Overview of the Budget 2012-2013

        

Amidst much speculations and expectations, the Union Budget for the year 2012-2013 was released in the month of March click here. At the time when the people seek the much needed support for financial security, the budget proved hard on the pockets of the ‘Aam janata’ of India as it has imposed additional indirect taxes. The imposition of these taxes, that too with sky rocketing inflation most certainly has failed to live up to the ‘aam aadmis’ expectations. The increased indirect taxes will be pushed by the manufacturers and the service providers to their retail consumers thus proving to be hard on the consumers pocket. It came up with a radically exceptional provision on ‘Retrospectively’ amending the tax laws and the applicability of the same. The issue will be settled if the Parliament passes the amendments and makes it a ‘Law of Land’. The Budget proposed a retrospective amendment of the provisions of the Income tax act. The provisions of Section 2, 9, 195 of the Income Tax act has been amended to include ‘cross border’ transactions to be made taxable. This was one  of the most critical parts of the Budget as it has given more power to the legislation and that the independence of the judiciary is threatened as the proposed amendments are in clear contrast with the decision  of the Supreme Court on a celebrated case.

The Government has hiked the indirect taxes like the Service Tax, by including all services except 17 in the negative list in the net along with the 2 percentage point increase in the rate of taxation that would yield an additional amount of Rs.  18,650 crore & the hike in the Excise duty in most of the items by 2 percentage points.

The Budget has encouraged the FDI in the Defense, infra sector. Rs. 15000 crore was allocated to revive the PSUs with an objective of ensuring increasing and stable contribution of the PSUs in the economy.

The Union Budget 2012 has been industry, growth centric. It focuses much on revival of the economy and providing social security from the turbulent global financial conditions. The increased indirect taxes gives the government the much needed leverage to reduce its fiscal deficit and achieve its goal of higher growth rate.

THE NEW TAKEOVER CODE-AN OVERVIEW-contributed by CS. Sushil Sojitra and CS Sneha Kadam

The Development of the takeover code:

In the year 1992, with the enactment of Securities and Exchange Board of India (SEBI) Act, SEBI was established as regulatory body to promote the development of securities market and protect the interest of investors in securities market. Thus SEBI appointed a committee headed by P.N. Bhagwati to study the effect of takeovers and mergers on securities market and suggest the provisions to regulate takeovers and mergers.

Meaning and Concept of takeovers:

To begin with we first need to understand the concept of takeover from its mere nature. A Takeover implies acquisition of control of a company which is already registered through the purchase or exchange of shares. Takeover takes place usually by acquisition or purchase from the shareholders of a company their shares at a specified price to the extent of at least controlling interest in order to gain control of the company.

From legal perspective, takeover is of three types:

I.        Friendly or Negotiated Takeover:-

Friendly takeover means takeover of one company by change in its management & control through negotiations between the existing promoters and prospective investor in a friendly manner. Thus it is also called Negotiated Takeover. This kind of takeover is resorted to further some common objectives of both the parties. Generally, friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.

II.        Hostile takeover:-

Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares of another company without being into the knowledge of that other company. The most dominant purpose which has forced most of the companies to resort to this kind of takeover is increase in market share. The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

In the context of business, takeover is of three types:

I.        Horizontal Takeover-

Takeover of one company by another company in the same industry. The main purpose behind this kind of takeover is achieving the economies of scale or increasing the market share. E.g. takeover of Hutch by Vodafone.

II.        Vertical Takeover –

Takeover by one company with its suppliers or customers. The former is known as backward integration and latter is known as Forward integration. E.g. takeover of Sona Steerings Ltd. by Maruti Udyog Ltd. is backward takeover. The main purpose behind this kind of takeover is reduction in costs.

III.        Conglomerate takeover-

Takeover of one company by another company operating in totally different industries. The main purpose of this kind of takeover is diversification.

