INDIA Law and Practice Contributed by: Anuja Tiwari, Mallika Anand, Pranjal Bhattacharya and Antra Shourya, AZB & Partners
• offer a business structure that is attractive for potential mergers or acquisitions, creating opportu- nities for strategic partnerships. 3.2 Tax Consequences Spin-offs in India can potentially be structured as tax- free transactions both at the corporate level and the shareholders’ level if spin-offs are being undertaken by way of a scheme of arrangement. Business com- binations that involve the transfer of capital assets – for example, amalgamations and demergers – can be tax-neutral transactions, as they are exempted from taxation on capital gains under the Income Tax Act 1961 (the “IT Act”). Such spin-offs must meet the following key require- ments. • The entity initiating the spin-off must be a demerg- ing company and the assets and liabilities must be transferred to the resulting company. • The assets and liabilities of the demerging com- pany must be transferred to the resulting company on a going-concern basis. • The resulting company must issue its shares to shareholders of the demerged company on a pro- portionate basis as consideration. • Shareholders should retain a substantial interest in the resulting company by holding at least 75% of the value of their interests in the demerging com- pany in the resulting company. 3.3 Spin-Off Followed by a Business Combination In India, a spin-off immediately followed by a busi- ness combination is possible; however, it must be in compliance with the regulatory framework under the Companies Act 2013 (the “Companies Act”) and approved by the Securities and Exchange Board of India (SEBI) and the Competition Commission of India (CCI), if applicable. Key requirements for undertaking a business combination after spin-offs are as follows. • The board of directors of the company must approve the spin-off and the subsequent business combination. Shareholders’ approval is typically required if there are significant changes in share- holding patterns or corporate structure.
• An independent fairness opinion must be obtained to ensure that the terms of the business combina- tion are fair to shareholders. • Detailed schemes of arrangement for both the spin-off and the merger need to be drafted, out- lining the terms and conditions, share exchange ratios, and other pertinent details. • Schemes for spin-offs and business combinations must be filed with the National Company Law Tri- bunal (NCLT) (ie, the quasi-judicial authority for all company law matters) for approval. • Listed companies must comply with stock exchange regulations regarding disclosures and approvals. However, in a business combination through contrac- tual arrangement in the form of a business transfer or asset transfer, approvals from regulatory authorities Spin-off undertaken by way of a scheme of arrange- ment has been reported to be a time-consuming process and the approval process typically takes between six and eight months. However, the timeline for spin-offs undertaken by way of business transfer or asset transfer agreements are case-specific and typically take between two and four months. 4. Acquisitions of Public (Exchange- Listed) Energy and Infrastructure Companies 4.1 Stakebuilding The SEBI (Substantial Acquisition of Shares and Take- overs) Regulations 2011 (the “Takeover Regulations”) govern the acquisition of voting shares or voting rights or control in a listed company. Any person ‒ with or without holding any shares in a target company ‒ can make an offer to acquire shares of a listed company, subject to minimum offer size of 26%. That said, the promoters or the promoter group typically control the board of listed companies, and it is difficult to successfully implement an open offer in the absence of any agreement with the promoters. From a practical standpoint, the acquisition of shares such as SEBI or CCI may be necessary. 3.4 Timing and Tax Authority Ruling
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