Business Restructuring and Succession Planning

Transcription

1 Business Restructuring and Succession Planning National Tax Convention ICAI Ahmedabad December CA Dhinal Shah

2 Contents Overview Modes of M&A in India Case studies M&A Outbound Investments by Indian entities Overview Succession planning Case studies Succession planning Page 2

3 Overview - Modes of M&A in India Page 3

4 Overview Modes of M&A in India M&A Merger / Demerger Court Process Non Court Process Capital Restructuring Amalgamation Demerger Business Share Capital Buyback Purchase Purchase Reduction Slump Sale / Itemised Sale Consolidation of businesses / entities Focus on core business /hiveoff of non core business /monetize Focus on core business /sell off non core business Focus on inorganic growth /strategic or non strategic investments Enhancing stake / repatriation ti Financial restructuring/ Enhancing stake / repatriation Page 4

5 Laws impacting M&A Income tax Companies Act Stamp duty Tax neutrality Availability of tax exemptions Transfer of tax credits Step up in tax basis High Court approval Approval of shareholders and creditors Post implementation procedures Valuation of shares Indian Stamp Act vs. State Stamp Act Valuation of immovable property Set-off of stamp duty SEBI & Stock exchange Listing of shares / New Co Stock exchange approvals Take over code implications Filing compliances Key regulations Exchange control Issue of shares to non resident on merger FDI / RBI Approval / automatic route Cross border Accounting Other regulations Host jurisdiction compliances Tax implications in host jurisdiction Method of accounting Pooling of interest Purchase method Expense accounting Cancellation of investment Competition Act Indirect tax Accounting Industry specific law Page 5

6 Merger Page 6

7 Merger Concept Consolidation of two or more entities Involves transfer of assets and liabilities from one or more Transferor Cos to a Transferee Co In consideration, typically the transferee company issues shares to the shareholders h of Transferor Co Court process (4-6 months) Pre-merger scenario Shareholders X X Co Merger of X Co in to Y Co Shareholders X Shareholders Y Y Co Shareholders Y Key drivers Internal Consolidation of operations Consolidation of promoter holdings Tax savings External Acquisitions Takeover of a sick entity X Co Post-merger scenario Shareholders X Merger YCo YCo Shareholders Y Page 7

8 Domestic merger Consideration in the form of shares of Company B Consideration in the form of shares of Company C Shareholders Shareholder Shareholder Shareholder Merger Company A Merger Company B Company A Company B Company C Merger of Company A with Company B Merger of Companies A & B with Company C No shares to be issued Shareholderh by HOLD Co HOLD CO Consideration in the form of shares of HOLD CO 100% SUB Co 100% SUB CO SUB CO Merger of SUB Co with HOLD Co Merger of HOLD Co with SUB Co Page 8

9 Merger Key Income Tax Implications Tax Neutrality conditions Transfer of all assets and liabilities of Transferor Co to Transferee Co Shareholders holding at least 75% shares (in value) of Transferor Co to become shareholders in Transferee Co Capital gains tax benefits For Transferor Co No capital gains tax on transfer of capital assets, if the Transferee Co is an Indian company For shareholders of Transferor Co No capital gains tax on transfer of shares of Transferor Co, if - Consideration for transfer is discharged by way of issue of shares in Transferee Co; and Transferee Co is an Indian company. Page 9

10 Merger Key Income Tax Implications Carry forward & set off of business losses / unabsorbed depreciation of Transferor Co Applicable to industrial undertaking*, specified banks, hotels, ship owning companies etc. Fresh lease of life to business losses Specified conditions to be satisfied by Transferor Co and Transferee Co: Transferor Transferee At least 3 years business history Transferred fixed assets to include at least 75% of book value of fixed assets held two years prior to merger 75% of book value of transferred fixed assets to be held for 5 years Continue business of Transferor Co for minimum period of 5 years Achieve Capacity Utilization of at least 50% of installed capacity before the end of 4 years and maintain till end of 5 years * Includes Manufacturing, Power, Computer Software, Telecom, Mining, Construction of ships / aircrafts / rails systems Page 10

11 Provisions of the Companies Act 2013 relating to mergers Permits outbound mergers i.e. amalgamation of Indian companies with Foreign companies Requirements applicable to inbound as well as outbound merger Foreign jurisdictions to be notified by CG Compliance with rules to be prescribed by CG in consultation with RBI Prior RBI approval Consideration to shareholders of merging entity could be in form of cash or depository receipts Provisions for exemption of certain companies without Court approval, such as merger of small companies or merger of holding company and WOS Now an auditor s certificate t is required to be filed with the Tribunal to the effect that t the accounting treatment is in accordance with the prescribed accounting standards Further, the tax authorities are required to be intimated for the merger Page 11

