INDIA Law and Practice Contributed by: Raj Ramachandran and Krutamana Pisipati, JSA
There is a longer time period offered for indem- nity pertaining to fundamental warranties as compared to business warranties. Business warranties are often provided for the time period prescribed under law. These time periods vary depending on diligence findings and the nature of the outstanding or likely claims that may arise in the future. These factors also determine the necessity of an escrow holdback. However, escrows are uncommon unless there are signifi- cant potential claims identified during diligence. In case of a transaction involving both Indian and foreign parties, escrow mechanisms are subject to the Indian Foreign Exchange Management Act, 1999 and the underlying rules and regu- lations (see 6.4 Consideration and Minimum Price ). Representations and warranties insurance is not uncommon in India. This type of insurance is explored in deals of a larger size given the cost and effort involved in procuring this insurance. However, where transactions have a shorter closing date, R&W insurance may not be used as it is often time-consuming given the custom- ary carve-outs. Spin-offs are common and an undertaking often makes the decision to spin-off for business rea- sons involving operational efficiency, unlocking of value, independent focus and targeted fund- raising options for a specific business vertical. 5.2 Tax Consequences Spin-offs can be structured in a tax compliant and efficient manner depending on the nature and corporate structure or treatment of the busi- ness. Demergers are considered tax efficient 5. Spin-Offs 5.1 Trends: Spin-Offs
where there is a preference to replicate the share capital and pre-agreed inter se economic inter- ests of the stakeholders. Some spin-offs may require approval from the regulatory authorities while others can be effected within shorter defin- itive timeframes akin to contract-based invest- ment transactions. 5.3 Spin-Off Followed by a Business Combination Follow-on business combinations are possi- ble and are often considered in the context of specific business requirements or tax and other operational efficiencies. In certain cases, these transactions take the form of a demerger (of a specific business from one entity) followed by a merger (into the target entity). However, it is not always the norm, and both restructur- ings (demerger and merger) can be undertaken independently. These decisions are often also dependent on the stakeholders involved and the terms governing their investments in the com- pany as well as the potential investments and fund raises that will govern the company’s busi- ness operations. 5.4 Timing and Tax Authority Ruling Spin-offs can be undertaken through business transfer agreements, asset transfer agreements, slump sales or demergers. The time period for concluding these spin-offs would be depend- ent on the manner in which the spin-offs were executed. For example, in cases of demerger, the approv- al of the National Company Law Tribunal is required. Other compliance requirements like issuing a public notice and notifying creditors and other stakeholders would also be required. Demergers can accordingly be time-consuming, while a slump sale or business transfer or asset sale could be concluded quickly as it would only
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