for third-party allotment of shares which is to be carried out in accordance with the guidelines of SEBI.

       

      In case of the non-listed shares the price will be determined by the SEBI registered merchant banker or Chartered Accountant and the price should be reasonable (Fair Price) determined on the basis of the DCF method (RBI/2009-10/445 DIR series Circular No.49).

       

       [Transfer of shares from a foreign company (non-residents of India) to residents of India]

       

      There are no specific guidelines or special regulations for stock trading from the foreign company (non-residents of India) to Indian residents. For example it is also possible to do the transfer between the Japanese residents and the domestic company of India.

       

      As per the Income Tax Act if the cost of the transferred shares of the company is greater than the acquisition cost of the shares  then the capital gains taxation occurs on the stock transfer of the company. If the capital gains taxation occurs then the acquisition by purchase of company stocks must impose this. In addition, the securities transaction tax will be imposed if the shares of the listed company are sold through the Stock Exchange.

       

      ● Liquidation of Company

      In law and business, liquidation is the process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. Liquidation proceedings in India take more than one year period of time to end this proceeding which is very complicated.

       

      As per the Indian Income Tax Act regulations if the residual assets are returned to the shareholders by the liquidation of the company then as long as the property is related to the cumulative earnings of the company before the liquidation proceedings it is considered as the dividend of the company. In case of performing this dividend deemed related proceedings it will be taxed under the dividend distribution tax (effective tax rate 16.2225%).

       

      On the other hand, the excess profit that is obtained from the shareholders (money or other property amount of shareholders is obtained by = liquidation - shares of acquisition cost equivalent to the dividend deemed) as capital gains will be taxable to the shareholders. So if capital gain occurs then acquisition by purchase of company stock must impose this.

       

       [Sale of business by business transfer]

       

      Through the business transfer or merger it can be chosen to how to sell the business of investment of Indian domestic company to other companies. However in the case of business transfer for the sale of the business it will be paid to the destination from where the investment of the Indian domestic company is done. This will be a method to recover the funds for the shareholders of the foreign company. For example to liquidate the Indian domestic company further proceedings will be required.

       

      In addition because the shares of surviving company are assigned to the case of merger so it is necessary to dispose of the proceedings.

    • Websites

      [1] COMPANIES ACT, 1956

      [2] SEBI (DIP) GUIDELINES, 2000 CHAPTER XIII

      [4] KPMG India [M&A Current status and its regulation contents in March 2010 in India]

    • Babiliography

      [1] THE Institute of Company Secretaries of India 『Handbook on MERGERS AMALGAMATIONS AND TAKEOVERS-Law and Practice』CCH 

      [2] [M&A specialized magazine MARR] RECOF data

      [3] [Feature 2013 Year of the Japanese economy M&A Trend] 2013 year 2 months

      [4] Azusa audit firm, KPMG ["investment accounting and tax guide book of India" Central Economic Corporation.

      [5] Tokyo Aoyama Aoki Koma Law Office, Baker & McKenzie foreign memorial service law firms (foreign law joint business) ed., "Cross-border M & A practice of" Chuokeizaisha, 2008

      [6] Shin Nippon Ernst & Young Tax Corporation ed., "Tax strategy of cross-border M & A" Chuokeizaisha, 2009

      [7] PricewaterhouseCoopers Ltd., tax accountant corporation Price Water House over Cooperstown ed., "Asia M & A Guidebook" Chuokeizaisha, 2010

      [8] Deloitte Tohmatsu FAS Co., Ltd. ed., "M & A integrated financial due diligence" Qing Bun-sha, 2010

      [9] Ernst &, Shin Nippon Ernst & Young Tax Corporation ed., "India of accounting, tax and legal Q & A" Tax Accounting Association, 2011