EMERGInG TREnDS In CRoSS-BoRDER MERGERS AnD THEIR TAx IMPLICATIonS In InDIA: A CRITICAL APPRAISAL A

The Indian economy has seen steady and sustainable growth over the past decade, even though other countries have been cash-strapped and suffering from stagnation. Most of this development is due to the inflow of foreign direct investment (FDI) into India through cross-border mergers and acquisitions (M&A) and the unparalleled rise in the size and number of cross-border M&A in India with a favourable market climate for such trade. As a business strategy, cross-border M&As in India are rife with many legal complexities and issues. This paper documents the steady growth of cross-border M&A activity in India over the years and presents a comprehensive depiction of cross-border M&As, what the applicable laws are, what the legal issues and complexities involved are, and finally how they can be offset. The paper highlights the tax implications and issues involved in a cross-border M&A and how far the Income Tax Act, 1961 is attuned with the corporate laws in force to promote cross-border M&As in India. The paper concludes with a broader observation that cross-border M&As bring massive economic benefits and global stature to a growing economic superpower like India. For this reason, the business and legal environment should be made more conducive to cross-border M&A activity.


Introduction
A merger between two giants in a declining industry is like the financial version of a couple having a baby to save a marriage. 1

Adam Davidson 2
On the global level, India is one of the fastest-growing economies, right behind the United States and China. India's economic transformation and immense market potential have attracted significant interest in the Indian economy. 3 India is among the top global investment destinations and ranked 12 th in foreign direct investment (FDI) inflows in 2018, with a 20% growth in FDI inflows, which amounted to USD42 billion in 2018, and USD51 billion in 2019. 4 The Indian economy has shown promising evidence of increasing depth and maturity, with an estimated real annual gross domestic product (GDP) growth rate of 8.8% in 2021, 5 owing to a strong capital market and market-friendly and competitive, regulatory reforms. In 2018, India recorded her highest ever half-yearly Mergers and Amalgamations (M&As) deal figures of USD75 billion comprising 638 transactions, including ten deals in the billion-dollar category, and around 52 deals having an 1 Adam Davidson, How Dead Is the Book Business?, New York Times, 13 November 2012 (Jan. 02, 2021), available at https://www.nytimes.com/2012/11/18/magazine/penguin-random-house-merger.html. estimated value above USD100 million each, which together contributed 93% of the total deal value. 6 The year 2018 witnessed 235 M&A transactions amounting to USD65.5 billion, along with the highest cross-border M&A deal value since 2011 at USD25 million, a monumental increase of 5.8 times the total value in 2017. 7 The following year 2019 witnessed an aggregate deal value of USD67 billion, and despite a fall of 34.4% from 2018, the year ended as second best in terms of deal volume and value. 8 The extraordinary events of 2020 brought on by the outbreak of COVID-19 were experienced in countries the world over, and India was no different in this respect. Yet, while wrestling with the pandemic, state-wide lockdowns, an economic slump, geopolitical tensions, and massive uncertainty, India still managed to better its 2019 performance by 7%, and the total deal value was recorded at an unprecedented USD80 billion across 1,268 transactions during the year. 9 Mergers and acquisitions are the essential precursors to globalization. 10 They promote geographical expansion, exploration, 11 and utilization of their core competencies in an expeditious, efficient, and economical manner. 12 Over the years, the juggernaut of cross-border mergers has rolled on and gathered unprecedented momentum, gaining prominence relative to worldwide mergers. 13 Many countries 14 have specific tax rules which grant tax benefits involving mergers, and acquisitions transactions, by allowing tax deferral otherwise imposed on the owners of some of the participating parties upon completion of a deal. 15 Once mergers and acquisitions transactions go beyond the national borders, countries are reluctant to provide tax incentives to attract investment and achieve economic growth, as, in such cases, 6 Ramasubramanian 2018, at 8. 7 Anuj Chande, Setting New Records for Indian M&A, Grant Thornton UK LLP, 2 August 2018 (Jan. 02, 2021), available at https://www.grantthornton.co.uk/insights/2018-setting-new-records-for-indian-ma. 8 Harsh Pais et al., M&A Report 2020: India, International Financial Law Review, 25 March 2020 (Jan. 02, 2021), available at https://www.iflr.com/article/b1lmx6b3qynryg/mampa-report-2020-india; UNCTAD (2020), supra note 4, at 5, 10. 