The Hindu Business Line : Budget 2008: Lagging behind M&A appetite

While there are many misses in the Budget 2008, from an M&A (merger and acquisition) perspective, there is one area where a lot of thrust can get diverted, say Mr Amrish Shah and Ms Falguni Shah, Executive Director and Senior Manager respectively, in PricewaterhouseCoopers.

Yes, the focus is now on R&D (research and development) companies. For, the Budget says that any sum paid to an approved R&D company for scientific research would be eligible for 1.25 times weighted deduction.

“This would enable various companies to restructure their R&D activities in a separate company so as to provide a greater focus and without being overtly concerned about funding from the operating company due to the proposed tax deduction,” explain the two PwC experts, during the course of an e-mail interaction with Business Line, shortly after the Finance Minister’s Budget presentation on February 29.

Excerpts from the interview, in which Mr Amrish and Ms Falguni discuss in detail how, in many ways, the Budget proposals are not keeping pace with the M&A appetite.

On the broad M&A scenario in the country.

The year 2007 will go down as the year of big-ticket mergers and acquisitions for India. India Inc overtook the Chinese counterparts in the race for M&A deals.

The M&A ticker at the end of 2007 showed the impressive figure of $70 billion, a jump of about 150 per cent over the previous year.

However, Budget 2008 has not created any areas which would have eased the way for India Inc to win the M&A race next year too.

Such as?

For any M&A transaction, whether acquisitions or internal restructurings through consolidation (merger), splits (demerger), or share swaps, income tax and stamp duty are the most important costs.

The corporate world was expecting some radical changes in the policy and tax laws related to M&A.

Several other expectations have also not been covered in the Budget, both on the cross-border aspects, and on the domestic front. On the cross-border aspects.

The following key amendments in the Budget 2008 would have assisted India Inc’s buying spree, abroad.

Availability of underlying tax credit paid in the foreign host country in respect of dividend received from foreign subsidiaries (in addition to the credit for taxes withheld in the foreign country in respect of dividend payments).

Exemption for transfer of shares of foreign companies held by Indian shareholders in the event of merger/demerger of the foreign companies in their jurisdiction.

On the domestic front.

At the domestic level, the following changes could have provided further impetus to the growing M&A plans of India Inc:

Continuation of the benefit of carry forward of the losses in the event of change of control of unlisted companies.

According the same status to acquired “goodwill” pursuant to a business acquisition for amortisation purposes as is available to other intangibles assets.

Introduction of securities transaction tax (STT) regime in respect of off-market transactions like open offers, delisting and share buybacks.

Extension of benefits of carry-forward and set-off of accumulated losses and unabsorbed depreciation (Section 72A) to amalgamation of all types of companies.

In particular, given that aviation and banking industries are in consolidation mode, it was expected that such benefit would be extended to the merger of private airlines and private sector banks to usher in a level-playing field with their PSU (public-sector undertaking) counterparts.

In some of the developing countries, share swap transactions, subject to certain conditions, are not liable to capital gains tax so long as there is no attendant cash flow to the seller. An amendment on this line would have enabled tax neutral M&A transactions in a speedy manner.

The Budget could have also requested the Empowered Committee of State Finance Ministers for rationalisation of stamp duty laws across States to give a uniform treatment to mergers, demergers, business transfers, etc. so as to facilitate elimination of aberrant planning and improving duty collections.

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