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Corporate

Restructuring-
An Overview
Vinod Kothari
Vinod Kothari & Company
1012 Krishna
224 AJC Bose Road
Kolkata 700017
Phone 033-22811276/
22813742/ 22817715
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98, Marine Drive,
Mumbai-400002
Phone: 022-22817427
www.vinodkothari.com
Email: vinod@vinodkothari.com
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About Us
Vinod Kothari & Company,
Company Secretaries in
Practice
Based out of Kolkata,
Mumbai
We are a team of consultants,
advisors & qualified
professionals having recently
completed 25 years of practice.
3
Our Organizations Credo:
Focus on capabilities; opportunities follow
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4
Why Corporate Restructuring?
Companies worldwide are refocusing, downsizing and merging
to become globally competitive.
Developing core competence for global / domestic competition,
technological development through collaboration and joint
venture
Divesting non profitable business
Closing down non operating companies
Modes of Corporate Restructuring
Restructuring
Merger/Amalga
mation
Sec 391-396 of
Cos Act
Demerger
Sec 391-396 of
Cos Act
Takeover of
assets/units
Sec 293 of Cos
Act
Takeover of
shares
SEBI
Regulations
Reduction of
capital
Sec 100-101 of
Cos Act
Others
Use of sec premium to
write off loss/expenses
Creation of reserves for
specific purpose
6
An overview
7
What is merger/ amalgamation/
demerger/ re-construction?
Not defined under the Companies Act, 1956
What is defined under Companies Act?
Arrangement- includes a re-organisation of the share capital
of the company by the consolidation of shares of different
classes, or by the division of shares into shares of different
classes or, by both those methods
What is defined under Income Tax Act?
Amalgamation [sec. 2(1B)]
Demerger [2(19AA)]
Meaning of the terms in common parlance:
Amalgamation - combination of two or more independent
business corporations into a single enterprise
Demerger transfer and vesting of an undertaking of a
company into another company
Reconstruction- re-organisation of share capital in any
manner; varying the rights of shareholders and/or creditors
Arrangement- All modes of reorganizing the share capital,
including interference with preferential and other special rights
attached to shares
Regulatory Framework
Companies Act, 1956 [Sec 391-394]
Listing Agreement [for listed companies]
Accounting Standard - 14
SEBI Takeover Code (in case of acquisition by/of a listed
company)
Companies (Court) Rules, 1959
FEMA (in case of merger of companies having foreign capital)
Competition Act, 2002
Income Tax Act, 1961
Indian Stamp Act
Applicable
Indian Laws
Definition of company for the
purpose of Sec 391- 394
Sec 390- company means any company liable to be wound up
under this Act:
Landmark ruling in Khandelwal Udyog Ltd. and ACME Mfg.
Ltd., Re, (1977) 47 Com Cases 503 clarifies the meaning of above
phrase
all companies registered under the provisions of the
Companies Act, 1956
all unregistered or other companies in respect of which
winding-up orders can be made by a court under the provisions
of the Companies Act
Under Sec 394 (4)-
Amalgamation can be done under Sec 391 where the transferor
company is a foreign company
There cannot be an amalgamation where the transferee company
is a foreign company
Provisions in the Companies Act,
1956- Compromise or Arrangement
Coverage:
Compromise & Arrangement between a company and its creditors or any
class of them; or
Compromise & Arrangement between a company and its members or any
class of them;
Who can apply:
company itself
creditors
members
in the case of a company which is being wound-up, the liquidator.
Approvals and sanctions required from:
Dual criteria for approval from members- more than a special resolution
majority of members/creditors, as the case may be, in number
representing three-fourth in value
Sanction from the High Court
Approval from SEBI, in case of listed companies
Vide General Circular 53/2011 dated 26th July, 2011, MCA streamlined
the process of mergers by laying down timelines for ROC and RD while
dealing with such applications
Types of Mergers
Mergers
Horizontal
Between cos dealing in
similar products or
competing directly
with each other
Eg. Idea Cellular with
Spice Communication
Vertical
Between cos operating
in the same industry
but at a different stage
of production
or distribution system
Eg. Uptron Colour
with BPL
Conglomerate
Between cos in
unrelated business, no
competition
Eg ITC Hotels with
ITC Ltd
Reverse
Between profit and
loss making, listed and
unlisted
Eg. KB Mall with
Future Networks
12
Mergers- Broad Process
Valuation & Scheme
BM for approval of
valuation
and Scheme;
authorize director /
company secretary
Application to HC for
direction to convene/
dispense with
shareholders &
Creditors meeting
Dispatch of notices and
issue of public notice
Holding of meeting and
passing of resolution
Filing of chairmans
report with HC
Filing of final petition
Submission of reports
of RD, OL with the HC
Final hearing ,obtaining
order, filing order with
RoC, post order
compliances
13
Companies Court Rules- Procedure
(R 67 to 87)
Rule 67: Formof application
An application for obtaining judges summons for directions to convene a meeting shall
be in Form No. 33, and shall be supported by an affidavit in Form No. 34.
A copy of the proposed scheme of compromise or arrangement is also required to be
annexed thereto.
Rule 68: where the company is not the applicant
A copy of the summons and affidavit is required to be served on the company, or, where
the company is being wound up on its liquidator, not less than 14 days before the date
fixed for the hearing of the summons
Rule 69: Direction to convene meeting(s)
Upon the hearing of the summons, the Judge gives directions (Form No. 35) in respect
of the following matters:-
determining the class or classes of creditors and/or of members whose meeting or
meetings have to be held
the time and place of such meeting(s)
appointing a chairman for the meeting(s)
fixing the quorum and the procedure to be followed at the meeting(s)
notice of the meeting and the advertisement of such notice
the time within which the chairman of the meeting is to report to the Court the result
of the meeting
such other matters as the Court may deem necessary.
Companies Court Rules- Procedure
(contd..)
Rule 70: Replica of requirements of Companies Act regarding meetings
Voting by proxy shall be permitted,
proxy to be prescribed form duly signed and
filed with the company at its registered office not later than 48 hours before the
meeting.
Member company/body corporate shall lodge with the company, certified true
copy of the resolution under section 187 at its registered office not later than 48
hours before the meeting
Rule 73: Format for issue of notice calling meeting
The notice of the meeting shall be in Form No. 36,
Notice shall be sent by post under certificate of posting not less than 21 clear days
before the date fixed for the meeting.
Notice shall be accompanied by a copy of the proposed Scheme and of the
statement required to be furnished under section 393 and a form of proxy in
Form No. 37.
Rule 74: Advertisement of notice
The notice to be advertised in such newspapers and in such manner as the Judge
may direct, not less than 21 clear days before the date fixed for the meeting in
Form No. 38.
