Published by: BCA Research Committee

Pages: 454 pages

Price: Rs 200

As Rajesh Kapadia, president of the Bombay Chartered Accountants Society (BCAS) remarked in a recent seminar, unlike in the past, mergers in the country will not be tax or synergy driven but survival driven. This publication of BCA's research committee will definitely make understanding of the issues related to survival far less complicated. The timing could not have been any better because 1998 witnessed nine of the ten all-time largest merger and acquisition M&A transactions in the country. It may be interesting to note that except one transaction, in which payment was a combination of stock swap and cash, all others were share transactions.

The list of contributors to the volume is impressive. Each and every aspect has been dealt with by an expert. Excise for example has been dealt with by Bhavna Doshi, investor perception and requirements of listing agreement by Deena A Mehta, sales tax by NC Mehta, stamp duty by Pradip Kapasi, cross-border amalgamation and takeover by Rashmin Singhvi, tax aspects of buy-back of shares by Pinakin Desai, due diligence by Nawshir Mirza of Parle-Coke and most recently Hindalco-India Foils fame and corporate reorganisation and family settlement by PP Shah. In all, there are 31 contributors for 33 masterpieces and the above mentioned list is just an indicator.

The compendium is exhaustive and apart from the above mentioned subjects also deals with brand valuation, relevance of accounting standards, buyback of shares and even a paper on valuation of intangible assets by KP Budhbhatti-a chartered valuer.

Let us consider some of the issues raised. The hottest topic is the buyback of shares. A question has been raised as to whether loss arising to the company on cancellation of shares can be allowed as deduction u/s 37(1). The answer is in the negative. The author is of the view that buyback results in purchase of shares by the company. This does not result in a loss. Post purchase, shares of the company become a capital asset for the company and cancellation of shares results in a loss. The Supreme Court has held in Vania Silk Mills case that there is no transfer in which asset is destroyed. Cancellation of shares results in destruction of a capital asset and, hence, the loss is on capital account (but not being a transfer, it may not be possible to claim capital loss) and cannot be allowed u/s 37(1).

As regards tax in the hands of shareholders, the author points out that if it were to be treated as deemed dividend, the wording of Sec 2(22)(d) is such that entire distribution to the extent of availability of reserves may result in exposure to dividend tax. For shareholders, the entire amount may constitute dividend income. Also, the quantum of accumulated profit may need to be worked out at each stage of distribution. If each transaction is regarded as involving distribution, the company may need to compute accumulated profit up to each such date. No satisfactory mechanism exists by which the company can communicate the working to each involved shareholder to enable him to make his own computation.

The paper on corporate laws by Jayant Thakur has some interesting posers. Will acquisition of shares in excess of limits prescribed under Sec 372A or by a subsidiary in a holding company in scheme of amalgamation be permissible? Under Sec 372 of the Companies Act, prior approval of Centre was required, but Sec 372A requires only a special resolution. What has changed is that instead of the Centre, shareholders will bring the matter to the notice of the court and the court will approve a scheme of merger even if the limits under Sec 372A are exceeded. DCA has accepted this stand. Though a subsidiary cannot hold holding company's shares (Sec 42 of the Companies Act), the provision of Sec 42 and Sec 77 will not be violated if shares are acquired consequent to a merger. India Cements' subsidiaries hold equity of Raasi Cements and, post merger, may hold shares of the holding company.

The paper on relevance of accounting standards explains in detail why AS-14 is the most liberal standard on M&A. Based on extracts from the notes to accounts, it is explained that for the HLL-BBLIL amalgamation, pooling of interest method was employed though HLL was much bigger than BBLIL. Under IAS-22, it would have been probably treated as purchase. It also explains why AS-14 needs to be amended and unless it is done, the objective of standard may not be achieved.

Acquisitions takes place when price is less than the value. On that criteria, the book is an ideal purchase.