The government has drafted facilitating measures for privatising state-owned firms, including amending laws relating to amalgamation, mergers and demergers as it moves to remove potential hurdles in achieving the goal.

The government propose to amend clause (19AA) of section 2 of the Companies Act to clarify that the reconstruction or splitting up of a public sector company into separate companies shall be deemed to be a demerger, if such reconstruction or splitting up has been made to transfer any asset of the demerged company to the resultant company; and the resultant company is a public sector company on the appointed date indicated in the scheme approved by the government or any other body authorised under the provisions of the Companies Act, 2013 or any other Act governing such public sector companies.

It also proposes to amend sub-section (1) of section 72A of the Act in case of amalgamation of one or more public sector company or companies with one or more public sector company or companies as well as the amalgamation of an erstwhile public sector company with one or more company or companies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of the said public sector company; and the amalgamation is carried out within five years from the end of the previous year in which the restriction on amalgamation in the share purchase agreement ends.

The planned amendments also provide that the accumulated loss and the unabsorbed depreciation of the amalgamating company, in case of an amalgamation, which is deemed to be loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company shall not be more than the accumulated loss and unabsorbed depreciation of the public sector company as on the date on which the public sector company ceases to be a public sector company as a result of strategic disinvestment.

These amendments, which will take effect from 1 April 2021, show the government’s intention to splitPSUs to be sold “piecemeal”.

“It also means that the government is anticipating hurdles in privatisation and it needs all these easing of provisions to smoothen the process,” said a senior executive with a navratna PSU. Such splitting will be considered demerger and the de-merged entity will carry forward its portion of losses and get tax benefits, he added.

Clause 19AA defines what needs to be satisfied in a demerger for tax-neutrality in the shareholder’s hands, else will get taxed as deemed dividend.

Section 72A requires a business that is being merged with carrying forward losses, being continued for a certain period of time and not shut down, to benefit from the carry-forward losses.

These changes will provide flexibility to the government in structuring the transactions to suit potential buyers’ appetite and interest.

Amalgamation amendments assume significance, as the government has cleared a road map for privatisation wherein “bare minimum CPSEs will be maintained in four areas that are strategic” while the rest will be sold.

“The proposed amendments mean that the government need not satisfy the rules and a non-compliant demerger/merger will not be subject to taxes lending clarity to privatisation of PSUs,” an investment banker said.

“This will also facilitate the government in demerging an asset of a PSU and not just an undertaking for the purpose of sale,” he added.

“To make the deals doable, the government is willing to look at all options to make it attractive both financially and commercially to buyers,” a company law expert said. “The governments intent is very clear: it will go to any lengths to privatise PSUs, in whichever form to get it done,” he said.

If potential buyers are not interested in buying a PSU as a whole or in taking over subsidiaries that are unrelated to the main business, they can be demerged and sold to someone else, said a government official.

“The proposed amendments will facilitate in addressing such issues which could emerge in the future,” he added.

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