Company Court Rules- Procedure
(contd..)
Rule 75: Furnishing copy of scheme on requisition
Every creditor or member entitled to attend the meeting shall be
furnished by the company, free of charge and within 24 hours of a
requisition being made for the same, with a copy of the proposed
compromise or arrangement together with a copy of the statement
required to be furnished under section 393, unless the same had been
already furnished to such member or creditor.
Rule 76: Chairmans affidavit for service of notices
The Chairman to file affidavit of service proving dispatch of individual
Notices to the shareholders and publication of the Notice in newspapers
with respective Court, at least 7 days prior to the date of the
shareholders meeting
Rule 77: Manner of ascertaining sense of meeting
The decisions of the meeting(s) held in pursuance of the order made
under rule 69 on all resolutions shall be ascertained only by taking a poll.
Rule 78: Submission of chairmans report
The chairman of the meeting(s) shall submission its Report within 7 days
after the conclusion of the meeting to the Court in Form No. 39.
Companies Court Rules- Procedure
(contd..)
Rule 79: Filing of second petition
The Company shall file petition for confirmation of the Scheme in Form No. 40 within 7
days of filing the Chairmans Report
Rule 80: Hearing date and publication of date
The Court shall fix a date for the hearing of the petition
notice of the hearing shall be advertised in the same papers in which the notice of the
meeting was advertised, or in such other papers as the Court may direct, not less than
10 days before the date fixed for the hearing
Rule 81: Format of Order sanctioning the scheme
The order sanctioning the Scheme shall include
such directions in regard to any matter and such modifications in the compromise or
arrangement as the Judge may think fit to make for the proper working of the
compromise or arrangement.
The order shall direct that a certified copy of the same shall be filed with the
Registrar of Companies within 14 days from the date of the order, or such other time
as may be fixed by the Court.
The order shall be in Form No. 41, with such variations as may be necessary.
Rule 84: Issue of Order
Upon hearing of the Petition, the Court shall make such order or issue such directions
as it thinks fit.
An order made under section 394 shall be in Form No. 42 with such variation as the
circumstances may require
Contents of the Scheme
Appointed Date (controversy as regards Appointed Date was set to
rest by the Supreme Court in Marshall Sons & Co case)
Effective Date
Capital Structure
Objective of Amalgamation
Vesting of property form the Appointed Date
Share Exchange Ratio
Accounting Treatment
Manner of conduct of business of Transferor Company between the
Appointed Date and Effective Date
Effect of amalgamation on contracts/litigations of the Transferor
Company
Service of Employees of Transferor Company
Dissolution of Transferor Company
Accounting Standard 14 Types of
merger
AS 14 recognizes two types of amalgamation:
Amalgamation in the nature of merger has been defined to mean an
amalgamation which satisfies all the following conditions:
All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company
Shareholders holding not less than 90%of the face value of the equity
shares of the transferor company become equity shareholders of the
transferee company by virtue of the amalgamation
The consideration for the amalgamation is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares
The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company
No adjustment is intended to be made to the book values of the assets
and liabilities of the transferor company when they are incorporated in
the financial statements of the transferee company except to ensure
uniformity of accounting policies
Amalgamation in the nature of purchase is an amalgamation which does not
satisfy any one or more of the conditions specified above.
Methods of Accounting
The pooling of interests method (for
Amalgamation in the nature of merger)
The assets, liabilities and reserves of the
transferor company are recorded by the
transferee company at their existing carrying
amounts
Reserves of the transferor company appear in the
financial statements of the transferee company in
the same form in which they appeared in the
financial statements of the transferor company.
Methods of Accounting (contd..)
The transferee company accounts for the amalgamation
either by incorporating the assets and liabilities at their
existing carrying amounts or by allocating the consideration
to individual identifiable assets and liabilities of the
transferor company on the basis of their fair values at the
date of amalgamation
There is no question of bringing to the books of the transferee
the profits/reserves of the transferor
The amount of the consideration is deducted from the net
assets of the transferor company acquired by the transferee
company and the difference, if any, is debited to goodwill or
credited to Capital Reserve, as the case may be. Goodwill
arising on amalgamation is treated as an asset and amortized
over a period of five years.
The purchase
method (for
Amalgamation
in the nature
of purchase)
Amalgamation after the Balance
Sheet Date
When an amalgamation is effected after the
balance sheet date but before the issuance of the
financial statements of either party,
Disclosure should be made in accordance with AS 4,
Contingencies and Events Occurring After the Balance
Sheet Date,
The amalgamation should not be incorporated in the
financial statements.
IFRS 3 Accounting for Business
Combinations
IFRS 3 have followed acquisition method of accounting for business
combinations.
Business Combination defined as a transaction or other event in
which an acquirer obtains control of one or more businesses.
One of the entities in business combination is identified as the
acquirer.
Assets acquired and liabilities assumed are measured at fair value
on acquisition date.
If consideration paid to acquire net assets exceeds fair value of net
assets (assets - liabilities) acquired, it shall constitute goodwill.
If consideration paid to acquire net assets is less than fair value of
net assets acquired, the acquirer shall make a gain on bargain
purchase. Gain on bargain purchase is recognized in profit or loss
(current period earnings) on the acquisition date
Sec 391 to 394- A complete code or
Single Window Clearance System
When the scheme envisages various incidental proposals as an integral
part of the scheme, the procedures prescribed under the Companies Act,
need not be separately undertaken.
Procedure for change in object clause need not be separately
followed-
PMP Auto Industries Ltd., (1994) 80 Com Cases 289 (Bom).
Rangkala Investments Ltd., Re, (1997) 89 Com Cases 754
Liqui Box India P. Ltd., In re, (2006) 131 Com Cases 645
(P&H).
The Court can sanction reduction of capital as a part of the scheme.
Cooper. Cooper and Johnson Ltd., Re, (1902) WN 199
Stephon Walters & Sons Ltd., (1926) WN 236
Durairajan (T.) v. Waterfall Estates Ltd., (1972) 42 Com
Cases 563 (Mad)
Asian Investments Ltd., Re, (1992) 73 Com Cases 517, 523
(Mad).
Sec 391 to 394- A complete code
(contd..)
No need to comply with the provisions of Sec
293(1)(a) for sale, lease, etc., of the companys
property
HCL Infosystems Ltd. Re, (2004) 121 Com Case 861
(Del).
