I OVERVIEW OF M&A ACTIVITY

India is the fastest growing major economy2 with a projected gross domestic product of 7.3 per cent in 2019 and 7.5 per cent in 2020.3 India's economy is expected to reach US$2.95 trillion by the close of 2019.4

While aggregate M&A transaction volume decreased (1,640 transactions in 2018 as compared to 1,824 in 2017),5 the aggregate deal value in 2018 (US$129.4 billion) increased from 2017 (US$63.2 billion).6 The increase in value may be attributable to increased sales of stressed assets (pursuant to the corporate insolvency resolution process), consolidation across sectors and a surge in big-ticket transactions.7 India's continuous rise in the World Bank's Ease of Doing Business rankings is also a contributing factor.8

E-commerce, fast moving consumer goods and agro-chemicals witnessed some major deals in M&A in 2018 (see Section V for details). The acquisition of 77 per cent of Flipkart (India's largest e-commerce website) by Walmart Inc for about US$16 billion is the largest-ever

e-commerce acquisition in the world and the largest M&A transaction of 2018.9 In addition, real estate, energy and manufacturing, collectively, witnessed significant activity.10

II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

The principal statutes governing M&A are the Indian Contract Act 1872 (Contract Act), the Companies Act 2013 (Companies Act), the Competition Act 2002 (Competition Act), the Foreign Exchange Management Act 1999 (FEMA), the Insolvency and Bankruptcy Code 2016 (Insolvency Code) and subsidiary legislation.

Listed entities must additionally comply with, inter alia, the Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code), the SEBI (Prohibition of Insider Trading) Regulations 2015 (Insider Trading Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations).

i The Contract Act

The Contract Act sets the paradigm for definitive agreements. Importantly, non-compete stipulations are relatively limited, and damages will not be awarded in excess of the loss suffered. Concomitantly, liquidated damages are, effectively, a cap on damages that may be awarded depending on the extent of loss proved. Punitive damages are not awarded.

ii The Companies Act

The Companies Act addresses company law including mergers and restructuring, while the Insolvency Code applies to insolvency resolution and liquidation.

Public companies are subject to more onerous compliance requirements than private limited companies.

The Companies Act was amended in 2018 primarily with a view to creating greater transparency in corporate structures while also increasing the ease of doing business in India. The key amendments include the introduction of provisions to determine significant beneficial ownership and, therefore, significant influence or control over an Indian company; simplification and liberalisation of the private placement process; and easing of the restrictions on providing loans to group companies.

Authority and capacity

The board of an Indian company must approve any acquisition or divestment of shares. If the aggregate of the consideration (including for business or asset transfers) and the amount of guarantees or securities extended by the company (to a company other than any of its wholly owned subsidiaries), or proposed to be extended, exceeds the greater of 60 per cent of the acquirer company's paid-up capital, free reserves and securities premium account, or 100 per cent of its free reserves and securities premium account, then at least 75 per cent of the shareholders must also approve.

Pre-emptive rights, restrictions on transfers, puts and calls

The Companies Act mandates free transferability of shares of a public company but recognises private arrangements between its shareholders as valid contracts. Implicitly, pre-emptive rights and restrictions on transfers are enforceable inter se shareholders.

Types of companies

Public, private, sole trader and small companies are permitted. The latter two are geared towards promoting domestic entrepreneurship.

Schemes of merger and demerger

The Companies Act permits schemes of compromise or arrangement between a company and all or a class of its creditors or members. Schemes can effect a restructuring, merger, demerger, hive-off or other reorganisation.

Every scheme must be approved by the board of each company concerned, at least 75 per cent of the shareholders of each company and at least 75 per cent of the creditors, and subsequently sanctioned by the relevant National Company Law Tribunal (NCLT).11

Schemes involving listed companies require SEBI and stock exchange prior approval at two stages: one month before the application to the NCLT for sanction and after NCLT sanction.

Schemes involving foreign companies require approval from the Reserve Bank of India (RBI) before filing with the NCLT. The transferee company must ensure that the valuation in respect of such schemes is conducted by recognised professional valuers in accordance with the internationally accepted principles on accounting and valuation.

