Inbound M&A Deals on I-T Department’s Radar

The Tax department has fixed its eagle eye on yet another target — this time it's inbound mergers and acquisitions (M&As). Forty companies are said to have received notices and the total tax demand could exceed Rs 4,000 crore, according to estimates. Income tax isn't levied on inbound foreign direct investment (FDI) to encourage the inflow of overseas money. But the revenue department has cited Section 68 of the Income Tax Act, which deals with "unexplained cash credits," to impose a hefty 34 per cent levy on a part of the transactions. While ETcould does not confirm the total demand under this provision, it adds up to more than Rs 500 crore in two cases. The 40 Indian companies that got the tax demand include Credit Suisse, Godrej Properties, Kohinoor Infrastructure and Carat Media, according to the documents that ET has seen. They are among at least eight that have filed writ petitions in the Bombay High Court. The latest move comes as the Narendra Modi government has been pushing hard to change its image as a tax aggressive jurisdiction to attract overseas investment. To this end, it has declined to challenge tax rulings that have gone in favour of companies besides easing norms on minimum alternate tax—moves that have gone down well with overseas investors. INEXPLICABLE PREMIUMS The reasoning behind the tax demand stems from what the department seems to construe as inexplicable premiums being paid by foreign buyers "The department suspects that these companies have provided some services to the foreign investors, and instead of payment the money is routed as capital investment to save tax. The department is also suspicious about the source of these investments," a person close to the development told ET. Many real estate and infrastructure transactions at SPV (special purpose vehicle) level have also come under I-T scrutiny Foreign Exchange Management Act (FEMA) norms require unlisted Indian companies to get themselves valued by an independent chartered accountant. The company cannot sell shares at below this price, a rule aimed at ensuring that shareholders are protected. Paradoxically, the revenue department's attention has been drawn by overseas buyers paying significantly higher amounts than the valuation. The 34 percent tax has been imposed on this 'premium. Informally, many tax experts have started referring to the tax as an "inverse Vodafone tax." In that case, the I-T department had said the company had underreported its valuation. [Source: - Economic Times] LLP incorporation certificate to have national emblem: Government The government has amended certain rules pertaining to Limited Liability Partnership (LLP) entities, which now require having national emblem on their certificate of incorporation. The changes, effective from 19th October 2015, have been made by the Corporate Affairs Ministry which is implementing the LLP Act. Under the revised rules, the national emblem would be there in the certificate of incorporation. The same would be applicable for certificates of registration on conversion and establishment of a place of business in India. Among others, entities that are converting themselves into an LLP have to intimate the same to the Ministry through a particular form within 15 days from registering itself as an LLP. SEBI mulls mandatory 'Dividend Policy' for listed companies As a debate continues about IPO- bound airline IndiGo doling out hefty dividend payouts to its promoters, markets regulator SEBI is mulling making it must for all listed companies to have a stated 'Dividend Policy'. The move is aimed at helping the investors identify stocks with greater return potential, but the proposed 'Distribution Distribution Policy' would not mean forcing the companies to pay the dividend, a senior official said. Rather, it would require the listed companies as also those looking to get listed through Initial Public Offer (IPO) route to state the circumstances under which their shareholders can or cannot expect a payout, he added. InterGlobe Aviation, which runs the low-cost air carrier IndiGo, has faced criticism from some quarters in recent days upon disclosure in its IPO papers about a dividend payout to the promoters leading to a negative net worth for the company. A final decision may, however, take some time as SEBI is looking to first issue a consultation paper in this regard and the final policy would be framed after taking into account suggestions from all the stakeholders, including the government, companies, and investor group. The policy may also require the companies to disclose a broad formula for dividend calculation. At the same time, SEBI would steer clear of any directive being given to the companies to pay any particular dividend amount as it wants to focus on disclosures rather than being intrusive into financial decisions of the companies, the official said. SEBI International Advisory Body has also suggested to that company as a policy should not be forced to pay a dividend and it is a better idea to explore mandating a Dividend Distribution Policy for corporates. The move follows complaints from a large number of investors during Annual General Meetings that companies are not paying a dividend despite sitting on huge cash piles. Besides raising their voice on this issue before the company management and the promoters at the AGMs, various groups of investors have also written to SEBI in this regard. There have been quite a few cases where some large groups have broken a years-long tradition of paying a dividend. The new policy would seek to encourage the companies to pay dividends if their financials permit so so that the investors can feel that they are also part of the concerned company's growth story. This would also bring in certainty among investors that they can expect a certain portion if the company does well. Globally also, investors have been raising their voice against the companies that are hoarding cash and not distributing their extra profits among the shareholders. A number of companies in India already have a dividend distribution policy, but it is not mandatory under any regulation and therefore there is no uniformity in such policies of different corporates. [Source: - Economic Times] Due-diligence disclosure stump potential acquirers The new insider trading norms have confused potential acquirers. Players are asking for clarity over a clause, which requires price-sensitive information obtained during due-diligence to be made public. The requirement gets trickier for transactions such as private equity investments, where an open offer doesn’t get triggered. (In an open offer, a shareholder is given the opportunity to buy stock at a price that is lower than the current market price. The purpose of the offer is to raise cash for the company.) These regulations only provide for situations when after diligence, the acquirer actually acquires the company. What is not clear is a situation when he does not proceed with the acquisition after conducting the diligence. Sometimes, on the basis of unfavourable findings in the diligence, the acquirers do not proceed further with the acquisition; so in this situation, the question arises what happens to the unpublished price-sensitive information that has been shared with the potential acquirer in the case of an aborted transaction, said Lalit Kumar, partner, J Sagar Associates. The regulations, which came into effect in May, have specific guidelines for disclosure of due- diligence for deals that do not trigger an open offer. The regulations state companies would need to disclose due-diligence two trading days before the completion of deal. However, the regulations are silent on disclosures of due-diligence if the deal is not completed. There is a concern among private equity and venture capital entities, where deal sizes are lower and often don’t trigger the 26 percent open offer. The concern is on the due-diligence disclosure requirement, as not all potential deals are completed. For all mergers and acquisitions, the exercise of due diligence is conducted by the potential acquirer to determine the health of the company and to arrive at an acquisition price. This confusion has led to some deals getting delayed as the companies fear they could be violating the regulations. According to Tejesh Chitlangi of IC Legal, clarity from the Securities and Exchange Board of India is required. To address such confusion, a clarification may be issued by Sebi and till then the parties should rely on general exemption by showcasing that the communication of information was in furtherance of legitimate purposes and for performance of duties, said Chitlangi. It appears that although the regulations are silent, it cannot be the intention that such diligence will not be permitted just because the transaction is aborted after the diligence, said Kumar.