Change of name can be carried out as a part of the
Scheme
Jaypee Cement Ltd. Re, (2004) 122 Com Cases 855
(All) : 2004 CLC 1031
Role of Court in sanctioning the
Scheme
Where the scheme is found to be reasonable and fair, it is not the
function of the court to substitute its judgment for the collective
wisdom of the shareholders of the companies involved
Jaquar Steels P. Ltd. Re, (2004) 50 SCL 87
The court must examine the scheme on its own merits and as a man
of business would reasonably evaluate it
Re, Kril Standard Products Pvt. Ltd., (1976) 46 Com Cases 203,
226 (Guj);
Ahmedabad Mfg. & Calico Printing Co. Ltd. v. Bank of India,
(1972) 42 Com Cases 493 (Guj).
The scheme has to be examined by the court with a view to see
whether it is such as an independent and honest member of the
company, while wisely acting in respect of his own interest, can
reasonably approve
Patiala Starch & Chemical Works Ltd., In Re, (1958) 28 Com
Cases 111 (P&H)
Role of Court in sanctioning the
Scheme
Important rules laid down by the Supreme Court in Miheer H.
Mafatlal v. Mafatlal Industries Ltd., AIR 1997 SC 506
The merits of the compromise or arrangement have to be
judged by the parties who as sui juris with their open eyes
and fully informed about the pros and cons of the scheme
arrive at their own reasoned judgment and agree to be
bound by such compromise or arrangement.
The court has neither the expertise nor the jurisdiction to
delve deep into the commercial wisdom exercised by the
creditors and members of the company who have ratified
the scheme by the requisite majority
The court cannot, therefore, undertake the exercise of
scrutinizing the scheme placed for its sanction with a view
to finding out whether a better scheme could have been
adopted by the parties
Principles of sanctioning the
Scheme
Principles laid down by the Supreme Court in Miheer H.
Mafatlal v. Mafatlal Industries Ltd., AIR 1997 SC 506
That the provisions of the statute have been complied
with.
That the class was fairly represented by those who
attended the meeting and that the statutory majority
are acting bona fide
That the arrangement is such as a man of business
would reasonably approve
There should not be any lack of good faith on the part
of the majority
Scheme not contrary to public interest or any other
law
Whether holding of meeting
necessary in all cases?
In case of amalgamation of the wholly owned subsidiary companies
with their holding company, the court dispensed with the
requirement of calling meetings
Punjab Chemicals & Crop Protection Ltd., Re, (2008) 84 CLA 33
(P&H).
Rajasthan Network (P.) Ltd. v. Synergy Entrepreneur Solutions
(P.) Ltd. [2007] 80 SCL 13 ( Raj)
Where the concerned shareholders gave their written consent to the
proposed scheme, their meeting was dispensed with.
Celica Developers P. Ltd., Re (No. 1), (2005) 145 Com Cases 154
(Cal).
Dabur Foods Ltd, Re, (2008) 144 Com Cases 378 (Del)
Balaji Industrial Products Ltd., In re [2008] 88 SCL 321 (Raj.)
Raj Narain Pratap Narain Rolling Enterprises (P.) Ltd., In re
[2009] 89 SCL 17 (All.)
C.M. Smith & Sons Ltd., In re [2009] 89 SCL 377 (Guj.)
To amalgamate is power or object?
Courts have held that to amalgamate is an inherent power and an express
provision in the MOA is not required:
Madras High Court in RBR Knit Process P. Ltd Re, (2007) 80 CLA 41 (Mad), held
that Company Court can sanction scheme of amalgamation regardless of fact as to
whether power to amalgamate with another company is contained in
memorandum of concerned company or not.
The Calcutta High Court supported the above view in
United Bank of India Ltd. v. United India Credit and Development Co. Ltd. [1977] 47
Comp Cas 689 (Cal)
EITA India Ltd., Re, AIR 1997 Cal 208
The Delhi High Court in Highland Electro Appliances P. Ltd., In re [2003] 2
Comp LJ 16 (Delhi) held
the powers of the court under Sections 391 to 394 are not circumscribed by or predicated
on the applicant-company possessing powers under its objects clause to amalgamate with
any other company
The Bombay High Court also taken a similar view in a decision reported in Aimco
Pesticides Ltd. In re [2001] 103 Comp Cas 463.
Karnataka High Court has also similarly held in Hindhivac P. Ltd., Re; Hind
High Vacuum Co. P. Ltd., Re, (2005) 128 Com Cases 266 (Karn).
Merger of Authorized Capital
Varied opinion by High Courts as to whether the authorized capital of a transferor
company merges into the authorized capital of the transferee company upon the
scheme being sanctioned
Cases decided in negative
the Delhi High Court in Hotline Hol Celdings Pat. Ltd. and Ors 127 Comp Cas.
165
A single bench of Calcutta HC in a scheme presented by Areva T & D India
Limited (date of judgment- July 7, 2007), decided the issue in negative
Cases decided in positive
In an appeal directed against the said judgment, the division bench of Calcutta
High Court reversed the above judgment allowing merger of Authorized capital
pursuant to the Scheme. Areva T and D India Limited [2008] 144 Company Cases
311
Sreeleathers Private Limited & Ors. (11/11/2008)- Calcutta HC
Surya Commercials Ltd., Re, (2007) 78 CLA 357 (All);
Om Metals Intraprojects Ltd., Re, (2007) 80 CLA 143 (Raj)
Ashim Investment Co. Ltd., Re, (2007) 138 Com Cases 89 (Del).
Ashwin Poultry Farms (India) P. Ltd., Re, (2007) 138 Com Cases 505 (Mad).
Valuation of shares
Principles laid down by the Supreme Court in Hindustan Lever Employees
Union v. Hindustan Lever Ltd., AIR 1995 SC 470
Valuation is an art, not an exact science
A combination of the yield method, asset value method and market value
method was used
Courts not to generally question valuation done by independent
professional expert and approved by the shareholders
Valuation of experts not to be set aside in the absence of fraud or
malafides on the part of experts
The Supreme Court in its decision in Miheer H. Mafatlal (supra) held that
Once the exchange ratio has been worked out by a recognised firm of
chartered accountants who are experts in the field of valuation and if no
mistake can be pointed out in the said valuation, it is not for the court to
substitute its exchange ratio, especially when the same has been accepted
without demur by the overwhelming majority of the shareholders of the
two companies.
The above principles were uniformly followed by Court while sanctioning a
scheme
33
Requirements in Nutshell
Circular issued on February 4, 2013
Clarification Circular issued on May 21, 2013
Listed Cos to seek no objection of SE for
All schemes of arrangements (under section 391-394 of the Act); or
Schemes of reduction of share capital (under section 101 of the Act); or
Application for exemption from Rule 19(2)(b) of SCRA.