9 Swaraj S. Dhanjal, India clocks $80 bn of M&A activity, PE deals in '20: report, LiveMint, 24 December 2020 (Jan. 02, 2021), available at https://www.livemint.com/companies/news/india-clocks-80-bn-of-m-aactivity-pe-deals-in-20-report-11608775915889.html. relief from taxation practically implies tax exemption, super deductions, tax holidays, and immunity. 16 Cross-border mergers are more complex and imbued with surprises and other pitfalls since there are multiple jurisdictions involved in the transaction. 17 The total range of concerns has expanded as the speed and volume of international deals have increased. 18 Domestic mergers and acquisitions are, generally, socially desirable transactions, as less risk is involved in comparison to cross-border M&As. 19 Companies in many countries 20 enjoy tax deferrals to the extent to which they use stock to compensate target corporations or their shareholders. 21 Tax laws should promote cross-border mergers and acquisitions to attract foreign investors and establish a pro-investment climate. 22 Mergers and acquisitions are intricate, have multifarious dimensions, and are attracted and governed by various laws and regulations simultaneously depending on the stakeholders and tax regimes involved. 23 Further, given the cut-throat competition in the world market and pressure on top-line and bottom-line growth, 24 Indian companies look at mergers and acquisitions as vehicles for change, significant growth, and a critical business strategy tool. 25 Income generated overseas is repatriated to an Indian company in interest, royalties, service or management or technical fees, dividends, and capital gains. 26  Indian Holding Companies by the target company it would attract double taxation. 28 The liability is then off-settled by tax treaties, 29 which decide the taxing rights between the two countries. An ideal situation for an Indian Holding Company would be one with a low/nil withholding tax on receipts, on income streams, and subsequent re-distribution as passive income. 30 Some jurisdictions 31 have relatively favourable tax treaties with India, e.g. the Indo-Mauritius, Indo-Singapore, Indo-Cyprus Double Taxation Avoidance Agreements (DTAAs), where repatriation of income back to India may be observed. 32 Given the essential role that mergers and acquisitions play in the globalization process, the Indian corporate environment has radically altered and aligned itself with the economic policy changes and the introduction of new institutional mechanisms. 33 The modern industrial policy changes of 1991 ushered in the era of free trade in the economy. 34 The past two decades reflect India's substantial rise in mergers and acquisitions activity in almost all sectors of the economy. 35 Indian industries underwent structural changes in the post-liberalization period when mergers and acquisitions were considered vital cogs of the corporate restructuring process, and of redirecting capital flows towards efficient management. In a way, corporate restructuring became imperative to the new economic paradigm. 36

Mergers and Cross-Border Mergers Differentiated
Whereas a "merger" is the "amalgam of two or more corporate entities into one, leading to accumulation of assets & liabilities of the distinct entities, and the organization 28 "Double taxation is a situation where two or more taxes are paid for the same transaction/income which arises due to the overlap between tax laws and jurisdictions of two countries. " George O. May, Double Taxation, 5(1) Foreign Aff. 69, 79 (1926). 29 These are country-specific Double Taxation Avoidance Agreements (DTAA of such entity into one business"; 37 a "cross-border merger" 38 means "any merger, arrangement or amalgamation between an Indian company and foreign company by Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016 39 notified under the Companies Act, 2013. " 40 Reversing the earlier prohibition, which was imposed by the 1956 Companies Act on mergers of Indian companies with foreign companies, the 2013 Act permits the merger of an Indian company with a foreign company (incorporated in foreign jurisdictions notified by the Central Government), provided prior approval of the Reserve Bank of India is obtained. 41 Under the new cross-border mergers regime, inbound 42 and outbound mergers 43 are permitted. While an inbound merger refers to a cross-border merger where the resultant company is an Indian company, an outbound merger refers to cross-border mergers where the resultant company is a foreign company. 44 Thus, a "cross-border merger" is an activity wherein a large foreign corporation purchases a controlling interest in a small local corporation. The company so acquired ceases to exist and is integrated into the acquiring corporation as a subsidiary. 