Private Equity & Venture Capital Investments Indian Tax & Regulatory Aspects May 20, 2015 -- Amithraj AN CA. Amithraj AN + 91 98861 20086/ [email protected] CA. Krishna Prasad + 91 99802 66200/ [email protected]
Private Equity & Venture Capital Investments
Indian Tax & Regulatory Aspects May 20, 2015
-- Amithraj AN
CA. Amithraj AN
+ 91 98861 20086/ [email protected]
CA. Krishna Prasad
+ 91 99802 66200/ [email protected]
2 Amithraj AN & Krishna Prasad VC & PE
Contents
• Taxation of DVCF & FVCI
• Indian Fund – Entity Form and Categories of AIF
• Typical Fund Structures
• Funding Instruments
• Listed Non Convertible Debenture (Listed NCD)
• Recent FEMA Developments
• Issue of Shares – Companies Act
• Issue of Debentures – Companies Act
• Repatriation Options
Section 1
Taxation of DVCF & FVCI
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Taxation of AIF
• DVCF/ specified AIF are regarded as flow through transparent entities, in terms of
Sections 115UB, 10(23FBA) and 10(23FBB)
• AIF Category I and Category II funds are entitled to transparent status
• AIF Category III set-up as Trusts also entitled to similar status, by virtue of being a Trust
• Status of Trust – Specific & Determinate critical to ensure pass through status
• ‘Pass through’ status – nature of income in hands of AIF flows up to the investors
• Except for business profits and business or non-business losses
• Business income to be assessed in hands of AIF
• Taxes to be deducted at source @ 10% (including exempt income?)
• Computation required on an annual basis
• Investors liable to tax on accrual basis and not on actual distribution of proceeds
• Non-resident investors are entitled to claim treaty benefits, with respect their share
of income and categorisation of the same
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Taxation of AIF
Capital Gains & Other Income
• Pass through status
• Income taxable for investors, in proportion of
the holding
• Treaty benefits can be claimed
• No capital gains tax on investors from
Singapore/ Mauritius
• TDS on this income @ 10%
• Possible to claim treaty benefit – Section 90(2)
Business Income
• Taxable at AIF level
• Further distribution of such income not liable
to tax
• No TDS on this income
Investors
SPV
AIF Cat I & II
Capital Gains & Other Income
Capital Gains & Other Income
Business Income
10% TDS No TDS
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Taxation of FVCI
• No specific exemptions under the IT Act or Section 10(23FB)
• Earlier FVCIs used to contend that their income is business income -- no tax liability
in India, in absence of a PE
• The Finance Act No. 2, 2014 has amended the definition of ‘capital asset’
• Consequently, all incomes arising to FVCIs are liable to tax as capital gains
• Funds qualifying as residents in jurisdictions with favourable tax treaties can avail
capital gains tax exemption
• Challenges in case funds are structured as transparent entities in host countries
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Foreign Investors – MAT Conundrum
• Proposal by Income-tax Department to collect MAT from FIIs, etc.
• Finance Act, 2015 gives MAT relief to foreign investors prospectively
• Prior years – legacy issue
• FM has clarified that MAT will not be collected from treaty jurisdictions having
capital gains exemption
• CBDT circular – no coercive action should be taken, given Justice A.P. Shah
committee has been constituted
• Bombay HC has granted stay in case of Aberdeen Global against MAT levy
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Fund Managers – Safe Harbour
• Fund Management in India not to trigger ‘business connection’ for non-resident
funds
• Subject to a number of conditions:
• Minimum number of members
• Restriction on maximum investment in investee company
• Management fee
• Should be paid at arm’s length
• Limit on share of profits
• Other conditions specified
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Investment Jurisdictions
Investment in India through
Corporate tax rate
Capital Gains taxability in
India
Capital Gains taxability overseas
Dividend taxability overseas
Remarks
Singapore 17% Not Taxable Not Taxable Not Taxable
(Foreign Sourced Income exemption
on fulfilment of certain conditions)
Substance in Singapore to be demonstrated
SGD 200k annual expenditure criteria
Cyprus 12.5% Not Taxable Not Taxable Not Taxable as per domestic laws
Treaty renegotiation discussions
Blacklisting concerns
Netherlands 25% Not Taxable, unless shares sold to Indian
resident
Not Taxable – Participation Exemption
Not Taxable – Participation Exemption
Capital Gains taxable in India if sold to Indian Resident
Luxembourg 22.05% Taxable @ 21.63%/ 43.26%