Schemes of Arrangement now to pass through SEBI
Listed Cos to submit certain documents to SE in addition to
compliance of Clause 24 (f) of
Before submitting the Scheme to Court
After getting approval of Court
SE to follow stipulated timelines and procedure for issuance of
Observation Letter
Listed Co. to obtain consent of public shareholders through postal
ballot and e-voting.
In certain cases (explained in later part)
In other cases Listed Cos to furnish an undertaking certified by the
auditor and approved by Board stating reasons of non-applicability.
Applicability of SEBI Circular
Listed Cos. entering into the arrangements
after 4
th
Feb, 2013
Listed Cos which have not submitted the
Scheme to the Court for approval as on 4
th
February, 2013
Schemes which have already received
objections/no objections from SE, but have
not yet filed with High Court
Obligations of Listed Companies
Submission of additional documents along with Draft Scheme
while seeking No objection
Valuation Report, Report of Audit Committee, Fairness opinion
by Merchant Banker, Compliance with Clause 49, Complaints
Report .
Draft Scheme along with documents submitted to be disclosed on
website
Obtaining Valuation Report from an Independent Chartered
Accountant
In cases where there is change in the shareholding pattern of the
Listed Co./ Resulting Co.
The Report to be placed before the Audit Committee
Complaints Report (in prescribed format) giving a status of
complaints received, disposed of and pending.
to be submitted to the SE within 7 days from the expiry of 21days
from filing of scheme with SE & disclosing the same on website.
to be included in notice sent to shareholders
Obligations of Listed Companies
(Contd..)
Observation Letter issued by SE
to be disclosed on website within 24 hrs of receipt
to be included in notice sent to shareholders
to be brought to the Notice of Court while seeking
approval
Submission of documents to SE upon Sanction
of the Scheme by the Court
Court approved Scheme, Voting Results, statement
explaining changes carried out in Approved Scheme,
Status of Compliance with Observation Letter,
Complaints Report, & Application seeking exemption
from Rule 19 (2) (b) of SCRR, 1957.
Approval of public shareholders through
Postal Ballot & e-voting
Approval through
Simple Majority
needed
Where additional
shares have been
allotted to
Where Scheme is
between Listed Co.
& any other entity
involving
Where shares of the
subsidiary being merged
into parent was acquired
by paying consideration in
cash or in kind in past to
any of the shareholders
being
Promoter / Promoter Group, Related Parties of Promoter /
Promoter Group, Associates of Promoter / Promoter Group,
Subsidiary/(s) of Promoter / Promoter Group
Designated Stock Exchange for
coordinating with SEBI
Status of Companies Selecting SE for coordinating
with SEBI
Listed solely on SE having
nationwide terminal
Such SE
Listed on two or more SE; one
having nationwide terminal, one
regional SE
SE having nationwide terminal
Listed solely on regional SE:
- If application is for seeking
exemption under Rules 19(2)(b)
of SCRA
- If application is for any scheme
of arrangement
To take in-principle approval of at
least one SE having nationwide
terminal for listing on that SE
To select any SE having nationwide
terminal as a platform to
disseminate all information to
public and SEBI
Eligibility requirement in case of
unlisted transferee entity
Unlisted issuer seeking exemption under Rule 19 (7)
of SCRR, 1957 to fulfill following conditions
Observation letter has to be issued by the Stock
Exchanges to the Draft Scheme.
The Listing of the equity shares of the transferee entity
should be in terms with the Scheme sanctioned by the
Court or its Order sanctioning the same.
The Equity shares to be listed needs to be allotted by
the unlisted issuer (transferee entity) to the holders of
securities of a listed entity (transferor entity) ;
The share certificates have to be dispatched to the
allottees pursuant to the Scheme or their names
should have been entered as beneficial owner in the
records of the Depositories.
Lock in requirements by
Promoters
No additional lock-in in case of hiving off of a
division of a listed entity and its merger with a
newly formed or existing unlisted issuer
If paid-up share capital of the unlisted issuer is only to
the extent of requirement for incorporation purposes
In merger cases where the paid-up share capital
of the unlisted issuer seeking listing is more than
the requirement for incorporation.
Lock-in requirement to the extent of 20% of the post
merger paid-up capital of the unlisted issuer, for a
period of three years from the date of listing.
The balance of the entire premerger capital shall also
be locked-in for a period of three years from the date
of listing of the shares.
Chapter XV (Sections 230-240)
42
Meaning of Arrangement
Arrangements to include:
a reorganisation of the companys share capital by
the consolidation of shares of different classes or
by the division of shares into shares of different
classes, or by both of thosemethods
Power to entertain the application is with NCLT
43
Snapshot of major changes
44
Particulars Act 1956 Bill 2013
Issue of treasury shares to trust No prohibition Treasury shares arising on
account of cross holding
companies will be invalid. Such
shares to be cancelled or
extinguished
Cross border mergers Allowed Will require prior approval of
RBI. CG may issue further rules
Objections to the scheme by
shareholders
Can be made by any member Can be raised by persons
holding at least 10% of capital
or by creditor whose
outstanding debt is at least 5%
of total outstanding debt
Process of arrangements Same for all companies Simplified process for holding-
WOS and small companies
mergers and specified class of
companies
CA certificate certifying
compliance with AS
Not required Required
Snapshot of major changes
(contd..)
Particulars 1956 Act Bill 2013
Dispensation of meeting Depends on courts decision Can be dispensed if members
90% in value agree and confirm
Corporate Debt Restructuring No provisions Provisions specified for schemes
of compromise or arrangement
involving CDR
Notice to other regulators Not required Notice to be given to SEBI, stock
exchanges in case of listed
companies.
Approval of members All approval, whether from
creditors or members, have
value and number test
Only value test
Mode of Voting Voting to be in person or by
proxy
Voting to be in person or by
proxy or through postal ballot
Filing of Certificate every year
until completion of scheme
Not required Certificate to be filed with RoC
indicating whether scheme is
being complied with in
accordance with the orders or
not
45
Additional powers with NCLT
(Sec 231)
NCLT to have additional powers to:
supervise the implementation of compromise or
arrangement
For proper implementation, orders may be passed
at the time of or at anytime after passing of order
modifying the scheme
If compromise or arrangement cannot be
implemented up to satisfaction, winding up order
can be passed by NCLT
Such powers extend to orders passed under 1956
Act also.
46
Other major Misc Provisions
Acquisition of shares of shareholders dissenting to scheme
which has duly been approved by majority [sec 235]
An acquirer with PAC may acquire the shares of remaining
minority shareholders if he, along with PAC, has acquired or
has become a shareholder holding 90% or more by virtue of
amalgamation, share exchange, conversion or any other
reason [sec 236]
CG may provide for amalgamation of companies in public
interest [sec 237]
Books and records of amalgamated company cannot be
extinguished without prior approval of CG [sec 239]
Liabilities of officers in default of amalgamated companies for
offences under the Bill shall continue even after
mergers/amalgamations [sec 240]
47
A Mystery
48
Tricky issues- how decided?