12 Merger Other Implications Stamp Duty State specific levy, rates/ rules vary from state to state Factors for duty levy place of registered office of the companies, location of immovable properties, market value of immovable properties etc. Stamp duty in Gujarat Bombay Stamp (Gujarat Amendment) Act On a Court convened Scheme of Arrangement involving a merger: Higher of: 1% of market value of shares issued of allotted or face value of such shares (whichever is higher) and consideration paid for amalgamation or 1% market value of immovable property subject to a maximum cap of Rs. 25 Crs Additional duty 0. 1% on value of shares issued Page 12

13 Demerger Page 13

14 Demerger Concept Involves transfer of identified business from one company to another In consideration, the Resulting Co issues shares to shareholders of the Demerged Co Court process similar to merger (4-6 months) Key drivers Internal Focus in management, achieve higher market value, etc Segregation of core and non-core businesses Pre-demerger scenario Shareholders X U1 X Co U2 Demerger of U2 of X Co in to Y Co Shareholders X XCo U1 U2 Demerger Post-demerger scenario Shareholders X Shareholders Y Y Co Shareholders Y YCo Shareholders Y External X Co Y Co Sale of business U1 U2 Page 14

15 Domestic demerger situations Shareholders 100% Demerger of DIV2 to WOS against consideration to shareholders of CO 1 Shareholders 100% Demerger of DIV2 to non- WOS against consideration to shareholders of CO 1 CO 1 CO 1 DIV 1 DIV 2 DIV 1 DIV 2 100% Demerger of DIV 2 54% Demerger of DIV 2 WOS CO CO 2 Shareholders 100% CO 1 CO 2 DIV 1 DIV 2 100% Demerger of DIV2 against consideration to shareholders of CO 1 Demerger of DIV 2 Shareholders CO 1 100% DIV 1 DIV 2 54% Demerger of DIV2 for NIL consideration Demerger of DIV 2 CO 3 CO 2 Page 15

16 Demerger Key Income Tax Implications Tax Neutrality conditions Transfer of business to constitute an eligible undertaking under the IT Act Undertaking should be transferred on a going concern basis All assets and liabilities of demerged undertaking to be transferred to the Resulting Co at their respective book values In case of general / multipurpose borrowings, liabilities to be transferred with demerged undertaking: Total general / multipurpose borrowings X Value of assets transferred in demerger Total value of assets of Demerged Co before demerger Resulting Co to issue shares as consideration to shareholders of Demerged Co on a proportionate basis (except where Resulting Co is shareholder of Demerged Co) At least 75% of Demerged Co shareholders (in value) to become shareholders of Resulting Co Page 16

17 Demerger Key Income Tax Implications Capital gains tax benefits For Demerged Co No capital gains on transfer of capital assets from Demerged Co to Resulting Co, if Resulting Co is an Indian company For shareholders of Demerged Co No capital gains on transfer or issue of shares by Resulting Co to shareholders h of Demerged Co as consideration of demerger Carry forward & set off of business losses / unabsorbed depreciation of Demerged Co Directly relatable to demerged undertaking available to Resulting Co for carry forward and set off Not directly relatable to demerged undertaking: To be carried forward (and set off) by Demerged and Resulting Co in the proportion of assets being retained and transferred by Demerged Co Fresh lease of life not available Page 17

18 Demerger Other Implications Companies Act, 2013 Provisions for exemption of certain companies without Court approval, such as demerger of small companies, demerger between holding company and WOS, etc Stamp Duty State specific levy, rates/ rules vary from state to state Factors for duty levy place of registered office of the companies, location of immovable properties, market value of immovable properties etc. Stamp duty in Gujarat Bombay Stamp (Gujarat Amendment) Act On a Court convened Scheme of Arrangement involving a demerger: Higher of: 1% of market value of shares issued of allotted or face value of such shares (whichever is higher) and consideration paid for amalgamation or 1% market value of immovable property subject to a maximum cap of Rs. 25 Crs Additional duty 0. 1% on value of shares issued Page 18

19 Acquisition through sale of business Page 19

20 Modes of acquisition Modes of acquisition Asset deal Slump sale Itemized sale Share deal Key considerations for acquisition structuring: Step-up in the cost base of assets for tax depreciation Receipt of consideration and tax cost to sellers Transferability of tax attributes (MAT credit, tax losses, if any) Stamp duty cost Regulatory approvals Time frame Page 20

21 Slump sale Page 21

22 Slump sale vs. Itemised sale Sale of business Slump sale of undertaking Itemized sale of assets Consideration to be a lump sum amount -Values not to be assigned to individual assets and liabilities Consideration assigned to individual assets / liabilities Capital gains to be computed for undertaking as per formula Capital gains to be computed for each item of capital asset Court Approval not required for Slump sale / Itemised sale Page 22

23 Slump sale Concept Involves transfer of identified business (undertaking) from one company to another In consideration, the Buyer Co issues shares / pays cash to the Seller Co Values not to be assigned to individual assets / liabilities No Court approval required Can be achieved through shareholder resolution and BTA (Time frame : 1 2 months) Consideration - issue of shares / cash Seller Co Buyer Co Business A Business B Sale of business Post slump sale scenario Shareholders Shareholders Key Aspects Disinvestment of non-core business Consideration may be structured Cash / shares unlike in case of demerger Seller Co Business A Buyer Co Business B Page 23