Not Taxable – Participation Exemption
Not Taxable – Participation Exemption
No capital gains tax exemption
Suitable for debt investments
Mauritius 15%
(80% deemed
FTC)
Not Taxable Not Taxable Not Taxable due to Underlying Tax
Credit Max rate 3%
Tax Residency Certificate (TRC) and requirement to demonstrate substance, limited GAAR
Cyprus notified under Section 94A of the IT Act
Cyprus is also under OECD watch list
Section 2
Indian Fund – Entity Form Categories of AIF
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Indian Fund – Entity Form
Trust Company LLP
• Significant corporate law
restrictions
• Challenges in raising funds
and retirement of investors
• Rarely used form for DVCF/
AIF
• Lacks flexibility
• Almost all funds are set-up as
Trusts
• No corporate law restrictions
• Ease in raising funds and
retirement of investors
• Significant flexibility
• Deposit challenges for
optionally convertible debt
instruments and loans
• 99% of funds are structured
as Specific Trusts
• Many aspects similar to Trust
• RoC restrictions in setting-up
LLP as investment vehicles
• LLP will be a taxable entity,
unless it qualifies as AIF Cat I
or II fund
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AIF Categories
AIF Cat I
• Invest in start-ups or early
stage ventures or social
ventures or SMEs or
infrastructure or specified
sectors
• Venture capital funds, SME
funds, social venture funds,
infrastructure funds
• May be entitled for specific
benefits by Government or
Regulators
AIF Cat II
• Neither Category I nor
Category III AIFs
• No leverage or borrowing,
other than for operational
requirements
• AIFs such as private equity
funds
• No specific incentives or
concessions are granted
AIF Cat III
• Employ complex or diverse
trading strategies
• May employ leverage
including through investment
in listed or unlisted
derivatives
• Hedge funds or funds
focusing on short-term
returns, open ended funds
• No specific incentives or
concessions are granted
Section 3
Typical Fund Structures
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Typical Fund Structures
DVCF – Domestic Investors
Indian Fund
Investors
Investors
Investors
Eligible Investments
Eligible Investments
Eligible Investments
AMC Management Services & Fees
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Typical Fund Structures
FVCI
Offshore Fund
Investors
Investors
Investors
Eligible Investments
Eligible Investments
Eligible Investments
AMC Management Services & Fees
Investment Advisor
Advisory Services & Fees
India
Overseas
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Typical Fund Structures
DVCF with Foreign Investors
Indian Fund
Investors
Investors
Investors
Eligible Investments
Eligible Investments
Eligible Investments
AMC Management Services & Fees
India
Overseas
Indian Investors
FIPB Approval
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Typical Fund Structures
DVCF with FVCI
Indian Fund
Investors
Investors
Investors
Eligible Investments
Eligible Investments
Eligible Investments
AMC Management Services & Fees
India
Overseas
Indian Investors
Offshore Fund
FVCI AMC Management Services & Fees
No FIPB Approval
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Typical Fund Structures
DVCF & FVCI – Parallel Investments
Indian Fund
Investors
Investors
Investors
Eligible Investments
Eligible Investments
Eligible Investments
AMC Management Services & Fees
India
Overseas
Indian Investors
Offshore Fund
FVCI AMC Management Services & Fees
No FIPB Approval
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Key Aspects in Domestic Fund Structure
Constitution of the Fund
Business Income v Capital
Gains
In case of Trust –
Determinate Status
Deferral of taxability /
withholding
Constitution of the
Manager – Company / LLP
Deductibility of expenses
In case of Trust –
Permissibility to do
downstream LLPs
Reporting to investors
Carry structure for
Manager employees
Differential fee / carry
structures
Companies Act – Deposit
Regulations
Investment in “Associates”
– Prior investor approval
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Key Aspects in Offshore Fund Structure
Jurisdiction for
establishing Fund / AMC
Exit strategies
Regulatory arbitrage and
efficiency
Co-investment vs. Unified
Tax Residency / PE
Carry/ Management Fee Sharing Reward planning
Tax efficiency on profit
repatriation
Ownership of India Advisory Company and
entities
Need for India Advisory
Company / LLP
Regulatory approvals
Revenue authorities
approach & MAT liability
Interplay between various
entities
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Issues for Discussion
• Investment by DVCF having majority foreign investment – Whether Downstream
Investment?