Resident directors and independent directors

Under the Companies Act, every Indian company must have at least one director who was resident in India for at least 182 days during the financial year; this period is proportionately adjusted for newly incorporated companies at the end of the financial year of incorporation. Every public company, whether listed or unlisted, must additionally have at least two independent directors if its paid-up capital exceeds 100 million rupees, its turnover exceeds 1 billion rupees or its debt exceeds 500 million rupees.

Related-party transactions

The Companies Act defines a related party as including holding, subsidiary and associate companies12 (including foreign companies) and entities in which directors are interested. All contracts with related parties that are not at arm's length must be approved by the board in meeting and, where the consideration exceeds specified thresholds, by a shareholders' resolution.

iii The Competition Act

Regulation of combinations

The Competition Act prohibits persons or enterprises from entering into a combination that has or is likely to have an appreciably adverse effect on competition within the relevant market in India.

Separately, the Competition Commission of India (Competition Commission) must approve a combination if the assets or turnover of the entities proposing to combine exceed prescribed thresholds. In the case of a business or asset transfer, an exemption from approval of the Competition Commission is available if the value of the relevant assets being transferred or the turnover attributable thereto is within the thresholds.

The Competition Commission publishes a summary of every notice of a combination received for stakeholders to review and submit their comments. It approves a combination based on, inter alia, the actual and potential levels of competition in the market, barriers to entry, market share, perceived benefits and the perceived adverse impact of the combination.

Mergers or amalgamations

The thresholds above which notice of a merger must be filed are as follows:

Enterprises considered for valuation Thresholds in India Aggregate global threshold
Enterprise remaining after the merger or created as a result of the amalgamation Asset value: more than 20 billion rupees Asset value: more than US$1 billion, including at least 10 billion rupees in India
Turnover: more than 60 billion rupees Turnover: more than US$3 billion, including at least 30 billion rupees in India
The group* to which the enterprise remaining after the merger or created as a result of the amalgamation will belong Asset value: more than 80 billion rupees Asset value: US$4 billion, including at least 10 billion rupees in India
Turnover: more than 240 billion rupees Turnover: more than US$12 billion, including at least 30 billion rupees in India

* A group means two or more enterprises that are directly or indirectly in a position to exercise at least 50 per cent of the voting rights in another enterprise to appoint 50 per cent or more members on the board of directors, or control the management or affairs of the other enterprise

Acquisitions

The thresholds above which notice of an acquisition of shares or a business must be filed are as follows:

Enterprises considered for valuation Threshold in India Aggregate global threshold
Target aggregated with acquirer Asset value: more than 20 billion rupees Asset value: more than US$1 billion, including at least 10 billion rupees in India
Turnover: more than 60 billion rupees Turnover: more than US$3 billion, including at least 30 billion rupees in India
Target aggregated with the group to which it will belong Asset value: more than 80 billion rupees Asset value: US$4 billion, including at least 10 billion rupees in India
Turnover: more than 240 billion rupees Turnover: more than US$12 billion, including at least 30 billion rupees in India

An acquirer that already, directly or indirectly, controls another enterprise engaged in a business similar or identical to the target must notify the Competition Commission if the following thresholds are exceeded:

Enterprises considered for valuation Threshold in India Aggregate global threshold
Target aggregated with the enterprise controlled by the acquirer and engaged in a similar or identical business as the target Asset value: more than 20 billion rupees Asset value: more than US$1 billion, including at least 10 billion rupees in India
Turnover: more than 60 billion rupees Turnover: more than US$3 billion, including at least 30 billion rupees in India
Target aggregated with the group to which it will belong Asset value: more than 80 billion rupees Asset value: US$4 billion, including at least 10 billion rupees in India
Turnover: more than 240 billion rupees Turnover: more than US$12 billion, including at least 30 billion rupees in India

Combinations exempt from regulation

The following combinations are, inter alia, exempt from the requirement of notifying the Competition Commission:

  1. acquiring, solely as an investment or in the ordinary course of business, less than 25 per cent of shares or voting rights and not control. Acquiring less than 10 per cent of the total shares or voting rights of an enterprise will be solely an investment if the acquirer is not a member of the board, has no right to nominate any director on the board, has only such rights as are exercisable by an ordinary shareholder, and does not intend to participate in the affairs and management of the target;
  2. acquiring additional shares or voting rights when the acquirer already holds between 25 and 50 per cent of the shares or voting rights;
  3. any acquisition in which the acquirer already holds 50 per cent or more shares or voting rights;
  4. acquisitions of assets by an acquirer's business or acquired solely as an investment or in the ordinary course of business, except where the acquisition represents substantial business operations, or the acquisition leads to acquisition of control;
  5. an acquisition pursuant to a bonus issue or capital restructuring or buyback of shares or subscription to rights issue not leading to acquisition of control;
  6. merger or amalgamation of two enterprises where one has more than 50 per cent of the shares or voting rights of the other, where 50 per cent of the shares or voting rights in each enterprise is held by enterprises within the same group, or both;
  7. until March 2022, an acquisition or amalgamation in which the value of the assets being acquired, taken control of, merged or amalgamated is less than 3.5 billion rupees or turnover attributable to the assets is less than 10 billion rupees;13
  8. until August 2022, any amalgamation of regional rural banks mandated by the central government;
  9. until August 2027, any amalgamation, reconstitution or transfer of the whole or any part thereof of nationalised banks in accordance with special statutes in this regard; and
  10. until November 2022, any combination involving central public sector enterprises14 operating in the oil and gas sectors under the Petroleum Act 1934 or under the Oilfields (Regulation and Development) Act 1948.

The exemptions in points b, c and f are not available if the transaction results in a change in control.

iv Exchange control regulations

The Indian rupee is not freely convertible, and the FEMA and its subsidiary rules and regulations restrict transactions between Indian residents and other persons.

Foreign direct investment (FDI), both primary subscription and secondary acquisition, is permitted in most sectors without prior approval and subject to compliance with conditions separate from licensing or domestic compliance of general application, including those relating to sectoral caps15 and pricing. All FDI must be reported through the government's online FIRMS portal. Investment by a non-resident in less than 10 per cent of the capital of a listed entity will be considered foreign portfolio investment.16

FDI is subject to pricing guidelines. These guidelines require the purchase price of shares to be at least the fair value (in the case of an Indian selling shares) or not more than the fair value (in the case of an Indian acquiring shares) determined by any internationally accepted pricing methodology. The valuation must be contemporaneous with the transaction.

Foreign investors may pay the entire consideration for an acquisition or subscription up front or defer, including through escrow, up to 25 per cent of the total consideration for up to 18 months. Similarly, indemnity obligations to a foreign investor of up to 25 per cent of the consideration are permissible without prior government approval.

v The Insolvency Code

The Insolvency Code contemplates a time-bound resolution of insolvency. The NCLT shall within 14 days of an application being submitted either admit or reject the application. The process under the Insolvency Code, once admitted, is required to be completed within 180 days of the date of admission. A further extension of 90 days may be granted by the NCLT if 66 per cent or more of the committee of creditors approves the extension. No further extension is permitted thereafter. If no resolution plan is approved at the expiry of the 180 or 270-day period, as applicable, the NCLT shall pass an order for liquidation.

Applications, once accepted, may be withdrawn if 90 per cent of the committee of creditors approve the withdrawal.

Currently, certain lacunae exist as, among other things, stakeholders have identified certain limitations under the Insolvency Code that hinder the effective resolution of insolvent companies.17

vi The Takeover Code

The Takeover Code is a comprehensive code that applies to a change of control of listed companies (other than companies listed without making a public issue on the institutional trading platform)18 of a recognised stock exchange. Control includes the right to appoint a majority of the directors, or control the management or policy decisions of a company, and applies to the acquisition of shares or voting rights.

Public offers

Mandatory offers and creeping acquisition

The Takeover Code mandates a public offer on acquiring 25 per cent or more of the voting rights of a listed company and, if a shareholder already holds shares or voting rights to that extent, on acquiring more than 5 per cent of the voting rights of that company in any 12-month period ending on 31 March.