24 Slump sale situations Shareholders 100% Slump sale of BU 2 to WOS against shares of WOS CO Shareholders 100% Slump sale of BU 2 to CO2 against cash CO 1 BU 1 BU 2 Slump sale of 100% BU 2 WOS CO CO 1 BU 1 BU 2 54% CO 2 Slump sale of BU 2 Shareholders 100% Slump sale of BU 2 to WOS against cash Shareholders 100% Slump sale of BU 2 against shares of CO2 CO 1 BU 1 BU 2 100% Slump sale of BU 2 CO 1 BU 1 BU 2 54% Slump sale of BU 2 WOS CO CO 2 Page 24

25 Slump sale - Key Implications Income Tax Special provisions to compute capital gains on slump sale Cost of acquisition = Net worth of the undertaking Capital gains = Slump sale consideration less net worth of the undertaking If the undertaking is held for more than 3 years gains on transfer to be LTCG, else STCG Indexation benefit not available in computation of LTCG Net worth of the undertaking = aggregate value of total assets less the value of liabilities Aggregate value of total assets = WDV of block of assets (for depreciable assets) plus book value (of other assets) Revaluation of assets to be ignored Assessee to furnish a report of CA indicating the computation of the net worth of the undertaking and certifying that such net worth has been correctly arrived Implications in the hands of Buyer PPA of the lumpsum consideration could be made for ascertaining WDV Excess consideration paid over the value apportioned to the assets is generally treated as Goodwill - no depreciation is likely to be allowed on the same Page 25

26 Slump sale - Key Implications Income Tax Implications in the hands of Seller Future depreciation to Seller after reducing tax WDV of the assets transferred Losses of undertaking not allowed to migrate Companies Act, 2013 Special resolution required for sale/lease/disposal of whole or substantially the whole undertaking substantially the whole of undertaking defined as 20% of more of value of undertaking as per audited balance sheet of preceding financial year Undertaking defined as undertaking which has investments > 20% of networth of preceding financial year generates 20% of total income of preceding financial year Stamp duty In Gujarat - leviable on immovable 4.97% and Intangibles / 2.8% Page 26

27 Itemized sale Page 27

28 Itemized sale Concept Involves transfer of business wherein consideration is identified against each asset In consideration, the Buyer Co pays cash to the Seller Co No Court approval required Can be achieved through shareholder resolution Key Aspects Not necessary what is transferred constitutes a business undertaking No requirement for the Buyer Co to continue to undertake the business Payment of consideration Seller Co Buyer Co Other assets Selected Assets Sale of assets Post itemized sale scenario Shareholders Shareholders Seller Co Buyer Co Other assets Selected Assets Cherry Picking of assets and allocation of value to individual assets based on their inherent commercial advantage Page 28

29 Itemized sale - Key Implications Income-tax Capital gains to be computed for each item of capital asset sold LTCG if asset held for > 3 years STCG if asset held for up to 3 years Provisions of Section 50 shall apply in the case of sale of depreciable assets that form a part of a block of assets Provisions of Section 50C apply in case of sale of capital asset being land / building Stamp duty value to be considered as full value of consideration for computation of capital gains Companies Act, 2013 Special resolution required for sale/lease/disposal of whole or substantially the whole undertaking substantially the whole of undertaking defined as 20% of more of value of undertaking as per audited balance sheet of preceding financial year Undertaking defined as undertaking which has investments > 20% of networth of preceding financial year generates 20% of total income of preceding financial year Stamp duty In Gujarat - leviable on immovable 4.97% and 2.8% Page 29

30 Slump Sale v. Itemised Sale SLUMP SALE Trade-off between ITEMISED SALE Immediate tax liability Possible litigation on allocation of lump sum consideration Seller Buyer Reduction in future depreciation Transaction Cost (sales tax / VAT, Stamp duty, etc.) Page 30

31 Case studies M&A Page 31

32 Case 1 - Optimization of tax losses Company A Accumulated tax losses in Trading / Distribution business Company B Profit Making Analysis of various options for utilization of tax losses of Trading / Distribution business of Company A Restructuring can be undertaken amongst various Group entities to optimize available tax losses Option I - Merger of Company A in to Company B Losses of Company A may lapse as the Trading / Distribution business may not qualify to be an industrial undertaking Option II - Merger of Company B in to Company A (Reverse Merger) Commercial rationale to be justified Carry forward and set off of losses may be affected if there is significant change (more than 49%) in shareholding of Company A Stamp duty costs to be analyzed Option III - Demerger of Company A s Trading / Distribution business in to Company B No restriction as to demerged business being an industrial undertaking No conditions as to continuing loss making business of Company A Option IV - Demerger of profit making business of Company B in to Company A Commercial rationale to be justified Carry forward and set off of losses may be affected if there is significant change (more than 49%) in shareholding of Company A Stamp duty costs to be analyzed Page 32

