The Interconnect

Ketan Dalal (Managing Partner, Katalyst Advisors LLP)
Beneficial Ownership: Substance over Form

The doctrine of a Company being a ‘separate legal entity’ from its members was recognised by the House of Lords in the landmark case of Saloman vs. Saloman & Co in 1897. This concept limits the liability of the shareholders from the business obligations of the legal entity, virtually creating a ‘veil’ between the shareholders and third parties; and this dimension is the very basis of a corporate form of organisation. While this has fundamental acceptance globally, in certain cases such as oppression and mismanagement, or transactions which are found to be colourable or artificial in nature, the Courts have held that the corporate personality of the Company could be disregarded. Over a period, it has been observed that under the shelter of Company being a distinct personality, complex structures and chains of corporate vehicles were being used to conceal the real owner behind certain transactions. To counter this practise, the Financial Action Task Force (‘FATF’) developed a series of recommendations for obtaining transparent disclosures of such ‘natural persons’ who hold ‘beneficial ownership’ in an entity thereby disregarding the artificial veil existing between the Company and its shareholders. In this context, the legislature in India has also introduced certain crucial amendments to its statutory provisions, and the judiciary, as well, has interpreted laws so as to give effect to the spirit of the law rather than merely the letter of the law with the ultimate purpose to identify the ‘natural persons’ and effectively, pierce through the smokescreen between the real owners of a corporate structure. Such amendments to the existing laws, inter alia, require obtaining transparent disclosures every time such person acquires ‘beneficial interest’ or is a ‘significant beneficial owner’ in Company, further obligating them, with additional regulatory compliances prescribed under the laws. Some of these amendments are especially in an Indian regulatory context where the corporate structure has been abused by a few and has led to amendments, administration and interpretation of law which, in essence, is an “outlier legislation” i.e. legislation for dealing with the exceptions......

Holding Vehicle -Company or an LLP? – Part 2

In part 1 of this article, we tried to understand the characteristics of a company and an LLP as a holding vehicle, identified particular taxation issues, discussed aspects of extraction of funds and identified other factors relevant for decision making. In this part, we deal with the several other aspects below.  .....

Holding Vehicle -Company or an LLP? – Part 1

Promoters are often required to make a choice, as to the ownership structure of businesses i.e. whether to hold shares in an operating company directly or through a Holding Company, or through a Limited Liability Partnership (LLP).  The Company and LLP vehicles are quite different and one obviously needs to test them in each situation; the results can be surprising at times and the widely acknowledged leverage of LLP of upstreaming profits without cost, may not be the sole factor to make a choice.  .....

Merger of an LLP with a Company - An 'Evolutionary' Decision by NCLT

There have been a large number of mergers between companies under the Companies Act, 2013/ Companies Act, 1956 but it’s rare to come across a proposition of a firm or an LLP merging into a company. The National Company Law Tribunal, Chennai Bench (‘NCLT Chennai’), has now allowed an LLP to merge with a company[1]. Under a Scheme of Amalgamation, Real Image LLP (‘Transferor LLP’) was proposed to be amalgamated and vested with Qube Cinema Technologies Private Limited (‘Transferee Company’) on a going concern basis. The Transferor LLP was incorporated and registered under the provisions of Limited Liability Partnership Act, 2008 (‘LLP Act’), whereas the Transferee Company was incorporated and registered under the Companies Act, 2013. Both the entities were engaged in the same business; further, the Scheme provided for the transfer of the whole of the undertaking of the Transferor LLP comprising its business, all assets, all liabilities and all rights, title and interest in immovable properties to the Transferee Company on a going concern basis. This article seeks to focus on the attendant implications both from a regulatory and tax standpoint [1] CP/123/CAA/2018 (TCA/157/CAA/2017) [dated 11th June, 2018].....

Cross Border Mergers – The Outbound Stitch

India has been one of the fastest growing major economies in the world attracting foreign investors across the globe promising lucrative opportunities. Continuous liberalisation in the regulatory framework over the last decade has improved the investment climate which has reported a significant rise in the Foreign Direct Investment (“FDI”) inflows in the country. The biggest e-commerce deal recently witnessed is the Walmart-Flipkart deal wherein the US retail giant is acquiring 77% stake in the Indian operations for ~USD 16 billion. The other significant acquisitions are Russia’s Rosneft in Essar Oil, Japanese SoftBank’s significant chain of investments in leading consumer internet start-ups like OYO Rooms, PayTM and Ola Cabs etc......

Cross Border Mergers – The Inbound Stitch

Over the last decade, Indian companies have set up or acquired companies overseas, largely to access the overseas potential customer base, capitalise on favourable market conditions, leverage the liberal regulatory climate and of course, gain significant synergies. Domestic companies primarily engaged in the Information Technology, Pharmaceuticals, Automobile and Oil and Gas sector have been more active in achieving their international footprint gradually. Notable acquisitions by Indian companies in the last decade are Tata Steel - Corus, Hindalco - Novelis, Lupin – Gavin and Tata Motors - Jaguar Land Rover. .....