A public offer must be for at least 26 per cent of the total shares of the target company (excluding shares held by the acquirer), subject to maintaining the mandatory minimum public float of 25 per cent.

Voluntary offers

A shareholder with 25 per cent of the shares or voting rights of a listed company may make a voluntary public offer to acquire at least 10 per cent of the voting rights of that company, provided that the mandatory minimum public float of 25 per cent remains unaffected.

Conditional offers

A public offer may be conditional on a minimum level of acceptance and on regulatory approvals.

Consideration and performance surety

An acquirer may offer cash, shares of another listed company, listed debt securities, or any combination of these as consideration for the shares tendered in response to a public offer.

The formula to calculate the minimum offer price is geared to the historical performance of the shares of the listed company. However, if the negotiated acquisition price is higher than the historical trading price, the negotiated price must be the minimum price of the public offer.

Every person making a public offer must deposit monies in an escrow account as performance surety. Indian banks may provide guarantees as surety for non-residents if such guarantees are covered by counter guarantees of a bank of international repute.

Disclosures of shareholding

Every person acquiring 5 per cent or more of the shares or voting rights of a listed company must disclose aggregate shareholding and voting rights to the concerned stock exchange within two working days of the acquisition.

Every person holding 5 per cent or more of the shares or voting rights of a listed company must disclose every subsequent acquisition or divestment of 2 per cent or more of the total shareholding in a company even if such subsequent acquisition or divestment results in the shareholding falling below 5 per cent.

Separate annual disclosures must be made on 31 March each year.

Delisting of target company

A company may be delisted in compliance with the delisting regulations.

The promoters or an acquirer making an open offer under the Takeover Code may offer to purchase shares held by the public, and delisting may be permitted if, following the offer, the promoters hold 90 per cent of the company and at least 25 per cent of the public shareholders have participated in the offer. The acquirer or promoter may make a counter offer if the price determined is not acceptable provided that the counter offer is not less than the book value of the company.

Schemes of amalgamation

The open offer process is not triggered if the shares of a listed company are bought through an NCLT-approved scheme of amalgamation.

Non-compete payments

The Takeover Code provides for any non-compete fees paid to be included in the transaction value, while in a scheme of amalgamation, the same may be paid outside the deal value.

vii Insider Trading Regulations

The Insider Trading Regulations oblige shareholders, promoters, employees and directors of listed companies to disclose any transaction or series of transactions involving shares of a listed company having a trading value of 1 million rupees or more.

Insiders may also formulate irrevocable trading plans that are to be publicly disclosed and mandatorily implemented.

viii LODR Regulations

The LODR Regulations apply to listed entities that have listed specified securities on an Indian stock exchange, and mandate event-specific disclosure and separately, periodic disclosure of, inter alia, changes in shareholding, proposals to change capital structure, information that may have a bearing on the operation or performance of the company, M&A activity, as well as transactions with group companies.

The LODR Regulations prevent directors and key management personnel of a listed entity from entering into compensation or profit sharing agreements with shareholders or third parties in connection with shares of the listed entity without the prior approval of the board and the public shareholders. This proscription was specifically included to regulate arrangements between private equity investors and management of listed entities.

Certain mergers, demergers and schemes of arrangement involving a listed company require approval of the majority of the public shareholders of the listed company.

III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND
THEIR IMPACT

i The Companies Act

The provisions of the Companies Act relating to M&A have recently been notified, changing the M&A landscape significantly.

Merger into a foreign company

Previously, the Companies Act did not permit the merger of an Indian company with a foreign company, and only permitted the merger of a foreign company with an Indian company. However, the Companies Act now permits cross-border mergers with foreign companies in certain jurisdictions, subject to RBI approval.

The RBI has promulgated regulations for cross-border mergers that primarily combine compliances under various regulations and statutes (e.g., pricing guidelines and sectoral caps as discussed above).