33 Case 2 Mitigating NBFC exposure Promoters A Co is the Group Hold Co solely for the purpose of Shareholding in multiple entities A Co An RBI Circular* prescribes criteria under which an entity may be considered as an NBFC entity. As per the said circular, The company will be treated a non banking financial i company (NBFC) if its financial assets are more than 50% of its total asset (netted of by intangible assets) and income from financial assets is more than 50% of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company. Co 1 Co 2 Co 3 Co 4 Thus, a company will not be classified as an NBFC if: If its financial assets are NOT more than 50% of its total assets (netted off by intangible assets) OR *Circular : RBI/ /158 DNBS (PD) C.C. No. 81 / / / If its income from financial assets is NOT more than 50% of its gross income In the present case, since the A Co will have most of its income from financial assets (i.e. dividend income from shareholding, interest income, etc.), it would be considered as an NBFC and will have to comply with the prescribed RBI Guidelines governing NBFCs for reporting and compliance purposes Page 33

34 Case 2 Mitigating NBFC exposure Promoters Trading activity A Co Option to Mitigate NBFC exposure: Co 1 Co 2 Co 3 Co 4 interest income, etc.) A Co to undertake business operations i.e. trading/ distribution activity which may be supplement the overall business operations of the other Group entities The income from such trading/ distribution activity undertaken by A Co should be more than 50% of the total income earned by A Co (including income from its financial assets i.e. dividend income, interest income etc ) Both the conditions of the RBI circular need to be satisfied by A Co in order to be classified as an NBFC Since the income earned by A Co from its operating activity would be more than 50% of the total income earned, it would be possible to mitigate NBFC exposure Page 34

35 Case 3 Separation of core and non core business Promoters Public Promoters 78% 22% X Co Y Co IT Non IT Background Xi is engaged din ITb business and non ITb business Objective Separation of non IT business into an unlisted company Ensure compliance with minimum public shareholding requirements of 25% in X Co Value unlocking of diversified business and Allow respective business group to grow independently while benefiting from sharing of the X Co brand Page 35

36 Case 3 Separation of core and non core business Promoters Public 78% 22% X Co Issue of shares Y Co IT Non IT Demerger Salient features of demerger scheme Demerger of non IT business into Y Co Y Co to be an unlisted company Exit options given discussed in subsequent slides Page 36

37 Case 3 Separation of core and non core business - Salient features Options Particulars Resident shareholders (either of the following three) 1 Allotment of Receive one 7% RPS in Y Co (face value Rs 50), for every five equity Redeemable shares of X Co Preference Maturity period 12 months and redeemable at Rs 235 Shares (RPS) 2 Allotment of Receive 1 equity shares (Face Value Rs 10) of Y Co for every 5 shares (face equity value Rs 2) in X Co 3 Equity swap (Default option) Subsequent to receipt of equity shares of Y Co as above, exchange such equity shares of Y Co for X Co shares, swap ratio being 1 share for every 1.65 equity shares in Y Co Options Particulars Non resident shareholders (except ADR holders) (either of the following two) 1 Allotment of equity Receive 1 equity shares (Face Value Rs 10) of Y Co for every 5 shares (face value Rs 2) in X Co 2 Equity swap Subsequent to receipt of equity shares of Y Co as above, exchange such (Default option) equity shares of Y Co for X Co shares, swap ratio being 1 share for every 1.65 equity shares in Y Co Page 37

38 Case 3 Separation of core and non core business - Salient features Options ADR holders Allotment of equity and compulsory swap Particulars Receive 1 equity shares (Face Value Rs 10) of Y Co for every 5 shares (face value Rs 2) in X Co; and Exchange such equity shares of Y Co for X Co shares, swap ratio being 1 share for every 1.65 equity shares in Y Co Resultant Structure Issues / Concerns Promoters 74% X Co 26% Public Y Co In case of option being exercised by shareholders for share swap there may arise tax implications on such exchange IT Non IT Page 38

39 Case 3 Separation of core and non core business - Tax implications Tax implications in the hands of other shareholders Particulars Resident Non resident Custodians 1 Issuance of RPS Redemption post 12 months Issuance of RPS not taxable COA to be split POH to continue Redemption would be taxable as LTCG NA NA NA NA 2 Equity shares Issuance of equity Issuance of equity Issuance of equity of Y Co shares not taxable shares not taxable shares not taxable COA to be split COA to be split COA to be split POH to continue POH to continue POH to continue 3 Subsequent Swap Subject to capital gains tax Subject to capital gains tax Subject to capital gains tax Page 39

