The Hindu Business Line : Tax exemptions — Ailing cement units on acquisition radar

AILING cement companies are in vogue. In a bid to take advantage of the tax shelter accorded to loss-making units, bigger manufacturers are increasingly eyeing them as prime takeover targets.

Over the past few years, there have been several instances of cement majors, such as Gujarat Ambuja, India Cements and Grasim, taking over or merging with sick companies. This includes a number of sick companies referred to the Board for Industrial and Financial Reconstruction (BIFR).

Companies acquiring BIFR units get tax benefits under the Income-Tax Act by way of setting off brought forward losses of the ailing company against the future taxable profits of the acquirer.

For instance, when Radico Khaitan Ltd proposed a reverse merger with the BIFR company, Abhishek Cements, the former got a tax shelter benefit of about Rs 96.5 lakh, factoring in carried forward losses, including investment allowance under the I-T Act, and waiver of interest as per the Act. Gujarat Ambuja had also acquired Modi Cements, a BIFR company, and got tax exemptions.

Recently, Gujarat Ambuja also merged the ailing group company Ambuja Cement Rajasthan with itself, following which it received tax benefits under Section 72A and Section 115JB of the I-T Act.

Grasim had taken over Dharani Cement for getting sales tax benefits over a period of six years, as per an ICRA report. India Cements also acquired the public sector Cement Corporation of India's (CCI) Yerraguntla plant at Andhra Pradesh, with an installed capacity 0.4 million tonnes. BIFR had declared CCI sick in 1996.

Besides the tax benefits, the acquisition of BIFR companies also come at significant discounts. For instance, in the Radico Khaitan-Abhishek Cements deal, institutions and banks had written off interest on loans to the extent of Rs 9.73 crore.

According to industry analysts, "Greenfield projects are getting rarer and existing players are increasingly opting for the brownfield or M&A route for expansion."

For instance, during the past seven years, only six companies have added new capacities. The mains reason, according to an ICRA study on the sector, is that the increasing cost of capacity creations, which has gone up several times during the last 15 years, make it viable for cement companies to acquire existing capacities.

Summing up the trend, experts point out that "the tax shelter benefits only provide an added incentive for bigger companies to target sick units."

More Stories on : Sick Units | Cement | Mergers & Acquisitions | Taxation

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Tax exemptions — Ailing cement units on acquisition radar