Creditors' objections

The Companies Act provides that a scheme of arrangement can be challenged only by shareholders holding at least 10 per cent of the shareholding by value or by creditors representing 5 per cent of the outstanding debt of the company. This should shorten timelines and preclude frivolous objections.

Ease of Doing Business Index

India's ranking improved significantly, from 100 in 2017 to 77 in 2018.19 This improvement can be attributed to the government's continued efforts in this regard, including the migration of several regulatory functions to e-portals, improving the country's position in the enforcing contracts indicator, and the simplification of procedures for tax, labour and corporate regulatory compliance.

ii FDI policy and foreign investment

FDI of up to 100 per cent is allowed in single brand product retail trading under the automatic route for products branded during manufacturing with the same brand as is used globally. This initiative aims to attract a larger number of foreign investors engaged in production and marketing. However, given that local sourcing requirements remain for FDI over 100 per cent, it remains to be seen whether the liberalisation will lead to further FDI.

Further, foreign investment in a company engaged in the business of investing and registered with the RBI as a non-banking financial company (NBFC) would fall under the 100 per cent automatic route. However, foreign investment in core and other investment companies is permitted only under the government route.

iii Startup India

The Startup India initiative promotes entrepreneurship and innovation by helping start-ups secure funding. A start-up is a new entity that is headquartered in India, is less than 10 years old and has an annual turnover of less than 1 billion rupees. Because of the muted success of this initiative, the government made several changes, the most notable being tax benefits to start-ups, as discussed later in this chapter. Certain additional benefits have also been introduced, such as self-certification, funding corpus of 100 billion rupees and concessions on patent and trademark filings. The impact of these changes remains to be seen.

iv Stressed assets

In the past, the RBI has prescribed various routes to be followed by financial institutions for restructuring debt of defaulting borrowers. In February 2018, the RBI notified a new framework mandating that insolvency proceedings be commenced against corporate borrowers where a debt resolution plan was not effected within 180 days. However, in April 2019, the Supreme Court struck down the RBI's new framework as ultra vires. While the RBI is likely to notify new guidelines for debt restructuring, for the present, financial institutions have greater flexibility for the restructuring of debt and disposal of stressed assets, as the somewhat unreasonable 180-day time frame is no longer applicable.

IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS

Foreign investors continue to be key players in Indian M&A with inbound investment increasing by 17 per cent.20

Below is a country-wide summary (top 10 only) of foreign involvement in Indian M&A (in terms of US$):21

Rank Country 2016–2017 (April to March) 2017–2018 (April to March) 2018(April to December 2018) Cumulative inflows (April 2000 to December 2018) Percentage of total inflows
1 Mauritius 15,728 15,941 6,023 132,408 32
2 Singapore 8,711 12,180 12,976 79,747 19
3 Japan 4,709 1,633 2,211 29,519 7
4 United Kingdom 1,483 847 1,056 26,494 6
5 Netherlands 3,367 2,800 2,951 26,433 6
6 United States 2,379 2,095 2,342 24,759 6
7 Germany 1,069 1,124 598 11,420 3
8 Cyprus 604 417 288 9,861 2
9 France 614 511 356 6,593 2
10 United Arab Emirates 675 1,050 299 6,054 1
Total FDI inflows
from all countries
43,478 44,857 33,492 409,268

V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES

i Significant transactions

Flipkart/Walmart

One of the biggest deals of 2018 was Walmart's US$16 billion acquisition of 77 per cent of Indian e-commerce company, Flipkart, making it the largest acquisition in the Indian e-commerce sector to date.

HUL/GSK CH

Hindustan Unilever Limited, one of the largest fast moving consumer goods companies in the country, is set to merge with GlaxoSmithKline Consumer Healthcare Limited to further strengthen its position in the food business and branch into the health and wellness business. With a reported transaction value of US$4.5 billion, the merger is awaiting regulatory approvals.

Larsen & Toubro/Mindtree

Larsen & Toubro (L&T) is in the process of a hostile takeover of Mindtree, an IT consulting company. L&T triggered a mandatory open offer by agreeing to acquire shares from the promoter of Mindtree and placing an order to acquire shares from the secondary market. While the value of the deal was only 80 billion rupees, the transaction is significant as hostile takeovers are rare in the Indian context.