• Payment of interest to DVCF – Whether WHT is applied as payment to Resident or
Non-Resident?
• Withholding tax obligations on DVCF
• Income-tax return filing
Section 4
Funding Instruments
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Funding Instruments
Equity
CCPS
OCRPS
CCD
OCD
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CCPS
Term of the instrument Convertible into equity shares within 20 years – typically 4 to 5 years considered
Nature of Investor DVCF/ FVCI
Coupon Typically nominal coupon (say 0.0001%) required
Companies Act requirement to distinguish against equity shares
FEMA Whether downstream investment?
Allotment pricing Allotment of CCPS at Par or Premium – No significant difference in outcome
Conversion to be at fair value
Security No charge on assets
Possible to have put option with the promoters
CCPS will rank lower than Creditors but higher than equity
Exit Options (a) Transfer of CCPS to Promoters, prior to conversion at a fixed IRR
(b) Conversion of the instrument into equity shares or other instruments at a fixed IRR
(c) Exchange against specific investments held by Investee company/ Promoters
(d) IPO (post conversion into equity) Tax Implications (a) DVCF Perspective
Gains on transfer of CCPS should be taxable as capital gains – short term/ long term
Benefit of DTAA could be claimed by the FVCI in DVCF for capital gains exemption
Conversion of CCPS into equity shares could be liable tax, subject to treaty
Step-up in cost may be possible
(b) FVCI Investor Perspective
Capital gains exemption under the treaty can be availed
(c) Company Perspective
No implications
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OCRPS
Term of the instrument
Redeemable/ convertible into equity shares within 20 years – typically 4 to 5 years considered
Nature of Investor DVCF
Coupon Typically nominal coupon (say 0.0001%) required
Companies Act requirement to distinguish against equity shares
FEMA Whether downstream investment?
Allotment pricing (a) Allotment of OCRPS at Par
Creation of CRR on redemption of OCRPS – to the extent of par value
Significant increase in authorised share capital required to accommodate issue of OCRPS
Conversion to be at fair value
(b) Allotment of OCRPS at Premium
Appropriate amount of premium to be determined based on conversion ratio
Face value of shares to be allotted on conversion > face value of OCRPS being converted
CRR to be created only to the extent of face value of OCRPS redeemed
Premium on allotment of OCRPS can be utilised to fund the premium on redemption of OCRPS
No Section 56(2)(viib) on allotment of shares at a premium to venture capital funds
Lower increase in authorised share capital required
Security No charge on assets
Possible to have put option with the promoters
OCRPS will rank lower than Creditors but higher than equity
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OCRPS
Term of the instrument
Redeemable/ convertible into equity shares within 20 years – typically 4 to 5 years considered
Exit Options (a) Transfer of OCRPS to Promoters, prior to redemption/ conversion at a fixed IRR
(b) Redemption of the instruments at a fixed IRR
(c) Conversion of the instrument into equity shares or other instruments at a fixed IRR
(d) Exchange against specific investments held by Investee company/ Promoters
(e) IPO (post conversion into equity)
Tax Implications (a) DVCF Perspective
Gains on transfer/ redemption of OCRPS should be taxable as capital gains – short term/ long term
Benefit of DTAA could be claimed by the FVCI in DVCF for capital gains exemption
Applying the same ratio, gains on redemption of shares at a premium should be regarded as capital gains
Potential risk of deemed dividend implications on redemption at premium
Conversion of OCRPS into equity shares could be liable tax, subject to treaty
Step-up in cost may be possible
(b) FVCI Investor Perspective
Capital gains exemption under the treaty can be availed
(c) Company Perspective
Pro-rata premium payable on redemption not entitled for deduction
Potential deemed dividend implications
Withholding tax provisions should not apply on redemption – payment to resident Accounting Coupon payment/ Premium on redemption of OCRPS shall not construed as interest
payment. Hence, no hit in the P&L a/c
Securities premium can be utilised for redemption premium
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CCD
Term of the instrument Convertible into equity shares within 10 years – typically 4 to 5 years considered
Nature of Investor DVCF/ FVCI
Coupon Typically nominal coupon (say 0.01%)
FEMA Whether downstream investment?