40 Case Study 4 U Ltd J Ltd Background for Restructuring Background U Ltd belongs to AB Group. It is one of the leading cement manufacturing companies in India JLtd Ltd. is a wholly owned subsidiary of JPA, another Indian Business Group The Western Cement Division of J Ltd is located in Gujarat and sells cement in Gujarat and neighboring states Under this Scheme ULtd acquires the Western Cement Division of J Ltd through a demerger process under a Scheme of Arrangement Objectives U Ltd Availability of assets in Gujarat to cater to the growing western market Synergies in operations and economies of scale Promoter Public 62.96% U Ltd 37.04% JPA Creation of value for the shareholders 100% Objectives J Ltd J Ltd Unlocking the value of the assets of the transferor company and creation of value for the shareholders Deleveraging the balance sheet of JLtd Ltd, including reduction of debt and interest outgo Other Cement Divisions Western Cement Division Page 40

41 Case Study 4 U Ltd J Ltd Restructuring Mechanics Demerger of Western Cement Division i i into ULtd The enterprise value of the transaction is Rs 3,800 crore of which Rs 3,665 crore is debt, which U Ltd will inherit from the demerged unit of J Ltd Consideration for demerger An amount of Rs 3800 crs Reduced by the financial indebtness of Rs 3665 crs Increased by the net working capital of Rs crs Adjustment to be made for Net Debt, WC and Fixed Assets on Closing date Capped at 150 crs Share entitlement ratio Consideration / price per share of U Ltd In consideration of demerger, U Ltd to issue equity shares: 1 equity share of Rs 10 fully paid up against every 10,00,000 preference shares of Rs 100 each of J Ltd 7.7 equity shares of Rs 10 each for every 6000 shares of J Ltd ( Valuation only indicative) The balance shares from the share entitlement to be distributed among the equity shareholders of J Ltd on proportionate basis Appointed Date = Effective Date = Closing Date (conditional on HC, SEBI and CCI Order) 100% JPA J Ltd Promoter U Ltd Other Western Western Cement Cement Cement Divisions Division Division Demerger of Western cement division into U Ltd 100% JPA J Ltd Other Cement Divisions 62.96% Promoter U Ltd Western Cement Division 62.77% 37.04% 37.23% Page 41 Public Public

42 Case Study 4 U Ltd J Ltd Restructuring Key implications Implications under the Income tax Act 1961 Is there more to pre-deal structuring by JPA? J Ltd acquired demerged business in a court approved slump sale from JAL w.e.f April 1, 2011 JAL recorded profit on sale as Capital Reserve on demerger MAT Implications Tax on slump sale to WOS? Demerger - In compliance with Section 2(19AA) of the Income tax act, 1961? Regulatory aspects: Approval of the shareholders and the creditors and Jurisdictional High Court required Approvals from the Stock Exchange and Securities and Exchange Board of India Approval of the Competition Commission of India ( CCI ) CCI Penalty precedence Coordinated action of the Association members in the industry Zonal leaders create price benchmarks Valuation report - Unique in many ways to reflect commercial deal Price of U Ltd shares fluid Only an indicative valuation report given Page 42

43 Case Study 5 Consolidation of business in separate listed companies Background ABC group is engaged in P and Q businesses carried out through h 2 listed entities as under: Pre restructuring structure ABC engaged in P business and Q business ABC Family Trust Objective XYZ engaged in Q business Consolidate Q business Increase promoter shareholding in XYZ as well as ABC without any cash infusion 70% ABC Ltd Q P 60% Public Public ABC Family Trust to continue holding stake in XYZ Ltd ABC post restructuring Q Minimal transaction costs Page 43

44 Case Study 5 Consolidation of business in separate listed companies Salient features Key mechanics Incorporation of D Ltd. Trust, an investment holding company and transfer of shareholding of ABC Ltd. Demerger of Q Business from ABC Ltd to XYZ Ltd; and Merger of D Ltd into ABC Ltd Appointed date Demerger 01 April 2008 Merger 01 July 2008 Consideration Demerger four equity shares of XYZ Ltd for every fifteen equity shares held in ABC Ltd Merger Cancellation of existing share of ABC Ltd and issue of new shares to ABC Family Trust 1 Incorporation of D Ltd. and transfer of shareholding to it 2 Demerger of Q division of ABC Ltd into XYZ Ltd 3 Merger of D Ltd into ABC Ltd ABC Family Trust 100% DLtd. 72% ABC Ltd. Q P 62% XYZ Ltd Q Business Public Public Page 44

45 Case Study 5 Consolidation of business in separate listed companies Resultant structure Date Key events ABC Family Trust 74% ABC Ltd. P Business 71% XYZ Ltd Q Business Public Public 13 Feb June Jul Sep Oct Jan Feb Feb 2009 Incorporation of D Ltd Transfer of ABC Family Trust s shareholding in ABC Ltd to D Ltd ABC Ltd Board approval for Scheme Shareholders and creditors approval for Scheme High Court approval for the Scheme Record date for demerger Amalgamation record date Listing of XYZ Ltd shares issued on demerger 02 Mar Listing of ABC Ltd shares issued on 2009 merger Page 45