Family Arrangements and Taxation – An Eternal Saga?

In India, majority of the businesses have traditionally been seeded by a family and the baton of management and control of such business is passed to the members of the same family across multiple generations. Further, in the Indian scenario, often, several unrelated businesses are housed in a single vehicle (such as a common holding company) but are distinctively managed and controlled by different members of family with no interference from the other family members......

Deemed dividend amendments: The Companies Act and accounting dimensions

The focus of this article is to deal with the amendment made in the Dividend Distribution Tax(DDT) Chapter (XII – D), the combined effect of which is to bring deemed dividend of the nature contemplated in Section 2(22)(e) within the purview of Dividend Distribution Tax (DDT) and the amendment made in Section 2(22) to deal with certain aspects of “accumulated profits” in the context of a merger; as the intent of this column has always been, an attempt is also made to link up these tax provisions with certain non-tax provisions, so that an integrated view is achieved......

Gifts and Inheritances received by NRIs - FEMA and Tax Issues

As per the International Migration Report 2017, published on 18 December 2017 by the United Nations (Department of Economic and Social Affairs), India is said to have the largest number of persons born in the country now living outside its borders – a staggering 17 million[1] in 2017. With such a large diaspora, and assets held or inherited by them in India having appreciated in value significantly over the years, and need for funds abroad, several issues arise; these issues are often a combination of tax (India and overseas) and FEMA issues.   [1] Does not include children of migrants born in the countries abroad.....

Schemes of Arrangement – Possibilities Galore!

The term “Arrangement” used in the context of a Scheme of Arrangement (“Scheme”) has an extensively wide import and can be explored to achieve various commercial objectives could principally be in the form of external arrangement or an internal arrangement. Any Scheme seeking to achieve such commercial objectives would have wider ramifications from a tax and regulatory perspective in the backdrop of evolving tax and regulatory landscape vis-à-vis different arrangements.....

Funding in India – Changing Landscape

The World Bank's recent 'Ease of Doing Business index' showed that India has risen as much as 30 positions to rank 100th amongst 190 countries, which has been amongst the world's top ten improvers worldwide and a leading regional reformer. Moreover, the latest Ease of Doing Business report did not consider the implementation of the Goods and Services Tax (GST) from July 1.....

MAT levy under IND AS regime – An unintended blow to strategic debt restructuring? - Part 2

In part 1 of this article, we discussed the meaning of financial liability, its classification, measurement and possible MAT impact. In this part, we shall now discuss derecognition of financial liability under IND AS 109 and the possible MAT impact of derecognition as well as general principles governing MAT applicability......

MAT levy under IND AS regime – An unintended blow to strategic debt restructuring? – Part : 1

Currently, macro global factors apart, back at home, India Inc is reeling under the pressure of mounting debt, stressed assets and NPAs. With big corporate houses finding it difficult to manage their debt and the numbers sometimes running into thousands of crores, the Indian Government, RBI and the consortium of banks and creditors are now in overdrive, and seeking to address the situation......

Business Combinations: A Tryst with Taxation

It has been said that change is the only constant – and with changes comes the paradigm shift in how we perceive the same things. In this context, a transaction would definitely be perceived differently owing to the new accounting standards i.e. Indian Accounting Standards (“Ind-AS”) kicking in, inter alia, for all listed companies from FY17-18. As in any other situation (such as taxation matters), Ind-AS also focuses on the substance of the transaction rather than merely the form or nomenclature of the transaction.....

Resolving Stressed Accounts– tax derailment ?

Over a period of time, Indian businesses have expanded significantly and extended their reach to global markets. In order to support expansion, businesses have availed various types of finances / loans for setting up as well as running their business operations, from various stakeholders such as banks, financial institutions, private and strategic investors, etc. However, due to several factors such as downturn in global market conditions, intense pricing competition, technology disruptions, etc. many businesses have not been able to sustain their business operations.....

RERA – It takes Two to Tango!

“Disruption” – a term usually associated with the digital age – is also a term increasingly being used to describe the evolving Indian legal landscape. Owing to the seminal nature of the new laws being enacted, India Inc. cannot afford to perfunctorily adopt them, but would be required to embrace a completely new perspective in order to cope up with them. One such ground-breaking law is the Real Estate (Regulation and Development) Act, 2016 (“RERA”) which will have significant impact on the different players engaged in the real estate sector.....

Trusts, Taxation and Takeover Code – a Timeless Tussle!

Complexity in business environment has grown multi-fold owing to the impact of globalisation on geopolitical and financial markets. While the global economy has remained lull, India has been an exception to the same with the Indian promoter families having steered their businesses onto the path of profitability and growth and in the process have amassed significant wealth for themselves and their families. A recent trend shows that in order to facilitate seamless transition of wealth from one generation to another, Indian promoters have favoured “trust” as a holding vehicle.....

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