Stamp duty on mergers:
Two school of thoughts prevailing:
Transfer of property in a scheme happens by way of
vesting, pursuant to a court order, and therefore,
cannot be regarded as an instrument.
Scheme is a voluntary act by Parties and the court
merely puts its stamp of approval on what the
parties desire (followed by Maharashtra, Gujarat,
Karnataka, Rajasthan, Chattisgarh, Madhya
Pradesh, Andhra Pradesh and now West Bengal)
Calcutta HC in Emami Biotech and Ors. held stamp
duty is applicable
Recently, West Bengal Stamp Act amended to include
duty on merger orders
Delhi HC in Delhi Towers Ltd vs. GNCT of Delhi also
held stamp duty is applicable
Conversion of Company into LLP
A private company and an unlisted public
company may convert into LLP in
accordance with provisions of Chapter X of
the LLP Act, 2008
A private company for conversion into LLP has to
comply with provisions of Chapter X and the Third
Schedule of the LLP Act
An unlisted public company for conversion into LLP
has to comply with provisions of Chapter X and the
Fourth Schedule of the LLP Act
Condition for conversion:
There is no security interest in its assets subsisting or
in force at the time of conversion
All shareholders becomes the partners of LLP
50
Continued.
Procedure
Filing of statement containing name, CIN and date of
incorporation of the company
Incorporation documents and statements required for
incorporation are:
Filing of Form 1 for reservation of name
Filing of Form 2 for incorporation
Filing of Form 18 for conversion of a company into an
LLP
Filing of Form 3 for registering the LLP Agreement and
Form 4 for partners details within 30 days of
incorporation
Intimation of conversion to the RoC within 15 days of
registration of the LLP in Form 14 of Central
Government (General Rules and Forms)
51
Conversion of Firm into LLP
As per Section 55 of the LLP Act, 2008 a firm may be
converted into a LLP in accordance with provisions of
Chapter X and Second Schedule of the Act.
Eligibility for conversion
A firm may convert into LLP only if the partners of the LLP
comprise of all the partners of the firm and no one else.
Steps involved in conversion
A firm files an application with the RoC along with
prescribed documents.
Registrar shall subject to the provisions of the Act, issue a
certificate of registration, registering the LLP.
The LLP within 15 days of registration shall inform the
Register of Firms with which it was registered under the
Indian Partnership Act, 1932 about the conversion.
52
Continued.
Effect of conversion
A LLP shall come into existence with the name
specified in the Certificate of Registration.
All tangible and intangible property, assets,
interests, rights, privileges, liabilities, obligations
of the firm and whole of the undertaking of the
firm shall be transferred to and vest in the LLP.
The firm shall be deemed to be dissolved.
Every partner shall be personally liable, jointly
and severally with the LLP for the liabilities and
obligations of the firm incurred prior to the
conversion.
53
Part IX Conversion
Under Part IX of the Companies Act, 1956
provides for registration of Joint Stock Company
as an unlimited company or limited company or
guarantee company.
The definition of company in this part is much
wider and includes a partnership firm with seven
or more members when the shares are freely
transferrable.
Thus this will lead to Corporatization whereby a
partnership firm satisfying the requirements of
definition of joint stock company can be
registered as a company.
54
Benefit of Part IX Conversion
When partners wants to sell some property in
their name then this will result in Capital Gains
Tax and also stamp duty will be payable on such
sale.
So to prevent this partnership firm register
themselves under Part IX as a company,
whereby all its properties are transferred.
Now the company can sell its share (in place of
the partners selling property if it was not
registered as a company). Even though this
attracts stamp duty but it is a very nominal
amount.
55
56
Merger of companies in different
states
Option 1
Filing of separate applications with both the high
courts having jurisdiction over registered office of the
companies
Two separate merger order will be issued by respective
high court
Scheme effective from the last of the date(s) when
respective high court order is filed with ROC
Separate cost for running both the merger application
(fees, stamp duty etc.)
Option 2
Shifting of registered office of one company in the
state of that of other
Same procedure as prescribed in earlier slides
57
Merger of firm with company
Option 1
Conversion of partnership into company under
Part IX
Merger of converted company into another
Option 2
Special case, as approved in Kiritlal Kalidas
Ornaments Exports (P.) Ltd, Dimexon Diamonds
Ltd., [(2008) 84 CLA 465 (Bom)]
Partnership firm (with all partners) to stand
dissolved and succeeded by the transferee company
Registrar of Firms to transfer records of PF to ROC
58
Merger of foreign company with
Indian company
Governed by law of both the countries
Foreign company is regarded as a Transferor
Company within the meaning of section
394(4)(b) of the Companies Act
There is no situation of conflict between
provisions of section 390(a) and 394(4)(b) of the
Act
Essar Shipping Ports and Logistics Ltd. [2009]
149 Comp Cas 417 (Guj.)
Zenta P. Ltd. [2009] 149 Comp Cas 413 (Bom.)
59
Merger of Indian Company with
foreign company
Presently, not allowed
Allowed under Companies Bill, 2013
With prior approval of RBI
60
Section 100-101 of Companies Act
61
Procedure
Articles should authorize the same
Prior approval of court required along with
special resolution of members
Resolution to specifically mention resolution for
reducing share capital
Subsequent alteration in MOA
62
Tax provisions on
corporate restructuring
63
Restructuring from tax viewpoint
Merger or amalgamation
Demerger
Slump sale
Itemised sale
Takeover of assets
Takeover of shares
Corporatisation
Firm into an LLP
Company into LLP
Firm into a company
Other restructurings such as
Reduction of capital whether long-term loss
claimable?
Use of share premium to write off losses, etc
Example of Amalgamation
65
X Ltd Y Ltd XY Ltd
+
=
Definition of Amalgamation
As per Section 2(1B) of the Income Tax Act, 1961
"amalgamation", in relation to companies, means
Merger of one or more companies with another company
or
Merger of two or more companies to form one company
In a manner such that
All the property of the amalgamating company or
companies immediately before the amalgamation
becomes the property of the amalgamated company by
virtue of the amalgamation ;
All the liabilities of the amalgamating company or
companies immediately before the amalgamation become
the liabilities of the amalgamated company by virtue of
the amalgamation ;
Contd..
