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Trend Of Share Swap M&A

Share Swap:
A corporate arrangement where two or more company agrees, on terms, to exchange the equity based asset of one with that of another like share exchange or stock for stock exchange is called as Share Swap. Merger and Acquisitions through share swap can be a beneficial option of investment due to the tax neutrality scheme provided by the Indian government. M&A in cash usually requires a huge pile of cash considerations which becomes a difficult task even for the company who has a huge liquidity at present, in such a case the M&A through share swap came to the rescue. To save their company against the competition of some new players in telecom sector, Vodafone-Idea announced a merger based on share for share structure where Vodafone acquired 50.3% and aditya birla group will be allocated 26% of equity.

During the time of the pandemic, companies who were short of funds and some of them who were on the verge of getting bankrupt due to the risk-averse lenders may find the share swap merger a very attractive option. Like in December 2020, Jindal stainless steel Hisar Ltd. was merger into Jindal stainless steel in a share swap ratio of 1:1.95.

Legal Implication Of Share Swap M & A:

India: Prima facie, the share swap transaction seems too simple but there have some fair regulatory compliance in the procedure. For instance, According to the Companies Act 2013, a company which is unlisted has to obtain a report from the registered valuer appointed by the board of directors or audit committee. This Share swap transaction along with the share swap ratio has to disclose it in the general meeting.

NCLT also came into the picture as it requires an approval by NCLT before continuing with the merger and an approval of minimum 75% of the shareholders. Considering all these compliances, a share swap merger may be inconvenient than a simple acquisition of assets or shares. For instance in 2020, HUL merged with GlaxoSmithKline Consumer Healthcare Limited using share swap structure where GSK Consumer Healthcare Limited will own 5.7% and HUL will own 61.9% of the merged company.

Cross Border
The M&A transaction using share for share structure shows an upward shift in the global economy. Recently in 2017, government of India liberalized the cross border mergers by an Indian company. For instance, Recently 21st century fox and Disney decided to came into the share swap merger where the 25% stock of new entity would be owned by 21st century fox and the rest 75% would be owned by Disney. As per the agreement, for each share of 21st Century Fox, the shareholders were offered 0.2745 shares of Disney.

The overseas companies have to face little difficulty in share swap deals prior to 2015 as they have to additional comply with the foreign exchange rules which were definitely not investor-friendly. But in 2015, RBI relaxed the laws for the companies falling under automatic route by allowing them to do share swap transaction without government approval. However the companies under government route still requires prior approval under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.
Further according to Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, there has been certain regulation for inbound and outbound mergers if they do not follow the prescribed conditions given below:
  1. Share issued by the amalgamated company must be in conformity with the prescribed regulations and sectoral caps.
  2. The office of the amalgamated company in India will be considered as the branch office.
  3. All the outstanding borrowings by the amalgamated company must be repaid according to the terms and conditions of the merger scheme.

Tax Neutrality:

There has been a lot of ruckus in the market with regards to the capital gain tax applicable in the share swap transaction where share are exchanged. Think of a case where one startup merged with another due to the lack of funds. The thing that achieved here is giving up one instrument (share of the old company) to get another instrument (i.e. shares of the new company). In such a case imposing capital gains tax would be so illogical and impractical as these shareholders will have to give tax out of pocket.

The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) held that section 68 of IT Act 1961 would not be applicable in the case of share swapping transaction. As in share swap, the shareholders of the company are given shares of the acquirer company as part of the deal, and hence not considered a transfer of shares. So the capital gain tax does not arise for the shareholders of the acquired company.

There have been certain conditions where the amalgamated company can be tax neutral like:
  • If minimum 50% of the shareholders of India became the shareholders of the new amalgamated company.
  • If all assets and liabilities of the amalgamating company are transferred to the amalgamated company.
  • Share swap merger is similar to the normal merger. There has no immediate profit or returns in such type of merger. So these mergers should be made tax neutral as there is no use of cash or any liquid stock. The tax should only be collected at the time of the cash-out by the shareholder in the future.
Despite the challenges faced by the companies, the Share swap arrangement is becoming very common. It is making M&A possible even when the companies are facing the cash crunch problems. Share swap mergers can be seen a golden opportunity which companies can seek to leverage each other�s market value. These types of mergers encourage the use of cashless transactions. Here the share swap M&A may be seen attractive and advantageous but must not ignore the fact that through this arrangement they will not get any consideration that is liquid.

The government should try to make cross borders share swap mergers more liberalized and ensure that the cash-strapped Indian company should be given an opportunity and script a turnaround. A Tax neutral scheme is also a need of the hour especially for the Indian start-ups who are cash-strapped due to the COVID-19 crisis. While the steps taken by government is in the right direction, there just need more liberalization especially in the cross border mergers.

Award Winning Article Is Written By: Mr.Apoorv Bansal
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Authentication No: AP33643938440-13-0321

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