Necessity for new takeover code:

It was felt necessary to review the Takeover Regulations 1997 due to several factors such as the growth of Mergers & Acquisitions activity in India as the preferred mode of restructuring, the increasing sophistication of takeover market, the decade long regulatory experience, various judicial pronouncements, etc. Accordingly, SEBI formed a Takeover Regulations Advisory Committee (TRAC) in September 2009 under the Chairmanship of (Late) Shri. C. Achuthan, Former Presiding Officer, Securities Appellate Tribunal (SAT) for this purpose. After extensive public consultation on the report submitted by TRAC, SEBI came out with the SAST Regulations 2011 which were notified on September 23, 2011 and came into effect from October 22, 2011 thereby substituting the SEBI (SAST) Regulations, 1997.

Significant Changes in the New Takeover Code:

·         Initial trigger threshold increased to 25 % from the existing 15 %.

·             There shall be no separate provision for non-compete fees and all shareholders shall be                           given exit at the same price.

·         In cases of competitive offers, the successful bidder can acquire shares of other bidder(s) after   the offer period without attracting open offer obligations.

·         Voluntary offers have been introduced subject to certain conditions.

·         A recommendation on the offer by the Board of Target Company has been made mandatory.

·         As regards definition of control and offer size, the Board decided as under:

Ø   Existing definition of control shall be retained as it is.

Ø   The minimum offer size shall be increased from the existing 20 % of the total issued capital to 26 % of the total issued capital.

Benefits of New Takeover Code:

The new Takeover Code is a step towards a vibrant and simplified regulatory regime, along the lines of best international practices. It would give a significant boost to Mergers & Acquisitions in India and enhance the synergy between the like working industries. The change can impact different stakeholders differently, and indeed, even the same stakeholder differently in different situations.

The increase in the initial threshold limit will provide greater flexibility for financial and strategic investors as they can move close to the striking distance of negative control without making an open offer and with lower cash outflow. The amendment will particularly benefit private equity investors, as they will have more headroom for deals of larger size both in absolute and percentile terms without succumbing to the legal requirements of disclosures and open offers.

A higher threshold limit for open offer should also ease the fund-raising process for the investee company. Also, concentration of holding may enhance corporate governance standards.

From a promoter's perspective, the amendment would open an opportunity of teaming with the substantial public shareholder in an event of hostile takeover. The ability to dilute higher shareholding without triggering the open offer will increase liquidity for promoters. 

The positive on the industry side is shadowed by the negative side of the amendment for public shareholders. Rise in threshold limit for open offer and concentration of shareholding with a substantial non-promoter shareholder would mean a longer waiting period to public shareholder for exit. Further, the concentration of holding in a few hands will reduce public float and liquidity in the market.

One of the key reliefs provided to prospective acquirers is that instead of increasing the size of the open offer to 100%, as had been recommended by the TRAC, the minimum offer size has been increased to 26% (from the earlier 20%).

This is a huge relief, especially to domestic investors, who otherwise faced the prospect of not having enough funding to finance large deals, given the restrictions on bank financing in India. This will surely do away with the unintended and unfair advantage that foreign investors may have had, having larger pools and means of funding at their disposal.

SEBI Takeover Code 1997 Vs. SEBI Takeover Code 2011

Particulars	SEBI Takeover Regulations, 1997	SEBI Takeover Regulations, 2011
Initial Threshold Limit	15%	25%
Creeping acquisition Limit	5% in each Financial Year for shareholders holding between 15%- 55%	5% in each Financial Year for shareholders holding between 25%-75%
Offer Size	20%	26%
Non-Compete Fees	Upto 25% of the Offer Price can be paid without including in the Offer Price	To be included in the Offer Price
Shareholding	Individual and Consolidated Shareholding	Individual Shareholding
Public Announcement	Only one Public Announcement in Newspaper	Short Public Announcement to Stock Exchange and Detailed Public Announcement in Newspaper
Acquisition of Control	either through Open Offer or shareholders approval	Through Open Offer Only
Recommendations of Independent Director on Open Offer	Optional	Mandatory
Event Based Disclosure	·         On acquisition of 5%, 10%, 14%, 54%, or 74% shares; ·         Between 15%-55%, whenever there is a change in shareholding of 2% or more; ·         Between 55%-75%, on the acquisition of 2% or more in accordance with second proviso to regulation 11(2).	On the acquisition of 5% shares and whenever there is a change in shareholding of 2% or more

Recent Trends of Takeover in India:

In June 2008, Daiichi Sankyo of Japan took over Ranbaxy, India’s largest pharma company, for $4.6 billion.

