(First published on Linkedin)
Last week, I had the opportunity to take a webinar, organized by Taxsutra, on the commercial considerations driving intra-group structuring. While tax and regulatory frameworks are critical in designing a structure, the real crux lies in the commercial objectives – simplification or realignment of group structure, optimizing corporate governance, being IPO ready, unlocking value, etc.
Some of the case studies discussed included:
1. Re-domiciling Foreign HoldCos to India: Indian tech unicorns have reversed global structures for better access to Indian capital markets, through cross border mergers – critical to analyze tax and regulatory laws of both India and the foreign jurisdiction in a cross border merger.
2. LBO Structure Streamlining: Many a times, SPVs are formed for raising debt for acquisitions, thereby, ring-fencing the operating company. However, debt servicing would usually be from the cash flows of the target company, warranting a reverse merger of the Acquisition SPV with the Target – issues like interest deductibility and recognition of intangibles under IndAS come to the fore.
3. Delisting via Demerger: In case of a dual listed structure, delisting through a demerger (whereby the business of the subsidiary ListCo is demerged to a wholly owned subsidiary of the parent ListCo), and issuance of shares by the parent ListCo effectively achieves delisting of the subsidiary ListCo.
4. Group Consolidation + Investor Exit: Merger of earlier acquired company with the parent listed company achieves business synergies, and also provides to any minority shareholders of the target in the form of a liquid currency i.e., shares of the listed company, facilitating exit of the minority shareholders (e.g.: PE/ strategic investors/ JV partners, etc.).
5. Revival of Asset-Rich ListCo: Merger of a profitable listed company with an illiquid and loss making/ defunct, but asset rich listed company (i.e., transferee company) with same promoter holding facilitates infrastructure synergies, unlocking value to the transferee company shareholders through liquidity, etc. without impacting the tax losses of the transferee company. Issues like majority of minority and maintaining minimum public shareholding, and stamp duty/ premium on lease transfers (say, MIDC), along side justification of valuation for share swap become key parameters.
6. Intra-group Funding via Perpetual Debentures (PD): PDs with no fixed tenure and discretionary interest payment act as quasi-equity but debt funding, resolving issues like debt-equity ratio (since PDs are treated as equity), no interest cost in P&L (since interest treated as dividend under IndAS), no withholding tax implications since accrual is itself contingent, etc.