A US-based company (the ‘Acquirer Company’) was considering to acquire an Indian-headquartered group company (the ‘Target Company’). The proposed acquisition is planned through the purchase of shares via a Share Purchase Agreement between the Promoters of the Target Company and the Acquirer Company. Additionally, the Acquirer Company extended a retention package to the Promoters of the Target Company.
The Acquirer company sought our advice on the specific areas:
- India Tax and regulatory implications in the hands of Acquirer and the Promoters of the Target Company.
- Implementation steps for execution of the transaction.
Key Challenges:
- Significant Non-Compliances: The Target Company faced substantial non-compliance issues, including pending Income-tax assessments and FEMA non-compliances (such as non-filing of Form APR, ODI, FLA), along with irregularities related to ECBs & Director loans. Hence, a strategy to provide immunity from all these to the Acquirer.
- Determination of the Target Networking Capital: This is where most of the deals go burst. Our challenge was to craft a strategy appearing reasonable to the Seller as well as covering all future liability risk (if any) of the buyer.
- Sellers loan to the Target Company: Cash was not adequate to settle the Sellers loan.
- Withholding Tax: As both parties involved in the transaction are Non-Residents, the Acquirer was required to remit withholding taxes directly from the foreign bank to the Indian Authorities.
- Overall Acquisition Cost: Commercial viability of the acquisition considering the tax arbitrage opportunity.
- Time-Sensitive: Our approach and implementation steps should facilitate the Acquirer in swiftly concluding the acquisition process.
Our primary objective was to offer comprehensive solutions for tax-efficient structuring of the deal including the determination of the appropriate target networking capital as well as settlement of Seller’s loan to the Target. Our analysis encompassed intricate aspects including tax implications, regulatory compliance, exchange regulations, valuation requirements, issuance of ESOPs by the acquiring company, and various detailed legal complexities.