UPL/Arysta

The acquisition of Florida-based Arysta Life Science Inc, by Indian company UPL (formerly United Phosphorus Limited) for US$4.2 billion was the largest overseas deal in 2018. Currently at number nine, after the merger, UPL will be the world's fifth-largest crop protection company.

ii Hot industries

The manufacturing sector was the focus of significant activity, with Tata Steel acquiring Bhushan Steel for US$5.5 billion under a corporate insolvency resolution process, Hindalco Industries acquiring Aleris Corporation for US$2.6 billion and Schneider Electric SA acquiring the electric and automation business of L&T for US$2.1 billion.

iii Key trends

Indian industry is experiencing a digital revolution with each sector capitalising on technology. The growth in the technology sector can be primarily attributed to increased internet penetration and government initiatives facilitating the same.

The real estate sector witnessed healthy activity; some notable deals include the acquisition of controlling interests in Essar Group's Equinox Business Park by Brookfield Asset Management Inc for US$360 million and Indiabulls Properties and Indiabulls Real Estate Company by the Blackstone Group Lp for US$742 million.22

VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS

i Indian banks

Indian banks are precluded from funding M&A other than providing guarantees as surety for offshore acquirers if such guarantees are covered by counter-guarantees of a bank of international repute.

ii NBFCs

NBFCs provide acquisition finance but are subject to exposure norms that apply to business sectors, a single borrower and affiliated companies. Therefore, the available finance is limited and expensive.

While a foreign investor may encumber shares of the relevant Indian company to secure credit facilities raised outside India, prior RBI approval is required if the proceeds of the credit facilities are to be used for further acquisitions, and the required approval is not forthcoming.

iii Leveraged buyouts

Leveraged buyouts (LBOs) are limited in Indian M&A as the Companies Act prohibits a public company from providing financial assistance to any person for the purposes of acquiring the shares of that public company. While this structure does not apply to private companies, LBOs are rare, although slowly gaining ground.

iv Structured investments and structured payouts

Given the difficulties in raising finance from more traditional sources, structured equity and quasi-equity investments are the preferred routes to raise acquisition finance. Consideration may be paid over time on the basis of earn-outs or other specific deliverables being achieved, but as Indian law requires delivery of shares of a public company against payment, transactions must be carefully structured.

VII EMPLOYMENT LAW

Contracts of employment cannot be specifically enforced under Indian law. Therefore, if an employer company undergoes a change in control, there is a de facto requirement to obtain employee consent.

Employees' consent must be handled sensitively, but as long as the terms and conditions of their employment are not adversely affected by a transaction, they are likely to give their consent. In larger industrial establishments, the prior consent of the relevant state government may be required, and this, too, is generally forthcoming.

As contracts of employment are not enforceable by specific performance under Indian law, key personnel may be offered a retention bonus or other incentive as appropriate.

VIII VIRTUAL CURRENCIES

The RBI prohibits all entities regulated by it (i.e., banks, NBFCs and payment system providers) from dealing with virtual currencies, or providing services23 to facilitate any person or entity dealing with virtual currencies. The RBI's proscriptions are currently being challenged before the Supreme Court.

IX TAX LAW

M&A in India are subject to income tax, stamp duty and, in the case of asset sales (including certain business transfers), goods and services tax (GST). However, a business transfer structured as a transfer of an undertaking as a going concern with no specific consideration allotted to each transferred assets (a slump sale) is exempt from GST.

Indian law subjects any gains accruing on the transfer of a capital asset to tax. Capital gains arising from both share transfers (of unlisted shares) and asset transfers are taxed as long-term capital gains if the shares or assets are held for more than 24 months prior to completion of the transaction. In the case of a transfer of listed shares, short-term capital gains tax arises if the shares were held for less than 12 months; if held for more than 12 months, long-term capital gains tax arises. A transfer of listed shares on the market, whether long-term or short-term, is subject to securities transaction tax. From 1 April 2019, capital gains arising from a sale of listed equity shares, units of equity-oriented funds or units of business trusts will be subject to long-term capital gains tax if the shares have been held for more than 12 months and the gain exceeds 100,000 rupees.