In June 2008, India-based Tata Motors Ltd. had acquired two iconic British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion.

In May 2010, U.S. multinational Abbott Labs snapped up the domestic formulations business of Piramal Healthcare for $3.72 billion.

In the largest ever acquisition in the services sector by an Indian company by Reliance abroad, a Reliance group company acquire 100 per cent equity in Nasdaq-listed Flag Telecom Group Ltd for $ 207 million [about Rs 1,000 crore (Rs 10 billion)].

Mahindra, which emerged as the preferred bidder for SsangYong in August 2010, will now holds a 70% stake in SMC, for which it has shelled out $463 million (about Rs 2,105 crore).

Conclusion:

It has been just six months the ‘Code’ has been enforced and hence is in a very infant stage to comment about. Nevertheless, considering the probable effect of the code and its clear distinction from its predecessor, it can be very well concluded that the new code will work in synchronicity with the intention of the makers to deal with the changing situations in the corporate world.

The regulations have proved to be very significant for the purpose of regulation of acquisition of shares. These regulations are a set of magnificently drafted rules. The credit for making the regulations so practical should be given to Justice P.N.Bhagwati committee and Shri. C. Achuthan, Former Presiding Officer, Securities Appellate Tribunal (SAT).

TheCorporateblog: VODAFONE-ESSAR CASE- A PARADOX OF PROVISIONS!!!!!

TheCorporateblog: VODAFONE-ESSAR CASE- A PARADOX OF PROVISIONS!!!!!: A long time speculation was put to end on 20 th January 2012 by the Apex Court in the matter dealing with the taxability of cross border...

VODAFONE-ESSAR CASE- A PARADOX OF PROVISIONS!!!!!

A long time speculation was put to end on 20^th January 2012 by the Apex Court in the matter dealing with the taxability of cross border transactions. The Vodafone-Essar deal taxability was one of the most speculated and awaited decisions by the corporate fraternity and a game changing decision for sure.

Over the years the number of cross border transactions all across the globe have paced up, reasons for which may be attributed to the steeply escalating reserves with the corporate giants as well as the cut throat competition in the emerging markets like India.

Vodafone-Essar deal serves to be one case study in itself as it involves the basis of interpretation of the existing provisions of the legislation governing the event as well as explicitly points out the lacuna in the existing legislation and the need for a structured legal framework to deal with such similar situations in the future.

THE CONCEPT OF A TAX HAVEN:

To understand this deal, one has to begin with understanding what a ‘Tax haven’ is, and how it works. As against the normal perception that a ‘Tax haven’ is a place where there are no taxes, the real understanding of the concept of a tax haven is that a state where in he undeclared objective of the government to help the rich people in the world to avoid taxes in various parts of the world. Now how this is done is the crucial game.

One state, Republic of Malta, decided to be a tax haven. The government intended to revlutionalize the concept of a tax haven but also wanted to make it appear to be completely legal and regular. The government came up with a tax policy that the of shore companies will be charged nominal taxes but, the government will pay off the tax, so collected, back to the shareholders of the same company within 24 hours. Isnt this a smart way to have a win-win situation? This is how a tax haven works. It is not in the policy of the government but in the conduct thereof, that helps deciding the actual intention of the tax haven and qualifies it to be one.

THE DEAL:

One company CGP Investments (for the time being we will refer to this as ‘CGP’)registered in Cayman Islands that is a Tax haven held 67% stake in the Indian Company Hutchison Essar limited ,which was eventually renamed as Vodafone Essar limited(for the time being we will refer to this as ‘VEL’). This Indian company operated the Vodafone telecommunication within the territory of India.