Shareholders holding not less than three-fourths
in value of the shares in the amalgamating
company or companies (other than shares
already held therein immediately before the
amalgamation by, or by a nominee for, the
amalgamated company or its subsidiary) become
shareholders of the amalgamated company by
virtue of the amalgamation.
Following not included in
amalgamation
Merger of one company with another company
as a result of acquisition of property of one
company by another company pursuant to
purchase of such property by the other company.
Merger of one company with another company
as a result of distribution of property of one
company to the other company after the winding
up of the first mentioned company.
Tax Neutrality in Amalgamations
Transfer of any capital asset is subject to capital
gains tax in India
However, amalgamation enjoys tax-neutrality
with respect to tax on transfer
The amalgamating company, the shareholders of
amalgamating company and the amalgamated
company are exempt from tax
Taxation of Amalgamating company
As per Section 47(vi) of the Income Tax Act, 1961
Any transfer, in a scheme of amalgamation, of a
capital asset by the amalgamating company to
the amalgamated company
Is an exempted transfer and no capital gain is
attracted
If the amalgamated company is an Indian
company
Taxation of Shareholders
As per Section 47 of the Act, there is no transfer
No Capital Gain
If following conditions are satisfied:
oThe transfer is made in consideration of allotment
to him of the shares in the amalgamated company
and
o The amalgamated company is an Indian Company
To be continued
Continued
As per Section 49(2) of the Act, the cost of
acquisition of the shares for the shareholders in
the amalgamated company shall be the cost of
acquisition of the shares in the amalgamating
company.
As per Section 2(42A) of the Act, Period of
Holding of the shareholders for the
amalgamated company shall include period for
which the shares were held in the amalgamating
company.
Taxation of Amalgamated Company
As per section 49(1) of the Act, the cost of
acquisition of the said asset to the amalgamated
company shall be cost for which the
amalgamating company acquired it
If capital asset was acquired by the
amalgamating company before 01.04.81 then
COA will be the cost or F.M.V. as on 01.04.81,
whichever is higher.
The cost of improvement incurred by the
amalgamating company shall be deemed to be
the cost of improvement incurred by the
amalgamated company.
As per Section 2(42A) of the Act, Period of
holding for the amalgamated company will
include the period for which the capital asset
was held by the amalgamating company.
Treatment of Amalgamation
expense
As per Section 35DD of the Act, One-fifth of the
expense on amalgamation shall be allowed as
deduction in five successive assessment years.
Apportionment of Depreciation as
per Section 32
The aggregate deduction, in respect of
depreciation allowable to the amalgamating
company and the amalgamated company
Shall not exceed in any previous year, the
deduction calculated at the prescribed rates as if
the amalgamation had not taken place.
Deduction shall be apportioned in the ratio of
the number of days for which the asset were
used.
Depreciation up to the effective date of transfer
shall be available to the amalgamating company
and thereafter to the amalgamated company
Explanation 7 to Section 43(1)
Where any capital asset is transferred by the
amalgamating company to amalgamated
company and the latter is an Indian Company
Actual cost of the capital asset to the
amalgamated company shall be same as it would
have been if the amalgamating company had
continued to hold the same for its business
purpose.
Explanation 13 to Section 43(1)
When the actual cost of the asset has been
allowed as deduction U/s 35D
To the amalgamating company
The actual cost of the asset to the amalgamated
company shall be NIL.
Treatment of other expenditures
Unamortized installments of certain deductions
Eligible to the amalgamating company
Allowable in the hands of the amalgamated
company.
Explanation to Section 43(6)
Notwithstanding anything contained in Section
43(1)
Actual cost of the block of assets
In the hands of amalgamated company ,which is
an Indian Company
Shall be WDV of the block of assets in the hands
of the amalgamating company at the beginning
of the previous year in which such transfer took
place.
Carry forward and set-off of
accumulated losses and
unabsorbed depreciation
Unabsorbed business losses including
depreciation of the amalgamating company
Deemed to be the unabsorbed business losses
and depreciation of the amalgamated company
For the year during which amalgamation takes
place
Amalgamated company can carry it forward for
another eight years
If the following conditions in section 72A (1) and
72A(2) are satisfied.
Conditions for amalgamating
company
It has been engaged in the business, in which
the accumulated loss occurred or depreciation
remains unabsorbed, for three or more years.
And
It as held continuously as on the date of the
amalgamation at least three-fourths of the book
value of fixed assets held by it two years prior to
the date of amalgamation.
Conditions for Amalgamated
company
It holds continuously at least three-fourths of the
book value of fixed assets of the amalgamating
company for a minimum period of five years from
the date of amalgamation
It continues the business of the amalgamating
company for a minimum period of five years from
the date of amalgamation
Fulfils such other conditions as may be prescribed
To ensure the revival of the business of the
amalgamating company or
To ensure that the amalgamation is for genuine
business purpose.
Conditions prescribed under Rule 9C
Amalgamated Co. to achieve production level of 50% of
installed capacity of undertaking of Amalgamating Co.
before end of 4 yrs & continue to achieve it till the end of 5
yrs
Amalgamated Co. to furnish a CA report to AO in Form
No. 62 along with ROI for AY in which above condition is
satisfied and for subsequent AY falling within 5 yr period
84
Consequence when these
conditions are not complied
The set off of loss or allowance of depreciation
Made in any previous year in the hands of the
amalgamated company
Shall be deemed to be the income of the
amalgamated company chargeable to tax
For the year in which such conditions are not
complied with.
What if conditions of income-tax law
on mergers/demergers are not satisfied
Bombay ITAT ruling in Avaya Global Connect seems
to hold that the all conditions of IT Act are
mandatory
AAR ruling in Hoechst GMBH has taken a view that
where the conditions are impossible to comply with,
a merger/demerger will not be denied the benefit of
tax neutrality
Also circular of 1967 also supports the view
However, what if the conditions are not impossible
to comply with?
Demerger with NIL consideration
Controversy continues
Vodafone Essar Gujarat
Delhi High court in Vodafone Essar Infrastructure
Calcutta High court in SREI Infrastructure
86
Tax Consequences on Companies
Income/ Loss transferred w.e.f Appointed date
Capital Gains:
To Transferor NIL
To Shareholders NIL
Depreciation basis for:
Transferee Existing WDV
Transferor Remaining WDV
Quantum Prorated
87
Tax Consequences (Continued)
Tax incentives of undertaking Continue
Subsequent Expenditure Allowed
Holding Period benefit
For Asset Transferred Continue
1/4/81 Option
For resulting shares Continue
B/f - carried forward
Depreciation Allowed
Loss Allowed
Cessation of liability Taxed
Expenses on process Deductible over 5 years
88
TAX implications on
Demerger
Demerger...
