Why Does The Hutch and

Vodafone merger have problems

-with respect to FEMA and tax?
HTIL(Whampoa group
Takes over
Vodafone(Briton) of Li-Ka Shing.
A Foreign company Hong Kong
A foreign company

67%
Essor group
Hutchison Essor
Indian Company Asim Ghosh-12%
A.Singh and other companies
(Minority)
Mergers and Acquisitions-Tax
impact
By Prof. Augustin Amaladas
M.Com.,AICWA.,PGDFM., DIM.,
B.Ed
For
TASMAC
 Provision of income tax act
• THE AMALGAMATED CO. IS AN INDIAN CO.
EXCEPTION
1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE
MERGER AND SUCH FOREIGN CO. TAKEN OVER BY
ANOTHER FOREIGN CO.
2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER)
TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.
? WHAT IS THE BENEFIT TO THE AMALGAMATED CO.
AMALGAMATING CO.(OLD CO.)
• The Court has also sent notices to the
Hutchison Essar's Managing Director,
Mr Asim Ghosh, and the Chairman of
Max Group, Mr Analjit Singh. The two
individuals hold 12 per cent of Hutchison
Essar, which is the bone of contention.
• The stake is being held indirectly by the two
individuals on behalf of Vodafone. The sale-
breached India's Foreign Exchange
Management Act and the licensing conditions
for providing telecommunications services in
India,
• What is the maximum holding possible by a
foreign company in telecom in India?
 TYPES OF MERGERS
• HORIZONTAL MERGER – SIMILAR LINES
OF ACTIVITY
• as Ford announced the sale of the two British
iconic cars to Tata Motors Ltd.
• Ford acquired Jaguar for $2.5 bn in 1989 and
Land Rover for $2.75 bn in 2000 but put them
on the market last year after posting losses of
$12.6 bn in 2006 - the heaviest in its 103-year
history.
 The First wave
• 1897-1904-horizontal Mergers
• Monopolistic Market structure
• Mega merger between US Steel and
Carnegie Steel.It also merged with 785
separate firms-75% of Steel production
of US.
As a result: ???? What happened to
Standard Oil?
 Standard Oil(SO)
• Divided in to 30 Companies.
• SO of New Jersey named EXXON
• SO of New York named MOBIL
• SO of California renamed CHEVRON
• SO of Indiana renamed AMOCO
• What is ANTI TRUST Act? What is
known in India?
Who plays an important role in
merger?
• Investment Bankers.
• Can you name some of the investment
bankers?
• What are the other firms involved in
merger and acquisitions?
 When did Management
principles used in merger in
USA?
• Merger activity reached its highest level
during 1965-69
• Booming of economy
• Conglomerate merger period-80%
• Management principles were applied in
industries.
• Management graduates were employed
to manage conglomerate mergers.
 M&A IN INDIA
• License era-Unrelated diversification
• Conglomerate merger
• Friendly take over and hostile bids by buying equity
shares
• Example: Swaraj paul attempted to raid on Escorts
Ltd.and DCM Ltd but could not succeed.
• The Hindujas raided and took over Ashok leyland and
Ennore Foundaries.
• Chhabria Group acquired stake in Shaw Wallace,
Dunlop india and Falcon Tyres.
• Goenka group from culcutta took over Ceat
tyres.
• The Obroi-Pleasant hotels of Rane group.
• 1989- Tata Tea acquired 50% of the equity
shares of Consolidated Coffee Ltd from
resident shareholders.
• merged to form HCL Ltd??.
 HCL
• Hindustan Computers, Hindustan
Reprographic, Hindustan
Telecommunications and Indian Software
Ltd.
 Basic concept behind capital
gain tax?
• Separate legal entity
• What do you mean by capital gain?
• Transfer of capital asset
• If company transfers without fulfilling
Income tax provision does it attract capital
gain tax?
• Is it taxed on
company?/shareholders?/debenture holders?
 INCOME TAX RELATED ISSUES FOR
AMALGAMATION

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2

(1B)
1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE
THE ASSETS OF THE TRANSFREE CO.
2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE
OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD
BECOME SHARE HOLDERS OF AMALGAMATED COMPANY
EX. NO. OF SHARES OF Altd CO. 1,00,000
NO. OF SHARES HELD BY Bltd IN Altd IS 20,000
NOMINAL VALUE OF SHARE IS RS.10
ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 =
60,000 TO BE THE SHARE HOLDES OF B CO.
NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE
HOLDERS
 EXAMPLE
A LTD AMALGAMATES WITH B LTD AS
ON 2007
PARTICULARS DOES NOT SATISFIES 2(1B) SATISFIES
SATISFY SEC BUT DOES NOT BOTH 2(1B) &
2(1B) & 72 A SATISFY 72 A 72 A
A MERGES NO BENEFIT DOES NOT NO CAPITAL
WITH B (A GOES TO A & B ATTRACT GAIN TAX &
OUT) CAPITAL GAIN ACCUMULATE
FOR A BUT NO D LOSSES &
GAIN FOR B UNABSORBED
DEPERICIATIO
N CAN BE
CARRIED
FORWARD
• NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE
TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT
? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND
DEPRECIATION
SEC 72 A TO BE FULFILLED
1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR
MORE YEARS
2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS
BEFORE AMALGAMATION
3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF BOOK
VALUE ATLEAST FOR 5 YEARS
4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS
5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED
CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE
FOR 5 YEARS
 Tax Concession To Share
Holders Of Amalgamating Co.

• No capital gain tax provided new co. is an

Indian co.& Shareholders are acquired
everything in shares
 EXERCISE

PARTICULARS CO. A CO. B

EAT 1,40,000 37,500

NO. OF 20,000 7,500
SHARES
EPS 7 5
MARKET 70 40
PRICE
P/E RATIO 10 8
• Co. A is acquiring co. B Exchanging one share
for every 1.5 shares of B ltd & p/e ratio will
continue even after merger
? Are they better or worse of than they were
before in merger
? Determine the range of minimum & maximum
ratio between the two firms
? A is an Indian co.
? A is a foreign co.
? A merges with T & formed a new co. AT ltd
? What are the tax planning required before &
after merger
 Conclusion
• Fulfill section 2(1B) of Income tax act by transferor company
• Amount to be in the form of shares
• No cash to be received
• Foreign Direct investments in selected sector can not exceed 74%
by foreign company
• Fulfill section 72A of the IT act so as to reap the benefit by
transferee company
• Shareholders can not transfer their holdings with in 5 years.
• Sales tax at the rate of 8% can not be avoided.
• Set off and carry forward of losses is possible.
• What are the losses can be carried forward and set off? How
many years?
Thank You