Hutchison telecommunications international limited (for the time being we will refer to this as ‘HTIL’) was a Hong Kong based Company. CGP was a 100% subsidiary of HTIL.

Vodafone International Holdings BV (for the time being we will refer to this as ‘VIH’) was a company registered in Netherlands.

In 2007 the deal happened between HTIL and VIH to sell the 100% stake in CGP to VIH thus effectively transferring the 67% holding in VEL that CGP held at the time of the deal.

THE LEGAL JARGON.

Show case notice was served to VHL to deduct tax on the consideration of $11.2 bn that was paid by VHL to HTIL. VHL instead of replying to the notice, files a writ petition with the HC of Bombay. The petition is dismissed. The IT dept slaps the VHL with a liability of Rs. 11000 cr as a penalty for avoiding tax.VHL files a petition with the apex Court under Art 136 of the Constitution. The Apex Court referred the case to the IT department till the time it investigates over the matter. The Apex Court heard the case from August 2011 and finally passed the judgment on 20^th January 2012 in favor of VHL.

THE ISSUES FORMING BASIS OF JUDGMENT.

The case involved many issues that were interpreted in revolutionary fashion during the hearing of the case. The Apex Court did place some support over the earlier decided cases like the ‘ Aazaadi Bachao Andolan¹’ case and the ‘McDowell’s’² case, and eventually opined in favor of VHL.

One of the most critical issues that were dealt with in the case is the interpretation of the section 9 of the Income Tax Act. The Section 9 of the act deals with the Income deemed to be accrued / arising in India.

Now to understand this logic applied by the Apex Court, one has to understand the difference in the perspectives of interpreting the provision. One perspective to look at it is the ‘Form over Substance’ perspective. As per this logic, the ‘Letter’ of the law is to be considered while interpreting any provision of law. This establishes that the law be read ‘As it is stated’ and to not plunge deep into the intentions and the perceptions of the lawmakers. This logic, In fact, places heavy dependence on the intelligence of the lawmakers. Thus, it says that the law be followed, adhered to as the word of the law is. A ‘Literal’ interpretation of law to put in simple form.

The second form of interpreting the provision of the law is the ‘Substance over the Form’ way of looking at it. This perspective emphasizes upon giving a wider interpretation to the provision of an act. Thus, it should not be interpreted only as per the letter of the statute but should consider the intention of the lawmakers and be interpreted accordingly. This thought places dependence on the ‘Subject matter’ of the provision instead of interpreting it only as per the letter of the law. Simply put, it is the ‘liberal’ interpretation of law.

To understand this basic difference of perspectives, we will consider an example. Let’s assume that there is a ‘Warehouse’ holding 10,000 tons of Wheat. Now, there are ‘Transfer Receipts’ of this warehouse, to transfer the wheat therein. Here, if the wheat is to be transferred from one party to another then the same can be easily done by merely changing the names of the buyers and the seller in the ‘Transfer Receipts’. This does not mean that there is an actual transfer of the 10,000 tone of wheat from one seller to another physically. Thus, to understand the form and substance, it can be inferred that, the change in the name as per the ‘Transfer Receipts’ is the ‘FORM’ and the actual transfer of the wheat, physically, will be the ‘SUBSTANCE’ of the transfer.

The counsel for VHL contended that the Section 9 does not explicitly restrain deals that are executed outside the territory of India. In the instant case, the counsel contended that the transaction is outside the purview of the section and hence the section is silent upon the transaction and the taxability of the same. The counsel relied heavily on the doctrine established by the ‘Azadi Bachao Andolan” that the Law to be read in its ‘Form’ and not substance.

The counsel for the IT department contended that the section 9 of the Act be read in it holistic form and not in isolation. Thus the section should be widely and liberally interpreted. In the instant case, the department contended that while determining the jurisdiction of the department the Court should be liberal and should not restrict its interpretation to the mere ‘words’  of the law but instead should adhere to the ‘spirit’ of law.

