Boosting M&A prospects

Font Size

Print

Feedback

Email

Discuss

: India Inc’s M&A story continues on a roll. During 2007, India Inc announced deals worth $70 billion, up 150% over 2006. All categories of M&As—domestic, cross-border inbound and cross-border outbound—grew strongly, fuelled by private equity participation, consolidation in telecom and pharma sectors, growth in real estate and internal corporate reorganisations.

Though M&As in India have been growing at a rapid pace, complexities in M&A laws pose a significant challenge to all forms of M&As, especially domestic ones. With the annual Budget upon us, the Union government has an opportunity to simplify Indian laws to facilitate M&As.

Income-tax and stamp duty are important transaction costs. These are sometimes prohibitive, deterring M&As. The government has recognised the need for fiscal clarity on M&As, and some legislative amendments have been made in the past. But more can be done to encourage M&A restructuring. For example, according to Indian tax law, for mergers, the losses or depreciation of a merging company can be carried forward or used as a set-off for the merged entity only in specified business sectors such as manufacturing, telecom, software, shipping and hotels. The question is why this benefit should not be available to the services sector, which is the fastest growing of them all and makes the largest contribution to GDP.

In the current market context, M&As are a compelling necessity for India Inc to reach international scale and access. Consolidation is a crucial element of expansion. Accordingly, tax benefits should be extended to service industries such as airlines, healthcare and financial services.

Presently, the carrying forward of losses and their set-off is not allowed in case of closely-held companies, unless, on the last day of the previous year, shares with not less than 51% of voting power are beneficially held by the same holders as on the last day of the year in which these losses were incurred. This restriction does not apply in cases of a shareholding change in an Indian company due to a merger/demerger involving stakes of foreign shareholders. To provide a level-playing field, it is necessary that this relaxation is provided to merger/ demergers involving stakes of Indian shareholders.