46 Case Study 5 Consolidation of business in separate listed companies - Objectives Stated objectives Consolidation of Q Business division in XYZ Ltd to ensure Economies of scale and future investment Separation of businesses Concentration ti on core businesses Better investment in manufacturing and R&D for Q Business Better alignment of network and reach of distribution and priorities to accelerate the Q Business Amalgamation of D Ltd with ABC Ltd to ensure ABC Ltd regains control over XYZ Ltd Other objectives achieved Increase in the Promoter shareholding of ABC Ltd & XYZ Ltd Creation of International Business Development Reserve of Rs 200 crores by ABC Ltd Page 46

47 Case Study 5 Consolidation of business in separate listed companies - Issues Whether the new Take Over Code be triggered on transfer of shares by ABC Family Trust to D Ltd? Created International Business Development Reserve by transferring Rs 200 crores from its Securities Premium Account for incurring various acquisition related costs Is creation of such reserve for EPS adjustment possible now? Given the April 05, 2010 amendment on auditor s certificate certifying compliance with the accounting standard.. file an auditor s certificate to the effect that accounting treatment contained in the scheme is in compliance with all the Accounting Standards specified by the Central Government in Section 211(3C) of the Companies Act, 1956 Page 47

48 Outbound Investments by Indian entities Page 48

49 Outbound Investment - Investments made directly through India Investments by Indian entities in overseas entities (Joint Ventures/ Wholly owned subsidiaries) in compliance with the RBI ODI Guidelines, may be made: Directly from India Through an intermediary entity in a tax friendly jurisdiction Structure Indian Co Overseas Co Investments by Indian entities in overseas entities (Joint Ventures/ Wholly owned subsidiaries) directly from India may have some tax and regulatory challenges: Possible higher withholding tax (WHT) on dividend, interest, royalty payments etc Capital gains tax implications in India in case of future exit/ divestment of stake in such Overseas Co Other regulatory and compliance challenges It may be possible to mitigate/ minimize such tax and regulatory challenges by having an intermediary company for making such overseas investments Page 49

50 Outbound Investment - Investments made directly through intermediary entity TFJ Lender Overseas Debt Structure Indian Co Equity Intermediary Hold Co Equity and/or Debt Overseas Operating Co Possible advantages: Minimising WHT on upstream payments Foreign sourced income may be tax exempt/ taxed at a lower effective rate in Hold Co jurisdiction Possibility of optimising foreign tax credits Capital gains tax exemption in Hold Co jurisdiction Key considerations: Commercial rationale Level of operations at Hold Co GAAR when introduced d Direct Taxes Code Need for raising funds Availability of foreign exchange earnings Page 50

51 Outbound Investment Considerations while deciding on an Intermediary jurisdiction The following parameters need to be considered while deciding on a jurisdiction for establishing an intermediary holding company to make overseas investments from India: Favourable treaty network with respect to dividend streams; Dividend repatriations from the overseas Operating Co to Hold Co in a tax efficient manner; Dividend repatriations from the Hold Co back to India in a tax efficient manner; Capital gains tax implications/ exemption considering domestic rules of Hold Co jurisdiction and tax treaties; Taxation of interest flows Favourable treaty network with respect to interest streams; Anti avoidance rules, if any, under the Hold Co jurisdiction Exchange control regulations in India and Hold Co jurisdiction; Proposed Direct Tax Code regulations relating to Controlled Foreign Corporation (CFC) and Place of Effective Management (POEM) Page 51

52 Outbound Investment RBI Regulations Investment limits RBI Overseas Direct Investment Guidelines specifically allow for Investments to be made in a JV/ WOS abroad directly or through the medium of an Special Purpose Vehicle (SPV) under the Automatic ti Route Outbound Investments in certain circumstances would require prior RBI approval The amount of such investment should not exceed 100% of the Net worth of the Indian partnership firm (as on the date of the last audited balance sheet) making such overseas investment in the JV/ WOS There is a prescribed mechanism to compute total financial commitment to be included within the limit of 100% of Net worth Compliance requirements: Form ODI (along with its applicable Annexures) Annual performance report Annual Return on Foreign Liabilities and Assets to be filed by July 15 of every year Page 52

53 Succession Planning Page 53

54 Succession Planning An Overview What is Succession planning? Building a robust structure in conformity with applicable succession laws for Perpetuating/ preserving/ maintaining/ holding the family wealth for generations Flexibility to distribute economic interests in desired proportions to family members and at desired time; Regular income flow for family members; Benefits / Value provided by Succession planning: Smooth transition of wealth to the next generation Segregation of economic interest and management control Segregation of business and personal assets Mitigation of inheritance tax (if levied in future) Simplification of group structure goes hand in hand with estate planning facilitating liquidity to Promoters with minimal tax leakage Page 54

55 Family business in India India has highest percentage share of family businesses ( FB ) in Asia* 67% of total t listed companies with market capitalization ti of each exceeding more than $50mn** accounts for family businesses in India Two out of three listed companies in India are family controlled** Family businesses account for more than 85% of businesses in India*** FBs represent a sustainable and profitable growth sector in India * Source: Reuters, Nov 2011 * * Source: Times of India February 5, 2012 study conducted by Credit Suisse * ** Source: Financial Express June 2012 Page 55