THE LIFTING AND PIERCING OF THE CORPORATE VEIL.

The Concept of the corporate veil in corporate law is as old as the concept of a Company itself. Perhaps, the concept of a Company came to life with the concept of a distinct legal entity. The famous ‘Solomon vs Solomon³ put to rest the now established structure of the concept of the Corporate Veil. But following the same logic and as held in various case laws like ‘the Dinshaw Pattite⁴’ case and similar others, the concept of corporate veil cannot be used to hide the unlawful/irregular activities by a company. Thus in such situations, the court shall part the veil to arrest the activities that the company is involved in, which are irregular or violative of any concerned, existing laws.

 

In the instant case, the counsel on behalf of the department contended that the court should pierce the corporate shield as sheltered by the Company to avoid taxation in India. It was further contended that the Company established in the Cayman Islands i.e. the CGP holdings was incorporated ‘Solely’ to fuel the tax avoidance. Further, that the said transaction involved clear tax avoidance by the parties and thus the department had the jurisdiction to levy tax on the parties to the transaction.

The council on behalf of the Company argued that the CGP Holdings Company had been in existence for almost a decade before the transaction. Hence the question that the company was incorporated with the intention to avoid the tax is quashed instantly. More so, now to be technical with our opinions, it is interesting to know that the said transaction was between the ‘Hong Kong’ company and the Vodafone BV Company. The transfer of the 100% holding in the CGP holdings nowhere mentioned that the transfer was actually of the 67% holding that the CGP had in the Indian company.

To simplify, let us consider the example of the warehouse again. Here the transfer has happened between the parties but there did not happen a physical transfer of the wheat from one warehouse to another. Now assume that if a tax is imposed on the ‘Actual’ or ‘Physical’ transfer of the wheat from one warehouse to another, will the parties be made liable in this case?? There lies the answer to our case. Well, in the above mentioned situation the parties will not be made liable, reason being there ahs happened no ‘actual’ transfer of the wheat from one place to another.

THE IMPACT OF THE JUDGMENT:

Now there have been many speculations and expectations attached to this case. Many cases like the one between GE and Genpact or the one between AT&T and TATA to sell its share in Idea Cellular or the Sesa goa deals, will be put to rest by this judgment. The law has been unsettled on this issue, and still the legislation has not come up with any substantial law to combat such situations, but the sources claim that the budget this year will involve some conclusive rules as to these issues.

More so, the judgment has sent a positive vibe in the International business fraternity and makes India a hot property to invest in. There appears that the Government has initiated its second phase of opening up of its economy. The FDI policies, the courts judgments, the regulations et al holistically give a picture of a healthy and more liberal economy.

Interestingly there has been unknown fact about this case that were not highlighted by the media like the assessing officer who opened the case, was within two years, promoted to be the Chief Commissioner of Income Tax. Well, interesting enough to raise eye brows. Logically, there could have been a deal between the CGP holdings and the Vodafone BV directly thus avoiding the Hong Kong Company which would have avoided this entire tax juggle, but was not, for most unknown reasons, not opted.  

In the end, it was a tough call for the apex court to decide upon the case as, much more than just the case was at stake. Both the contentions, counsels were extraordinarily convincing and that there existed no specific rule/ legislation pertaining to this issue made it even more interpretative and subjective. But the stage is now set, the rule is now made, this one to be one of the most remarkable judgments, in the History of Indian judiciary.

1.  Union Of India (Uoi) And Anr. vs Azadi Bachao Andolan And Anr (2004) 1 CompLJ 50 SC, (2003) 184 CTR SC 450.

2.  The McDowell Dictum- (2003) 5 SCC (Jour) 15

3.  Salomon v A Salomon & Co Ltd [1897] AC 22

4.  Sir Dinshaw Maneckji Petit AIR 1927 Bom.371