45 It is "an activity where an enterprise from one country purchases the entire asset or controlling interest of an enterprise in another country. " 46 Related to the wider reach of this concept, in 2001 Faulkner argued that there has been a growing interest in cross-border mergers and acquisitions since the 1990s, thus raising additional challenges to ethnic, linguistic, and institutional diversity. 47 He further argued that post-merger integration could be problematic in cross-border mergers from the perspective of value addition mainly because they have to integrate their operations in different countries. 48 Thus, internationalization 37 To be understood as a means of corporate restructuring under Secs. 230-240 of the Companies Act, 2013.   theory predicts a positive return from cross-border acquisitions because of gains from geographic diversification and synergies. 49

Strategic Motivations and Determinants of Cross-Border Mergers and Acquisitions
Cross-border M&As provide an additional set of factors that affect the likelihood that two firms decide to merge. 50 The main reasons and motives for domestic mergers as well as cross-border mergers can be found in (i) Neoclassical profit-maximization theory, 51 which includes efficiency, strategy, and shareholder value as its core value; (ii) Principal-agent theory, 52 which is based upon managerial efficiency and considerations; (iii) Internationalization theory in the OLI eclectic paradigm, 53 which is based upon ownership, location advantages, and internalization of a firm; and (iv) Comparative ownership advantage theory, 54 which is based upon five characteristics 55 of accelerated internalization. These theories explain the basis and reasons for corporate mergers. 56 In simple terms, mergers are corporate strategies aimed at market access, 57 diversification, 58 expansion, 59 risk-reduction, 60  the company. 62 There are four key independent yet inter-dependent motives for M&As, namely strategic, market, economic, and personal. 63 Thus, both domestic M&As and cross-border M&As are important strategic decisions 64 for maximizing a company's growth. 65 Additionally, synergistic operational advantages are among the most significant purposes that mergers and acquisitions intend to achieve. 66 The combined effect of two corporate entities compared to separate effects is always more beneficial since it reduces expenses relating to production, administration, and sales. 67 It utilizes the optimum capacities and factors of production. 68 Other benefits of integration are reduced competition, cost savings by reducing overhead, capturing a larger market share, and pooling technical or financial resources. 69 A company mired with financial constraints can also opt for a merger. 70 Per-unit cost will fall when output increases is noted as a reason for mergers and acquisitions. As a result of the scale effect, 71 products can be offered at a more competitive price in the market. 72 Strengthening their financial position and revival of sick companies, 73 the advantage of brand-equity, 74 diversification, competitive advantage, and sustaining growth are some of the other reasons for which companies go for mergers. 75 In addition to these factors, the geography, quality of accounting disclosure, and bilateral trade increase the likelihood of cross-border mergers between two 62 countries. 76 Cross-border mergers can create market power since it is legal for postmerger combined firms to charge profit-maximizing prices themselves, but not for pre-merger separate firms to collude to do so collectively. 77 Similarly, mergers can also have tax advantages if they allow one firm to utilize tax shields that another firm possesses. 78 Such benefits accrue in the form of tax credits, carry forward and set-off of losses, 79 foreign exchange arbitrage gains, 80 etc. Tax efficiency in M&As is another tangible form of financial synergy. 81 However, these synergies are unrelated to the "cost of capital" improvements and other tax benefits. 82 One of the main benefits is that profits or tax losses may be transferred within the combined company to benefit from the differential tax regimes. 83 Moreover, the merged company's net operating losses may be used to shelter the income of the more profitable company before the merger. 84 Thus, often profit-making firms acquire firms making losses for this purpose. 85 After the economic liberalization, it has been noticed that the largest share of foreign direct investment (FDI) takes the shape of cross-border mergers and acquisitions because low-cost firms find it profitable to merge with high-cost firms, since the monetary union would enhance goods competition across countries through a reduction in the trade cost, elimination of exchange rate risk, and improved price transparency.