56 Family business in India Typical Characteristics Complex and multi-tiered cross holding structures Multiple operating entities for Historical reasons Challenge of liquidity for promoters Typical Characteristics of Indian business Personal and Business assets held in same structure Extended joint families with diverse family members running various businesses Promoter shareholding spread among various individuals, relatives & promoter held companies Page 56

57 Key drivers for succession planning and group restructuring To balance/ align economic interest & management control of various businesses Preserve and perpetuate economic interests & control in family Pre-empt potential family conflicts Streamline shareholding in terms of economic interest & voting rights Ensure ownership and control given to the successive generations in the desired d manner Segregation of business assets & non-business assets Clear demarcation of wealth at the same time ensuring continuity of business Exit flexibility for each branch of family Ensuring control of each business/ asset vests in desired manner Flexibility of making funds available to family members at desired time in desired proportion Recurring consistent cash flows Flexibility to deploy funds generated in businesses Potential levy of estate duty if re-introduced Forced Heirship rules EST AT PLANNING Streamlining the ownership and businesses in desired manner Eliminate cross holding Sector specific holding vehicles Maximisation of cash available for distribution to promoters GROUP RESTRU CTURING Minimise DDT inefficiency on repatriation of profits as dividends Minimise multiple cash trap Group restructuring may go hand in hand with Succession planning Page 57

58 Succession planning - Popular strategies Use of discretionary trusts Gift of or detachment from assets well ahead of time Use of companies as holders of assets Restrictive provision in well designed partnership deed to introduce companies or young members to share corpus Partnership re-organization for adequate commercial justification Gift or assignment of life interest in assets, or of insurance policies Partition of HUF, including unequal partition Cross insurance on life of spouse and MWP policies Page 58

59 Case Studies - Succession Planning Page 59

60 Case Study 1 - Family structure First Generation Brother 1 Brother 2 Second Generation Son 1 Daughter 1 Son 1 Son 2 Third Generation Child 1 Child 2 Child 1 Child 1 Page 60

61 Case Study 1 - Family business: Typical assets and pattern of holding Brother 1 / Brother 2 and their respective branch of family Resident/ Non-Resident Indian/Overseas Citizen Assets Directly held by Indian Assets Overseas Assets Individual, or Held through single/ multi tiered holding structures Business Assets Non-Business Assets such as: Shares/securities Shares/securities Offshore/Indian: Interests in Interests in Company Partnership Firms Partnership Firms Listed LLPs LLPs Unlisted Intellectual Property Intellectual Property NBFC / CIC Real Estate Lifestyle Assets Gold Currencies Other commodities Partnership Firm LLP Page 61

62 Case Study 1- Present group holding structure Brother 1 Brother 2 100% 90% 40% 40% C Holding Company 5 45% 100% F SPV for holding Residential property 1 20% Holding Company 1 60% 20% A 20% 80% Holding Company 2 SPV for holding 100% Residential F property 2 10% Holding Company 55% Holding Company 4 C 3 (IP housed here) 25% 100% SPV for holding Residential F property 50% 3 20% 100% 100% 45% Business 2 (listed) Business 4 Business 5 (listed ) Public 35% Business 1 D Business 3 25% 20%D Public Page 62

63 Case Study 1 Resultant structure post Group Restructuring & Estate Planning Brother 1 Brother 2 Son 1 Daughter 1 Son 1 Son 2 Economic ownership Economic ownership SPV for holding Residential property 1 Economic ownership to vest SPV for holding Residential property 2 SPV for holding Residential property 3 with Brother 1 & Brother 2 along with their respective families & charity Global Holding Vehicle + IP (Co/ LLP/ PF/ Trust) Discretionary Trust; or Determinate Trust Sector Hold Co Sector Hold Co Sector Hold Co Sector Hold Co Sector Hold Co Business 1 Business 3 Business 5 Business 2 Business 4 To provide flexibility of generating liquidity, some portion of assets may not be held jointly - could be held separately for each branch Page 63

64 Case Study 1 Possible Alternate structure post Group Restructuring & Estate Planning Charity Brother 1 & family Brother 2 & family Charity Beneficiaries Beneficiaries Discretionary Trust 1 Discretionary Trust 2 50% 50% Sector Hold Co 1 Sector Hold Co 2 Sector Hold Co 3 Sector Hold Co 4 Sector Hold Co 5 IP Hold Co 100% 100% 100% 100% 100% 100% Business 1 Business 2 Business 3 Business 4 Business 5 IP Page 64

65 Case Study 2 Family Structure First Generation Second Generation Son 1 and Daughter 1 Daughter 2 Family and Family and Family Third Generation (minor) Son 1 Son 2 Son 1 Son 2 Page 65