Allotment pricing (a) Allotment of CCD at Par
Interest can be paid on entire amount invested
Possible to undertake repatriation of significant interest
Conversion to be at fair value
Creation of DRR or CRR should not be required for CCD
(b) Allotment of CCD at Premium
Appropriate amount of premium to be determined based on conversion ratio
Face value of shares to be allotted on conversion > face value of CCD being converted
Interest payable only on par value of CCD
No Section 56(2)(viib) on allotment of CCD
Security Can have charge on assets
Possible to have put option with the promoters
Typically CCD will rank lower than Creditors but higher than equity and preference shares
Exit Options (a) Transfer of CCD to Promoters, prior to redemption/ conversion at a fixed IRR
(b) Conversion of the instrument into equity shares or other instruments at a fixed IRR
(c) Exchange against specific investments held by Investee company/ Promoters
(d) IPO (post conversion into equity)
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CCD
Term of the instrument Convertible into equity shares within 10 years – typically 4 to 5 years considered
Tax Implications (a) DVCF Perspective
Gains on transfer of CCDs should be taxable as capital gains – short term/ long term
Benefit of DTAA could be claimed by the FVCI in DVCF for capital gains exemption – language of treaty to be assessed
Conversion of CCD into equity shares not liable to tax
Cost of shares goes back to CCD cost
(b) FVCI Investor Perspective
Capital gains exemption under the treaty can be availed – to be assessed
(c) Company Perspective
Periodic interest payment allowable as deduction
Accounting Coupon payment construed as interest payment
Companies Act Maximum tenure – 10 years ?
Deposit if convertible after 5 years, if received from a Trust
Can CCD be converted into Preference Shares
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OCD
Term of the instrument
Redeemable/ Convertible into equity shares within 10 years – typically 4 to 5 years considered
Nature of Investor DVCF
Coupon Typically nominal coupon (say 0.01%)
FEMA Whether downstream investment?
Allotment pricing (a) Allotment of OCD at Par
Interest can be paid on entire amount invested
Possible to undertake repatriation of significant interest
Conversion to be at fair value
Creation of DRR is required
(b) Allotment of OCD at Premium
Appropriate amount of premium to be determined based on conversion ratio
Face value of shares to be allotted on conversion > face value of OCD being converted
Interest payable only on par value of OCD
No Section 56(2)(viib) on allotment of OCD
Security Can have charge on assets
Possible to have put option with the promoters
Typically OCD will rank lower than Creditors but higher than equity and preference shares
Exit Options (a) Transfer of OCD to Promoters, prior to redemption/ conversion at a fixed IRR
(b) Redemption of the instruments at a fixed IRR
(c) Conversion of the instrument into equity shares or other instruments at a fixed IRR
(d) Exchange against specific investments held by Investee company/ Promoters
(e) IPO (post conversion into equity)
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OCD
Term of the instrument Convertible into equity shares within 10 years – typically 4 to 5 years considered
Tax Implications (a) DVCF Perspective
Gains on transfer of OCDs should be taxable as capital gains – short term/ long term
Benefit of DTAA could be claimed by the FVCI in DVCF for capital gains exemption – language of treaty to be assessed
Conversion of OCD into equity shares not liable to tax
Cost of shares goes back to CCD cost
Redemption of OCD at premium will be construed as interest payment
Treaty benefit can be claimed with regard to interest income
(b) FVCI Investor Perspective
Capital gains exemption under the treaty can be availed – to be assessed
Interest taxation and treaty benefit
(c) Company Perspective
Pro-rata premium payable on redemption entitled for deduction
Withholding tax provisions may apply on redemption – payment to resident Accounting Coupon payment construed as interest payment
Significant impact on P&L on proportionate premium Companies Act Maximum tenure – 10 years ?
Deposit if received from a Trust
Section 5
Listed Non Convertible Debenture (Listed NCD)
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• Schedule 5 of FEMA 20 governs foreign investment under NCD route
• SEBI registered FPIs (including FIIs and QFIs) are allowed to invest in listed NCDs or
bonds, government securities/ treasury bills, commercial papers, units of mutual
funds, primary issue of NCDs, etc.
• Primary issue with the condition that NCDs/ Bonds are committed to be listed within 15 days
of investment. Terms of offer to have a clause that if not listed within 15 days, the issuer shall
immediately redeem/ buyback
• SEBI (Foreign Portfolio Investors) Regulations, 2014 govern investment by FPIs
• Three categories of FPI Investors:
• CAT I : includes Government, Govt agencies, sovereign funds, etc.
• CAT II : includes mutual funds, investment trusts, insurance companies, etc.
• CAT III : includes corporate bodies, trusts, foundations, individuals, etc.
