NCLT has recently approved the merger of Sanghi Industries into Ambuja Cements (both listed companies). The transaction followed a two stage process: first, an acquisition of Sanghi Industries by Ambuja Cements, and then a merger with Ambuja Cements.
Following summarises the key considerations:
Commercial
1. The initial acquisition provided price certainty to the exiting promoters. The mandatory open offer provided public shareholders an exit at a determined price.
2. The acquirer absorbed the upfront cash outflow for control, while continuing shareholders could then participate in its future upside post-merger.
Regulatory
1. Takeover Code: The acquisition triggered an open offer, with pricing as per the parameters in Regulation 8 including negotiated price, historical acquisition benchmarks and market linked averages.
2. Merger process: The merger required requisite corporate approvals, approvals of stock exchange/ SEBI, NCLT sanction (including regulatory authorities) and public shareholders’ approval.
3. FEMA: Issuance of shares to non resident shareholders is under the automatic route.
4. Appointed Date: With an appointed date of 1 April 2024, transitional issues arise for the intervening period including GST/ ITC, TDS, advance tax and attribution/ conduct of business.
Tax
1. While the original acquisition was subject to capital gains tax for the exiting promoters, the subsequent amalgamation is a tax neutral merger. Capital gains arise only when shareholders sell shares of the merged entity.
2. Both the domestic grandfathering framework linked to the listed price as on 31 January 2018 and treaty grandfathering under the Mauritius and Singapore DTAA use the literal word i.e., “acquisition”. In a merger, there is continuity of holding and therefore, logically, it should continue to apply even where listed shares are received pursuant to a merger, but litigation risk remains.
IndAS
1. Pooling of interests under Appendix C to IndAS 103 provided. First blush: No fresh recognition of intangibles or goodwill since assets and liabilities are carried at book values.
2. However, the carrying values adopted are those reflected in the CFS of the transferee company; since the target had earlier been consolidated using the acquisition method, the FMV of intangibles/ goodwill recognised at that stage effectively carry forward post-merger.
3. The merger does not create new goodwill or intangibles, but earlier consolidation outcomes carry forward into the standalone financials.
4. Goodwill is not amortised – subject to impairment. Intangibles with definite life are amortised; for tax, amortisation on goodwill is not available, while depreciation on other intangibles available.
Stamp duty
1. Gujarat: Higher of – 1% of the FMV of shares issued, or 1% of immovable property value
2. Conveyance rates in respective states where immovable property situated.