The Hindu Business Line : There's opportunity in every threat

India has a good tax regime for restructuring. This is required to be boosted by adopting practices such as share swaps exemption and tax consolidation.

MR MAGNUS JOHNSSON, GLOBAL M&A TAX HEAD, PRICEWATERHOUSECOOPERS.

An adverse outcome in the Vodafone case may hamper foreign investment flow into India and act as a barrier for investments into India, cautions Mr Magnus Johnsson, Global M&A Tax Head, PricewaterhouseCoopers. Companies would think twice before investing here as you don't want to pay tax (thereby reducing their effective returns) on selling the investments, he adds during a recent email interaction with Business Line.

"In the Vodafone case, income-tax is attempted to be levied on a transaction where the shares of a foreign company were being transferred from one non-resident to another non-resident, where the underlying asset was an Indian company," recounts Mr Johnsson. "The tax department slapped a $2-billion claim of capital gains tax on Vodafone International Holdings for its acquisition of the domestic mobile operator, Hutchison Essar. Vodafone is contesting the claim and the matter is before the Bombay High Court."

Mr Johnsson is, however, of the view that India has a good tax regime for restructuring. "This is required to be boosted by adopting practices such as share swaps exemption and tax consolidation," he insists. "The introduction of such benefits would certainly act as a shot in the arm for the M&A (merger and acquisition) activities in India. Innovative concepts such as exempt share swaps would certainly help M&A."

Excerpts from the interview in which Mr Johnsson scans the M&A scene from the perspective of a tax expert.

On the tax treaty with Mauritius.

The renegotiation of the treaty would be critical as it would impact the existing and future investments. It is not clear how the treaty would be amended.

A large chunk of the foreign investment into India is usually through the Mauritius jurisdiction. The prime reason for using Mauritius is its favourable treatment as regards capital gains.

Maybe people have to think a bit differently when they are investing in India (through Mauritius). The Singapore treaty also has an advantage of capital gains tax but has various conditions attached to it. Other jurisdictions such as those of Cyprus and the Netherlands also have capital gains tax advantage.

On the outlook for M&A in the aftermath of recent financial failures.

The years 2006 and 2007 saw an unparalleled rise in the M&A activities around the world. The positive trend is not being carried forward to FY 08 and there has been reduction in M&A activities around the world.

The turmoil in the financial markets and the liquidity crunch will hamper M&As which saw two years of significant action. The M&A activities in India and around the world were driven by private equity (PE) players. There will not be as many big transactions from the PEs (as seen in the past).

PEs still have an unprecedented level of committed capital, but they would find it difficult to leverage, which means their model won't work.

Hence, the M&A activities would certainly take a hit, but corporates who are not stuck with liquidity crunch, may find the valuations attractive and could look at acquisitions. As it is always said, there is an opportunity in every threat. Hence, it could be a very interesting phase for M&A activities around the globe.

The appetite for capital in the infrastructure and financial services sectors is huge.

Hence, in our view, such sectors could see a substantial number of M&A activities. Further, the capital-intensive sectors can also see good amount of activities.

On changes needed in Indian law to speed up the M&A process.

Only legal mergers are allowed in India. There should be a mechanism for contractual mergers which would save lot of time and effort.

Also, liberalisation of FDI (foreign direct investment) can make India more attractive as a potential investment destination. Foreign participation - especially in sectors such as retail, telecom and insurance - can be of help during the initial phases of business wherein capital is a must for growth.

Further, foreign participation would ensure cross-border sharing of knowledge and skills and provide visibility to the Indian companies in the foreign market.

On the global appetite of Indian companies.

India Inc. has shown that it has an appetite for global companies. Deals such as (to name a few) Tata Steel-Corus, Hindalco-Novelis, Suzlon-RE Power, Tata Motors-Jaguar, United Spirits-Whyte & Mackay, have shown the power and mettle of Indian Inc. With global ambitions, India Inc. is definitely poised as an emerging power and well-positioned to take advantage of M&A activities around the globe.

During the past few years due to significant investment by Indian companies, the power of such companies has been noticed by the developed nations. The successful acquisitions and blending of culture have increased the goodwill. The developed nations now look at India Inc. as good and favourable investors.

D. MURALI

(Portrait by R. Rajesh)

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