Promoter - 40% Public - 60%
Company(DC)
Promoter - 40%
Public - 60%
Cement Unit
Steel Unit
Cement Unit Steel Unit
Company(RC) Company (DC)
Definition of demerger
As per Section 2(19AA) of the Act, demerger
means
Transfer, pursuant to a scheme of arrangement
under sections 391 to 394 of the Companies Act,
1956
By a demerged company of its one or more
undertakings to any resulting company
In such a manner that the following conditions
are satisfied by virtue of demerger:
Conditions for demerger
All the property of the undertaking, being
transferred by the demerged company,
immediately before the demerger, becomes the
property of the resulting company.
All the liabilities relatable to the undertaking,
being transferred by the demerged company,
immediately before the demerger, become the
liabilities of the resulting company.
These properties and liabilities are transferred at
book value immediately before the demerger.
Continued..
Any change in the value of assets consequent to their
revaluation shall be ignored
In consideration of the demerger, the resulting
company issues its shares to the shareholders of
the demerged company on a proportionate basis.
Shareholders holding not less than three-fourths in
value of the shares in the demerged company
Other than shares already held therein immediately
before the demerger, or by a nominee for, the resulting
company or, its subsidiary
Continued
Shall become share-holders of the resulting
company or companies
By virtue of the demerger
Otherwise than as a result of the acquisition of the
property or assets of the demerged company or
any undertaking thereof by the resulting company.
Transfer of the undertaking is on a going
concern basis
Demerger is in accordance with the conditions, if
any, notified under sub-section (5) of Section
72A, by the Central Government in this behalf.
Meaning of Undertaking
It includes any part of an undertaking
Or a unit or division of an undertaking
Or a business activity taken as a whole
But does not include
Individual assets or liabilities
Or any combination thereof
Not constituting a business activity.
Tax neutrality in demerger
Transfer of any capital asset is subject to Capital
gains tax in India.
However, a de-merger enjoys a dual tax-
neutrality with respect to transfer taxes under
Income Tax Act to both
De-merged company transferring the undertaking
and
Shareholders transferring their part of the value
of shares in the de-merged company
By way of exemption from tax
When the resultant company is an Indian
company.
Taxability of shareholders
By virtue of Section 47(vid) there will be no
capital gain in the hands of shareholder of
demerged company when they receive in
exchange of shares of the demerged company
the reduced shares of demerged company and
the new shares of resulting company.
By virtue of Section 2(22)(v) there will be no
dividend in the hands of shareholders on
distribution of shares pursuant to a demerger by
the resulting company to the shareholders of the
demerged company.
97
Continued..
By virtue of amendment in section 2(42A), for
calculating the period for which the shares are
received upon demerger are held, the period for
which shares were held in the demerged company
shall also be considered.
By virtue of Section 49(2C) the COA of shares of
resulting company shall be in the proportion that
the net book value of the assets transferred in a de-
merger bears to the net worth of the de-merged
company before de-merger. (discussed later)
By virtue of Section 49(2D) the COA of shares in the
demerged company shall be:
COA of original shares in the demerged company
Less: COA of shares in the resulting company as
calculated in section 49(2C)
98
Continued
Shareholders of the de-merged company get shares in
the resultant company.
The cost of acquisition of the original shares in the de-
merged company
Is split between the shares in the resultant company and
the de-merged company
In the proportion that the net book value of the assets
transferred in a de-merger bears to the net worth of the
de-merged company before de-merger.
Net worth refers to the aggregate of the paid-up share
capital and general reserves as appearing in the books of
account of the de-merged company immediately before the
de-merger.
Taxation of Resulting Company
By virtue of Explanation 7A to Section 43(1) the
actual cost of asset to the resulting company
shall be lower of:
Actual cost to the demerged company
or
WDV of the asset to the demerged company
This is applicable for assets on which
demerged company had not claimed depreciation
and the depreciation is to be claimed by the
resulting company
Depreciation has been allowed to the demerged
company U/S 32(1)(i) on SLM basis.
100
Taxation of Demerged Company
No Capital Gain as per Section 47(vib) when resulting
company is Indian Company
No Capital Gain as per Section 47(vic)
Any transfer in a demerger, of a capital asset, being a share
or shares held in an Indian company, by the demerged
foreign company to the resulting foreign company, if
The shareholders holding not less than three-fourths in value
of the shares] of the demerged foreign company continue to
remain shareholders of the resulting foreign company; and
Such transfer does not attract tax on capital gains in the
country, in which the demerged foreign company is
incorporated :
Provided that the provisions of sections 391 to 394 of the
Companies Act, 1956 (1 of 1956) shall not apply in case of
demergers referred to in this clause.
101
Continued
As per Explanation 2A to Section 43(6) the WDV
of block of assets shall be reduced by the WDV of
assets transferred to the resulting company
pursuant to demerger
Where any asset forming part of assets is
transferred by the demerged company to the
resulting company.
102
Carry forward of accumulated losses
and unabsorbed depreciation
The unabsorbed business losses and depreciation
Of the de-merged company
Directly related to the undertaking transferred to
the resultant company
Are treated as unabsorbed business losses or
depreciation of the resultant company.
If not directly related to the undertaking being
transferred
The losses should be apportioned between the de-
merged company and the resulting company in
the proportion in which the assets of the
undertaking have been retained by the de-merged
company and transferred to the resulting
company
Apportionment of depreciation
The total depreciation on assets transferred to
the resulting company
In a financial year
Shall be apportioned between the de-merged
company and the resulting company
In the ratio of the number of days for which the
assets were used by each during the year.
Depreciation up to the effective date of transfer
shall be available to the de-merged company and
thereafter to the resulting company
Other Points
When any undertaking of the de-merged
company enjoys any tax incentive, generally the
incentive can be claimed by the resulting
company for the unexpired period, even after the
de-merger.
The expenses of de-merger can be amortized in
five equal annual installments commencing with
the year in which the de-merger takes place.
However, in sec. 49 (1) (iii) (e), sec 47(vb) has
not bee included
That would mean the cost to the previous owner
not to be taken as the cost in case of demerger
Demerger.. .Tax consequences if
conditions of demerger not satisfied
Capital gain to transferor / shareholder
Deemed dividend to shareholder dividend
distribution tax
Section 72A not applicable
Depreciation to transferee on consideration paid
Cost of shares issued to shareholders of
demerging company
106
Tax Implications on Slump sale
107
Example on Slump Sale
Promoter - 40% Public - 60%
Company X Ltd..
Promoter - 40% Public - 60%
Cement Unit Steel Unit
Cement Unit Steel Unit
Company X Ltd..
Y Ltd..