Mergers and Acquisitions in India: The Legal Landscape
The word "merger" is not defined under either the Companies Act, 2013 or the Income Tax Act, 1961. However, in academic parlance, the words merger/acquisitions and amalgamations are used very loosely and synonymously. Under the Income Tax Act, 1961, the words "amalgamation" and "demerger" find explicit mention. Under the Income Tax Act, 1961, "amalgamation" means the merger of one or more companies with another company to form one company in such a manner that the conditions mentioned in the Act are satisfied. 87 Similarly, a "demerger" is defined as the transfer of one or more undertakings to any resulting company under a scheme of corporate arrangement described in Sections 230 to 240 of the Companies Act, 2013 in such a manner that it conforms to the conditions mentioned therein. 88 Despite being a voluminous piece of legislation, the Companies Act, 2013 89 fails to accommodate terms such as "merger" or "amalgamation." However, Sections 230 to 240 of the Companies Act, 2013 provide for the different means of corporate restructuring which involves both mergers and acquisitions. 90 Thus, the Companies Act, 2013 did not strictly define the term "merger" or "amalgamation, " but brought the concept under the broader ambit of corporate restructuring. 91 Similarly, under the mandatory accounting standard 14 (AS-14), 92 "amalgamation" means an amalgamation under the Companies Act, 1956, or any other statute applicable to corporations. The standard provides for "two methods of amalgamation, " one of them being a merger and the other being an acquisition. 93   Competition Commission of India is the statutory and regulatory body responsible for enforcing the Competition Act, 2002, ensuring fair trade practices across the Indian Territory, and preventing activities that negatively affect India's competition. 120 Sec. 2(a) of the Competition Act, 2002. 121 Id. Sec. 6. 122 Id. Secs. 2-5. 123 Sec. 3(a) read with Art. 62, Schedule I of the Indian Stamp Act, 1899. will be leviable in case of any transfer or issue in a dematerialized form. 124 Further, the conveyance 125 of business under a valid business transfer agreement in case of a slump sale is subject to stamp duty at the same rate levied on the conveyance of assets. 126 A scheme of merger or demerger attracts stamp duty at a concessional rate in comparison to the conveyance of assets. However, the exact rates leviable depend upon the specific heads or entries under respective state laws for stamp duty. 127 All transfers, issues, sale, or purchase of equity shares involving residents and nonresidents are allowed under RBI pricing guidelines and permissible sectoral caps. However, mergers or demergers involving any issuance of shares to non-resident shareholders of the transferor company are not subject to prior RBI/government approval. 128 Issuances of any other instrument than equity shares/compulsorily convertible preference shares/compulsorily convertible debentures to the nonresident in the form of debt are subject to prior RBI approval. 129

Tax Implications in Cross-Border Mergers and Acquisitions in India
Tax is a significant business cost to be considered while taking any business decision, particularly when competing with other global players. 130 The new Direct Tax Code, 131 which will replace 132 the current Income Tax Act, 1961, seeks to stress transparency and taxpayer friendliness. 133 Under the Income Tax Act, 1961, capital gains tax would be The Direct Tax Code (DTC), 2013 is an attempt by the Government of India (GOI) to simplify India's direct tax laws. DTC will revise, consolidate, and simplify the structure of India's direct tax laws into a single legislation. The DTC, when implemented, will replace the Income Tax Act, 1961 (ITA), and other direct tax legislation, such as the Wealth Tax Act, 1957. However, it is still pending in parliament because the Government wants to leave no stone unturned in the simplification of the tax regime and it is considering the reccomendations of the CBDT Task Force Committee Report, 2019 on DTC. levied on such transactions as when capital assets are transferred. 134 From the definition of "transfer, " it is clear that if the merger, amalgamation, demerger, or any form of corporate restructuring results in the transfer of a capital asset, it will lead to a taxable event. As far as mergers and acquisitions are concerned, the provisions of the Income Tax Act, 1961 concerning "amalgamation, " 135 "demerger, " 136 "securities transaction tax" (STT), 137 "capital gains, " 138 "slump sale, " 139 "set off and carry forward of losses, " 140 etc., need to be examined intricately to establish legitimate safeguards. In the Income Tax Act, 1961, the transfer of any capital asset is generally subject to capital gains tax in India. 141 However, where a foreign company is holding shares of Indian companies, then, with amalgamation or demerger of that foreign company with another foreign company, the transfer of shares would be exempted from capital gains tax provided it follows certain conditions 142 under the Income Tax Act, 1961. 143 Nevertheless, there might be situations wherein the parties enter into a noncompete agreement, and a non-compete right is transferred. 144 Where a foreign company transfers its shares to another company and the value of the shares is derived mainly from the assets based in India, then capital gains so derived on the transfer are subject to income tax in India. 145 Furthermore, under the Indian tax law, specific depreciation 146 rates for tangible assets and intangible assets, such as knowhow, patents, copyrights, trademarks, licenses, franchises, or any similar business or commercial rights, are allowed. Therefore, when there is an excess of consideration over the value of the assets, depreciation allowance may be available. 147 However, the situation is ambiguous for expenditure incurred on the acquisition of a non-134 compete right. Whether non-compete rights can be treated as capital assets eligible for depreciation or as capital assets not eligible for depreciation remains a grey area. 148 Though certain mergers enjoy tax-neutrality under Indian tax law, the provisions for mergers and acquisitions are extremely complicated, and the tax system is certainly not neutral. 149 In an inbound merger, a foreign company merges with an Indian company and the amalgamated entity is an Indian company. 150 Amalgamation enjoys tax-neutrality, and both the amalgamating company and the shareholders of the amalgamating company are tax-exempt. 151 The amalgamated company should be an Indian company, 152 and the amalgamation should be under Section 2(1B). 153 In an amalgamation, all the properties, assets, and liabilities of the merging companies immediately before the amalgamation should become the properties, assets, and liabilities of the amalgamated company, and further, 75% shareholders of the amalgamating companies shall remain the shareholders of the amalgamated company. 154 Further, to achieve the aim of tax-neutrality for the amalgamating company shareholders, the entire consideration should be in the form of shares in the amalgamated company.
