Think Tank


With growth opportunities abounding, companies are boldly looking at transformational deals to build scale and new capabilities. M&A activity in India is near an all-time high. Significantly, this wave is being led by first-time buyers, who accounted for over 80% of all deals closed in 2020 and 2021. However, there are continuing uncertainties around tax and regulatory issues arising from M&A. To optimise their M&A strategy, it is critical for CFOs to take stock of the evolving deal landscape and understand the tax and regulatory implications. At a recent session of the India CFO Forum, Pranav Sayta, Partner and National Leader of the International Tax and Transaction Services practice at EY India, presented an update on these issues.

Mergers and acquisitions come in many shapes and forms…

…but the key is to create a structure that is workable, efficient and compliant


Various factors must be considered whilst evaluating an M&A transaction. These include: whether to pursue a business acquisition or a share acquisition; whether to monetise the transaction partially or fully; and whether to pursue a slump sale or a demerger. Recently, large conglomerates have increasingly opted for demergers as a means of unlocking value. This is because, often, the sum of the businesses does not adequately capture the conglomerate’s true value.

The most important requirement is putting together a structure that is workable, efficient and meets all legal and regulatory requirements. Moreover, the deal should be tax efficient for both buyer and seller. In many industries, it is also critical to review industry-specific legislation, such as RBI-issued regulations for banks and NBFCs and the IRDA’s for insurance businesses.

An acquisition through merger involves the acquirer merging the target company into itself

Here, the seller hives-off and sells a portion of its business

Share acquisition…

…versus business acquisition

A diversified conglomerate may seek to unlock value by breaking away some of its parts


Acquisition through merger
Hindustan Unilever’s recent acquisition of GlaxoSmithKline Consumer Healthcare Limited (GSKCH) was effectively an ‘acquisition through merger.’ HUL paid GSKCH’s owners using its own shares as compensation, resulting in a nearly-cashless transaction. Other similarly-structured deals include ones involving PVR and Inox; IndusInd and Bharat Financial; and Sony Picture Network and Zee Entertainment. In each case, the acquirer’s shares became a ‘currency,’ improving its tax efficiency.

Acquisition through demerger
Demergers – where a corporation separates a portion of its business and sells it to another company – have become increasingly common. A demerger can be used to offload a business that is either ‘not working’ or not adding adequate value. For example, Bharti AXA demerged and sold its insurance company to ICICI Lombard, with its stockholders receiving ICICI Lombard shares. Another notable demerger was Tata Chemicals’ sale of a portion of its consumer products business to Tata Global Beverages.

Share acquisition
This is where the acquirer purchases the target company’s stock. Two notable examples are Carlyle Group’s acquisition of Hexaware Technology and IDFC’s sale of its AMC to GIC-Chrys Capital.

Business acquisition
This route is typically employed when a firm wishes to separate itself from a component of its business that has become unproductive, or with which it no longer wishes to be affiliated. Doing so allows the company to concentrate on its main business lines. Citibank recently announced the sale of its retail consumer-banking business to Axis Bank, and L&T sold its power and automation business to Schneider.

Value unlocking
Parts of a firm may, in some cases, be worth more than the aggregate value of the company. In such circumstances, it becomes tempting to demerge certain parts, thus unlocking their value. ABB, for example, has carved out a niche for itself in the power-grid business, while Johnson & Johnson is splitting off its consumer healthcare business.

Demergers are time-consuming whereas a slump sale can be achieved quickly

Each route will have its own tax considerations

Complexities can arise on account of existing contracts and processes

Location and value of immovable assets can impact stamp-duty amounts quite drastically


While selecting between these various M&A routes, there are several considerations to keep in mind:

Timelines: Demergers tend to be time-consuming, typically requiring 9-12 months, depending on the complexity of the situation. In comparison, a slump sale might be easily concluded in three months or less.

Sale consideration: A slump sale infuses cash into the company or entity that is transferring the business, whereas a demerger puts the consideration amount directly in the hands of shareholders of the target firm. In some cases, moving cash from the entity to shareholders may involve an additional layer of tax.

Existing contracts and arrangements: Existing vendor arrangements, contracts with customers and other such factors can make it harder to smoothly transfer ownership of a business. Under a demerger or a court order for a transfer, it becomes much easier to migrate the existing contracts. Thus, while the NCLT model can prove time-consuming when it comes to certain schemes of arrangement, it can actually help expedite matters in this respect.

Stamp duty payments: Typically, stamp-duty charges are determined by the location of the company’s headquarters, and the value and location of its immovable property. If the two parties to a deal are based in different states, two separate NCLT approvals are required, which both elongates the approvals process and can increase the stamp-duty amount. In some cases, this makes it more efficient to do a business transfer, while in others, a merger or demerger may provide a better stamp-duty outcome. Caps on stamp duties also vary across states, from Rs 75 million in Haryana to Rs 500 million in Maharashtra.

Where the purchaser leverages debt, the interest is tax exempt if the acquirer buys the business

This can result in gaps between the interests of buyers and sellers


When a firm seeks to monetise a portion of its business, it might consider a demerger. The newly-formed company’s shareholders can then sell some or all of their shares to other investors. This ensures that the first phase of the demerger is tax-free, but the second phase may result in capital gains tax for the original owners. Another option is to create a new, fully-owned subsidiary and transfer the manufacturing business to the new firm. The new business must pay in cash but the payment can be delayed to a later date. Investors may also inject cash into the new entity, from which a consideration may be paid out to the seller. This results in a cost increase for the new firm, allowing for higher depreciation on various assets, except goodwill, which, after recent rule-changes, no longer qualifies for depreciation.

In some cases, a buyer will seek to acquire a business at full-value using debt but the seller will be reluctant to engage in such a transaction. This is because, in a business sale, the target receives cash, which can entail additional costs, including capital gains tax, as the money moves up to various shareholders. For the acquirer, it is more tax-efficient to buy the business rather than its shares. Share purchases that are made using debt are not tax-deductible, whereas buying a business can earn the buyer a cost uplift, based on the current fair market value.

An OFS can bring various complexities with it


The tax treatment of an offer for sale (OFS) depends on both the ownership and the listing status of the entity. If a foreign entity is from a country with which India has a tax treaty, it will be entitled to the treaty’s advantages. In order to get the most out of an OFS, it is critical to keep track of the tranches from which the shares are being sold, and to ensure that the proper amount of shares are transferred from the right entity/shareholder.

The appropriate cost of acquisition for computing capital gains under an OFS remains an area of controversy. Specifically, it is unclear whether the cost should be indexed or taken at fair market value as of January 31st, 2018. The latter is the most reasonable assumption and results in greater tax efficiency for shareholders selling their shares under an OFS.



For the CFO, the significance of day-to-day ‘Finance’ work is diminishing relative to new demands around business leadership. Apart from a basic technical/accounting background, the key skills and competencies today’s CFO must possess rest on four fundamental pillars: leadership, operations, controls and strategy. Sumendra Jain, CFO (India & Asia Pacific) at SMS India, believes that for Finance leaders to be effective business partners, they must have the necessary leadership and communication skills. Additionally, to be able to offer an independent perspective, they must possess a strong understanding of the company's business model and industry. CFOs should also be able to identify opportunities for top-line growth, manage downside risks and drive profit improvement, not just through the traditional methods of cost-control, but using new methods like product line/regional profitability analysis and benchmarking against industry players. Sumendra’s 25-year-long career offers insightful lessons and learning for executives in general and CFOs in specific.