66 Case Study 2 Structure pre restructuring Family A Co 100 % Family XCo 100 % Family members Listed company Holding company Unlisted companies Other than promoters Family 8% Public Y Co 92% Family 80% Public 3% B Co 20% 75% Z Co 2% 57% Family Public List Co 3% 40% Page 66

67 Case Study 2 Key objectives Sustaining business continuity Unanimous decision required for exit of control & management Desired liquidity and flexibility in hands of individual branch of the family Flexibility to distribute ib t economic interests t in desired d proportions and at desired d time Flexibility to assume desired operational roles Facilitate philanthropic initiatives Objectives: 51% stake in List Co and stake held by corporate entities in B Co and Z Co will be under joint family trust; and 3% stake in List Co will be under respective discretionary trusts Facilitate enjoyment of economic interest in operating entities between siblings equally Page 67

68 Case Study 2 Resultant structure Trustee Trustee Trustee Branch 1 family members, entities, etc Branch 2 family members, entities, etc Branch 3 family members, entities, etc Trust 2 Trust 3 Trust 4 Public Trustee Trust 1 80% 80% 20% 51% B Co Z Co List Co Public Public 40% 9% Page 68

69 Case Study 3 - Family structure First Generation Second Generation Daughter 1 Daughter 2 Third Generation Child 1 Child 2 Child 1 Page 69

70 Case Study 3 Possible Resultant structure Daughter 1 & family, entities, etc Daughter 2 & family, entities, etc Trust 1 Trust 3 50% 50% 100% 100% Op Co1 Trust 2 Op Co 3 100% Op Co 2 Page 70

71 Case Study 4 Family Structure Non-residents First Generation Second Generation Son 1 and Daughter 1 Daughter 2 Family and Family and Family Third Generation (minor) Son 1 Son 2 Page 71

72 Case Study 4 Possible Resultant structure Trustee Trustee Trustee Branch 1 family members, entities, etc Trust 2 Trust 3 Trust 4 Trust 1 Offshore Trustee Onshore Branch 2 family members, entities, etc Op Co Branch 3 family members, entities, etc Page 72

73 Succession planning: Key elements Succession planning could be achieved through a mix of - Structures Arrangements/ Agreements Holding company Partnership firm LLP HUF Trust Family constitution Family arrangement Shareholders Agreement Memorandum & Articles of association Partnership Deed/ LLP Deed Transfer Deed Trustee Memorandum Trust deed Letter of Wishes by Settlor Operating protocol Will Trustee Partnership Deed/ LLP Deed Professional / Family owned Individual / Entity Administrator / Protector Beneficiaries Individual / Entity Charity element to pursue philanthropic objectives Family Office Page 73

74 Succession planning & group restructuring Key regulations involved Specific rules and procedures laid for certain industries eg. telecom, real estate, etc IP & other sector/ industry specific regulations Tax Mergers/demergers Share transfers Protection of tax attributes SEBI regulations Tax leakage on cash flows Transfer Pricing Regulations Delisting regulations ICDR regulations ToC regulations Disclosure requirements Applicable succession laws Forced Heirship Rules Relevant Succession Laws Key regulations Competition regulations Approval A l from CCI on merger/ demerger/ acquisition, etc if asset/ turnover exceeds specified limit Pricing Guidelines Conditions for ODI FDI policy for downstream investment ECB regulations Foreign Exchange Regulations /FDI Guidelines Company law Specific conditions for buyback, capital reduction Scheme for merger, demerger, etc to be in line with s Applicability Registration Reporting requirements NBFC/CIC regulations Stamp duty Transfer of: Immovable property Shares Manner/mode of transfer Conveyance on court schemes Page 74

75 Concluding thoughts Succession planning would help in - Segregation/ Streamlining of: Economic interest and control Business and non-business assets which permits smooth transition of wealth Bringing clarity as regards succession plan amongst family members Maintaining unity and peace between family members Preserving family wealth and name Ensuring seamless and smooth functioning of the family businesses Important to recognize the need to plan & put in place an appropriate structure & arrangement The Right Time is Now!! Page 75

76 Thank You!

77 Glossary Abbreviations Particulars Abbreviations Particulars Hold Co Holding Company HC Jurisdictional High Court Sub Co Subsidiary Company SEBI Securities and Exchange Board of India Co Act Companies Act, 1956 IT Act Income Tax Act, 1961 CG Central Government CCI Competition Commission of India WOS Wholly owned subsidiary OCI Overseas Direct Investment LTCG Long Term Capital Gains RBI Reserve Bank of India STCG Short Term Capital Gains GAAR General Anti Avoidance Rules FDI Foreign Direct Investment CFC Controlled Foreign Company WDV Written Down Value POEM Place of Effective Management NBFC Non Banking Financial Company JV Joint Venture RPS Redeemable Preference Shares ECB External Commercial Borrowings POH Period of Holding COA Cost of Acquisition Pacifica Group Restructuring - Draft for discussion purposes National onlytax Convention Business restructuring and Succession Planning Page 77