Provisions on Slump Sale
As per Section 2(42C) of the Act Slump Sale means
transfer of business undertaking as a going concern
for lump sum consideration without values being
assigned to individual assets and liabilities.
Transferor Company as per Section 50B of the Act is
liable to short/long term capital gains depending on
the period of holding
Capital gains is computed by deducting net worth
from the sale consideration
As per Section 32 & 72 step up of Depreciation -
possible as transferee entitled to depreciation on the
cost of assets Valuation of assets required
109
Issues in slump sale
Contingent consideration tax implications to
purchaser/seller
Negative net worth capital gain?
Depreciation to purchaser on cost impact of 5
th
proviso to section 32
Tax liabilities of predecessor Sec 170
Approval u/s 281 practical difficulty
110
Can the excess of consideration paid
be treated as intangible asset?
Ruling of the Supreme Court in SMIFS
Securities [2012] 24 taxmann.com 222 (SC)
allows the excess consideration as an intangible
asset and depreciation on the same is allowable
U/s 32 of the Act.
111
Transfer of assets to wholly owned
Subsidiary
112
Promoter - 40% Public - 60%
Company X Ltd..
Promoter - 40% Public - 60%
New Company Y Ltd..
Steel Unit
Cement Unit Steel Unit
Company X Ltd.
Cement Unit
Tax Provisions on transfer to
wholly owned subsidiary
Transfer of undertaking to Wholly Owned
Subsidiary for a consideration
As per Section 47A of the Act the transaction is
tax neutral subject to a lock-in period.
As per Section 47(iv) there is no capital gains
to the holding company
As per Explanation 6 to Section 43
depreciation to subsidiary is allowable on the
basis of the written down value for the holding
company
Two layers of Dividend distribution tax
113
Itemized Sale
Sale on the basis of value being assigned to a
separate item.
Transferor liable to short/long term capital gains
depending on the nature of asset & period of
holding
Depreciable asset-Short term capital gain
Non depreciable assets
For stock-Long term if held for a period > 12 months
For others-Long term if held > 36 months
Depreciation to transferee on cost opportunity
to claim step up depreciation
114
Restructurings other than
merger/demerger
Use of share premium or capital reserves
For writing off intangible assets/past losses
Can such a utilisation be liable to book profits tax
SC ruling in Appollo Tyres 255 iTR 273 the tax
officer cannot travel beyond the scope of the P/L a/c
Issue of bonus debentures
Whether dividend distribution tax applicable?
115
Tax on Conversion of company into
LLP
Sec 47 (xiiib) specifically covers conversion of
company into LLP
Conditions are put for the transfer not being
exempted
Conversion of a firm into a company under part
IX of Companies Act
Bombay high court ruling in Texpin [263 ITR
345]
Vesting of property is not a transfer
AAR ruling in M/s Umicore Finance Luxembourg
116
Exemption of Capital Gain in the
hands of Company:
Capital Gain on transfer of assets (capital and
intangible) is exempt under Section 47(xiiib) of
Income Tax Act, 1961, subject to following
conditions.
Conversion takes place in accordance with the
provisions of Section 56 and 57 of LLP Act.
All assets and liabilities of the company immediately
before the conversion should become the assets and
liabilities of LLP at the time of conversion.
All the shareholders of the company immediately
before the conversion should become the partners of
the LLP and proportion of profit and capital
contribution will be same as before the conversion.
117
Continued
No consideration would be paid by LLP to the company and
Shareholders of the company do not receive any consideration
other than by way of share in profit and capital contribution in
the LLP.
The aggregate of the profits sharing ratio of the shareholders of
the predecessor company in the LLP shall not be less than 50%
immediately after conversion and at any time during the period of
five years from the date of conversion.
The total sales, turnover or gross receipts in business of the
company in any of the three previous years preceding the year in
which conversion takes place should not be more than Rs. 60
lakhs.
No amount is paid to any partner out of balance of accumulated
profit standing in the accounts of the company on the date of
conversion for a period of three years from the date of conversion.
118
Exemption of Capital Gain in the
hands of shareholders
Capital Gain on transfer of shares held by a
shareholder in the company is exempt under
Section 47(xiiib) of Income Tax Act, 1961
provided above seven conditions are complied
with.
119
Other Provisions
Carry forward of losses
Accumulated loss and depreciation of the company will become
accumulated loss and depreciation of the LLP of the previous year
in which conversion takes place.
Mat credit
Any unutilised MAT credit in the hands of the company would
not be available to the LLP.
Cost of Assets in the hands of LLP
The actual cost of the block of assets in the case of the limited
liability partnership shall be the written down value of the block
of assets as in the case of the said company on the date of
conversion of the company into the limited liability partnership.
Cost of partnership in the hands of partners
Where the capital asset being rights of a partner become the
property of the assessee on conversion as referred to in clause
(xiiib) of section 47, the cost of acquisition of the asset shall be
deemed to be the cost of acquisition to him of the share or shares
in the company immediately before its conversion.
120
Tax Implications if the above
conditions are not complied with
Capital Gain will be taxable in the hands of LLP
Capital Gain on transfer of assets (capital and intangible),
as exempted under Section 47(xiiib), shall be deemed to be
the capital gain, in the hands of successor limited liability
partnership, of the previous year in which above conditions
are not complied with.
Capital Gain will be taxable in the hands of partners
Capital Gain on transfer of shares hold by him, as exempted
under Section 47(xiiib), shall be deemed to be the capital
gain of the previous year in which above conditions are not
complied with.
No incremental tax burden is involved in the above
procedure. Normal tax provisions as are applicable on
dissolution of a firm will apply in case of dissolution of
LLP.
121
Summary of Tax Issues
For Transferor
Carry forward of loss / depreciation
Capital gains tax.
Transfer pricing.
Tax avoidance device
Business closure
Diversion of income at source.
Depreciation.
Tax impact of alternate funding.
Staggered consideration.
Capital receipt.
Chapter XXC - Allocation of common assets /
liabilities.
122
Summary of Tax Issues
(Continued..)
For Transferee
Carry forward of loss
Production / asset holding criteria.
Depreciation on tangible / intangibles.
Tax credit under MAT.
Deduction for 43B liabilities.
Deduction for liabilities of predecessor / remission
of liabilities.
Cost of acquisition / fair market value.
Continuity of tax exemptions / deductions.
Restatement of value.
Succession of business.
123
Summary of Tax Issues
(Continued..)
For Shareholders
Deemed dividend
Capital gain / loss
Consideration in kind / staggered consideration.
Short term / long term capital assets
Cost of acquisition
Transfer pricing
Treaty protection
Foreign tax credit
Underlying tax credit
Tax sparing on exempt income
Tax avoidance
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