Taxable income Short-term capital gains Long-term capital gains* Obligation to deduct tax at source*
Resident assessee (%) Non-resident assessee (%) Resident assessee (%) Non-resident assessee (%) Short-term capital gains (%) Long-term capital gains (%)
Unlisted equity shares Gain on transfer 30 40 or 30§ 20 10 40 or 30§ 10
Listed equity shares on market Gain on transfer 15 15 10 10 15 10
Listed equity shares off market Gain on transfer 30 40 or 30§ 20ll 20ll 40 or 30§ 20
Asset transfer Gain (i.e., difference between sale consideration minus cost of acquisition or indexed cost of acquisition) 30‡ 40 or 30§ 20 20 40 or 30§ 20
Business transfer (undertaking as a going concern) Gain (i.e., difference between sale consideration minus net worth of undertaking transferred) 30 40 or 30§ 20 t 20 40 or 30§ 20**

* This will change where the asset is a business asset and is subject to depreciation. The cost of acquisition would also be increased by indexation benefit as available

† No withholding of tax for resident assesses except for the purchase of immovable property

‡ For individuals, HUF, AOP and BOI, at progressive slab rates

§ 40 per cent in the case of a corporate entity and up to 30 per cent for all other persons

¶ Indexation benefit not available

ll Where tax payable in respect of long-term capital gains on listed securities exceeds 10 per cent of the amount of capital gains before giving indexation benefit, such excess has to be ignored

** In the case of a slump sale, the mode of computation of capital gains will be subject to the mode of computation prescribed as per Section 50B of the Income Tax Act 1961

Note: in the case of non-residents, the benefits of a double taxation avoidance agreement will be available

The rates in the above table may be subject to a surcharge at the following rates:

Individuals
Total income Surcharge (%) Health and education cess (%)
5 to 10 million rupees 10 4
Above 10 million rupees 15 4

Companies
Total income Surcharge (%) Health and education cess (%)
Domestic company
Zero to 10 million rupees Nil 4
10 to 100 million rupees 7 4
Above 100 million rupees 12 4
Foreign company
Zero to 10 million rupees Nil 4 per cent
10 to 100 million rupees 2 per cent 4 per cent
Above 100 million rupees 5 per cent 4 per cent

i Tax efficiencies

For foreign investors, immediate tax efficiency is achieved if the applicable double taxation avoidance agreement permits a lower rate of taxation.

A slump sale is more tax efficient than an asset transfer simpliciter, as it allows for business losses to be carried forward and, as long as the undertaking has been held for more than three years prior to completion of the transaction, gains are subject to long-term capital gains tax notwithstanding that individual assets may have been more recently acquired. 'Slump exchange' structures are gaining popularity on account of their tax efficiency.

An NCLT-sanctioned scheme is also tax efficient if, inter alia, shareholders holding at least 75 per cent in value of the original entity become shareholders in the resulting entity.

The general anti-avoidance rules (GAAR) may also prove to be problematic. GAAR enables the tax authorities to declare an arrangement as an impermissible avoidance arrangement if they are of the view that the arrangement has been entered into with the primary intention of avoiding tax. The law provides that there is a presumption of an arrangement being an impermissible avoidance arrangement, and it is for the taxpayer to demonstrate that it has commercial substance.

ii Developments

After years of uncertainty, attempts are being made to make the tax regime in India more transparent and investor-friendly. While intention is articulated frequently, progress on the ground is, arguably, slow.

Reduced rate of corporate tax

From 1 April 2018, income tax rates of Indian companies having a total turnover or gross receipts of less than 2.5 billion rupees have been reduced from 30 to 25 per cent of the total income.

Tax benefits for start-ups

For start-ups incorporated between April 2016 and March 2021, a 100 per cent deduction of profits is proposed for three out of seven years. Further, start-ups and investors may seek exemption from tax payable out of income from other sources in respect of the issuance of shares at more than fair market value, subject to the fulfilment of the required thresholds.