Similarly, an outbound merger 155 is one where an Indian company decides to merge with a foreign company, and where the amalgamated entity is a foreign company. 156 The transfer of capital assets through amalgamation by the amalgamating company to the amalgamated company will lead to the imposition of capital gains tax under the IT Act, and if the amalgamated company is an Indian Company, it will be exempted from tax implications. 157 148 However, this exemption is not available in the case where the resultant company is a foreign one, thus leading to a tax burden in the hands of the profit-making acquirer foreign company. 158 Therefore, the notification of "cross-border mergers under the 2013 Act," 159 and the introduction of Cross-Border Regulations, 2018, 160 necessitate adequate corresponding changes in the Income Tax Act 161 to establish a favourable legal environment for the promotion of cross-border mergers and acquisitions in India. For all unqualified M&As, capital gains tax will be chargeable, which may deter foreign investors from investing in India, as the norms are still stringent in comparison to other economies More sectors should be opened up and liberalized so that more transactions can benefit from tax exemptions, which will be an added incentive for investing and hence result in more cross-border M&As in India Withholding Tax Obligations,s. 195 Payment by a resident to any nonresident, or any passive income in the form of interest, royalties, dividends, etc., is chargeable as withholding tax, which could act as a deterrent to cross-border M&A activity This tax cost can be substantially minimized if read with DTAAs provisions and applying the treaty benefits to the transaction, thus promoting more cross-border M&As

Conclusion
The increasing trends in cross-border M&As have been motivated by various strategic considerations which normally differ from purely domestic M&As. Compared to domestic M&As, companies engaging in cross-border M&As are facing unique risks, such as "liability of foreignness" and "double-layered acculturation." Due to their international nature, they face unique challenges, as different countries have different institutional, economic, regulatory, and cultural structures. 162 Section 234 of the Companies Act, 2013 163 permits the integration of Indian markets within world trade wherein Indian companies are now able to participate in "outbound mergers" and acquisitions (M&As), with companies of specified jurisdictions, 164 which was previously prohibited by the Companies Act, 1956. This puts the spotlight on cross-border M&As.
Under the Income Tax Act, 1961 rules, a merger or amalgamation where the resulting entity is an Indian corporation is exempted from capital gains tax. However, where an Indian company merges with a foreign company, a similar exemption is not available, likely because such a deal was not previously allowed. Another potential tax issue for outbound mergers is that operations of the resulting foreign company in India, through a branch or otherwise, could amount to the company having a "permanent establishment" under Indian tax laws and thus attracting 26 per cent corporate tax 165 on account of operations in India. 162 Robert House et al., Understanding Cultures and Implicit Leadership Theories Across the Globe: An Introduction to Project GLOBE, 37(1) J. World Bus. 3, 7-8 (2002). 163 Secs. 234-240 of the Companies Act, 2013, notified on 13 April 2017. 164 The term "specified jurisdictions" means and includes jurisdictions specified in Rule 25A(2)(a), and Annexure B to the Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016. 165 Corporate Tax @22% exclusive of Surcharge (2%-5%) & Health and Education Cess 4% (Introduced from Finance Year, 2019). Therefore, the effective corporate tax rate plus surcharge plus cess would be between 25% and 26%.
Unless the present tax regime affecting cross-border mergers is amended and harmonized with all of the other corporate and allied laws, for the time being in force, the popularity of these provisions, despite the latest regulations, will fail to soar. The proposed Direct Tax Code seems to be a possible solution to such issues. 166 The business environment and the legal regime look to be in favour of cross-border mergers in India, as the Direct Tax Code, 167 which emphasizes lowering the corporate tax rate to boost the competitiveness of India's business environment, is likely to promote cross-border M&As in India by making taxing provisions more certain, competitive, and comprehensive. The recent changes in FDI policy and tax reforms therein, including reduction of the corporate tax rate, concessional tax rates for power and infrastructure companies, 168 tax holiday schemes for investors, and the abolition of dividend distribution tax, will go a long way in making India Inc. a favourite among foreign investors and create favourable opportunities for more cross-border M&As in India. 169