IX OUTLOOK

India continues to rely on FDI as a significant driver of economic development, and the legislative support for easing business processes should facilitate further investments. Additionally, the resolution and acquisition of stressed assets under the Insolvency Code framework is likely to drive a substantial portion of Indian M&A in 2019 despite protracted timelines for the approval of resolution plans.

While India does seem to be on the cusp of an economic slowdown, the re-elected Modi government, which took office on 31 May 2019, has announced policy measures to stimulate economic growth and M&A activity in India.


Footnotes

1 Justin Bharucha is a partner at Bharucha & Partners. The author would like to thank Ayesha Bharucha, managing associate, for her assistance in the preparation of the chapter.

4 'France back at No.6 in GDP rankings, India slips to No.7 again', Business Today. See https://www.businesstoday.in/top-story/france-back-at-no6-in-gdp-rankings-india-slips-to-no7-again/story/293271.html 

5 'Deals in India: Annual review and outlook for 2019', PricewaterhouseCoopers. See https://www.pwc.in/assets/pdfs/publications/2018/deals-in-india.pdf 

6 'India mergers and acquisitions at record high of $129 billion in 2018', Business Standard. See https://www.business-standard.com/article/economy-policy/m-as-break-records-119011501213_1.html 

7 'Deals in India: Annual review and outlook for 2019', PricewaterhouseCoopers. See https://www.pwc.in/assets/pdfs/publications/2018/deals-in-india.pdf 

8 'Doing Business 2019 (published 31 October 2018)', the World Bank. See http://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf 

9 'Walmart acquires Flipkart for $16 billion in world's largest ecommerce deal', The Economic Times. See https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/walmart-acquires-flipkart-for-16-bn-worlds-largest-ecommerce-deal/articleshow/64095145.cms, and http://gtw3.grantthornton.in/assets/DealTracker/Grant-Thornton-Dealtracker-H1-2018.pdf 

10 'Dealtracker Providing M&A and Private Equity Deal Insights', Grant Thornton. See http://gtw3.grantthornton.in/assets/DealTracker/Grant-Thornton-Dealtracker-H1-2018.pdf 

11 Approval of the NCLT is not required for a merger of two or more small companies and a merger of a holding company and its wholly owned subsidiary.

12 Investing entities will be considered associate companies.

13 This exemption was previously available only in the case of an acquisition, and the value of the assets and turnover of the enterprise as a whole were to be taken into account instead of the value of the assets and turnover being acquired.

14 A central public sector enterprise consists of companies in which the shareholding of the central government exceeds 51 per cent.

15 Illustratively, foreign direct investment in defence is permitted only up to 49 per cent without the prior approval of the government.

16 Aggregate foreign portfolio investment in a company is restricted to 49 per cent or less.

17 Illustratively, certain stakeholders are of the view that where a company undergoing insolvency has inadequate funds to remain afloat, the financial creditors of that company should bear the cost of the insolvency proceedings.

18 An institutional trading platform is a trading platform in a small or medium-sized enterprise (SME) exchange for listing and trading of securities of SMEs, including start-ups.

19 'India Improves Rank by 23 Positions in Ease of Doing Business', Press Information Bureau. See http://pib.nic.in/newsite/PrintRelease.aspx?relid=184513 

20 'M&A Deals in India declined 17% to $25.8 billion in Jan-Mar: Report', Mint. See https://www.livemint.com/companies/news/m-a-deals-in-india-declined-17-to-25-8-billion-in-jan-mar-report-1554396413647.html 

21 'Fact Sheet on Foreign Direct Investment (FDI) from April, 2000 to December 2018', Indian Brand Equity Foundation. See https://www.ibef.org/download/fdi_factsheet_12_march_2019.pdf.

22 'Dealtracker Providing M&A and Private Equity Deal Insights', Grant Thornton. See http://gtw3.grantthornton.in/assets/DealTracker/Grant-Thornton-Dealtracker-H1-2018.pdf.

23 Including maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and the transfer and receipt of money in accounts relating to purchase or sale of virtual currencies.