• NRIs cannot register as FPIs
• Person seeking FPI registration should engage a Designated Depository Participant
(DDP) for obtaining the registration
• DDP shall also act as a custodian of securities for the FPI
Listed NCD
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• Any Indian company (private or public) can issue NCDs on a private placement basis
• NCDs are listed in Wholesale Debt Market (WDM) segment of stock exchange
• Listing not necessary if investment is in ‘infrastructure’ sector
• NCDs subscribed/ purchased by FPIs are not treated as ECB
• No end-use restrictions and also conditions applicable to FDI investors under FDI policy
would not apply
• No restrictions on the interest remittances and also on redemption
• However, NCDs with a maturity of less than one year are regulated by RBI
• NCDs can be secured against mortgage of assets of the issuing company
• NCD issue to comply with SEBI (Issue and Listing of Debt Securities) Regulations
• Compliance with Company Law requirements
• Private placement related provisions
• Does it amount to acceptance of deposit ?
• Stamp duty implications under Indian Stamp Act
• 0.05% per year of the face value of the debenture, subject to a maximum of 0.25% or Rs. 25
lakhs, whichever is lower
Listed NCD
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NCD Issue Process
Appointment of credit rating agency, RTA and debenture trustee
Obtaining rating certificate for the NCD issue
Obtain In-principle approval for listing from the stock exchange
Obtain ISIN for the Company from the depository (NSDL/ CDSL)
Filing of listing agreement and other documents with stock exchange and
NCD listing
Finalisation of Information Memorandum, debenture trust deed
Subscription and allotment of NCDs
Registration of charge and other RoC filings
Estimated Time Frame : 6 - 8 Weeks (Approx)
Shareholders Approval for allotment of NCD
Board Approval for allotment of NCD and convening of EGM
Section 6
Recent FEMA Developments
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Pricing of FDI Instruments with Optionality
• RBI has recently issued a Circular w.r.t ‘Put & Call options’ in Equity/ CCPS/ CCDs
• RBI was not comfortable with these options in SSA/ SHA – takes color of debt
• Docomo stake sale stuck before RBI on same aspect
• Optionality clause will oblige buy-back of securities from investor at the price
prevailing/ value determined at the time of exercise of option
• RBI has further specified that there shall not be an ‘assured price/ return’ for exit
• Is only buy-back by the Company permitted or purchase by Promoter also possible?
• For Listed Companies – at prevailing market prices
• For Unlisted Companies – As per RBI Pricing Norms
• Minimum lock-in – 1 year (few sectors may require a longer lock-in)
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Issue of Partly Paid Shares and Warrants
Partly paid equity shares
• Partly paid shares now FDI compliant
• Pricing to be determined upfront
• 25% of consideration to be paid upfront (balance within 12 months)
• Can be received after 12 months, if issue size > 500 cr and appoint monitoring agency
Warrants
• Warrants now FDI compliant
• Pricing of warrants and price/ conversion formula to be determined upfront
• 25% of consideration to be paid upfront (balance within 18 months)
• Price for conversion not to be lower than fair value at the time of issuance of warrants
• Investee company can receive more than pre-determined price
Section 7
Issue of Shares – Companies Act Sections 42, 62, 63, 55 and 54
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Types of Share Issue
Rights Issue
Preferential Issue/ Private Placement
Public Issue
Sweat Equity Shares/ ESOPs
Bonus Shares
Preference Shares
ADR/ GDR
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Rights Issue
Rights Issue Offer Document
15 to 30 days *
Deemed Right to Renounce , unless Articles provide
otherwise
Shareholders may: • Subscribe • Decline
• Renounce
Company may allot shares on Subscription or
on Renouncement
Board may dispose the shares
in a manner not disadvantageous
OR
Declined by Shareholders
Applicable to Private and Public Companies
Covers Allotment of Equity Shares and Preference Shares
* Can be shorter period, if approved by 90%+ shareholders in a Private Company – Proposed Amendment
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Rights Issue – Key Points
• Pricing guidelines not applicable – same position under FEMA
• Allotment to persons other than shareholders requires Special Resolution –
Preferential Allotment
• Private Placement guidelines to be complied with for Preferential Allotment
• Not applicable on conversion of loan or convertible debentures
• Special resolution shall have been passed earlier
• Separate compliance prescribed for ESOPs
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Preferential Issue/ Private Placement
Special Resolution – 12
month time limit
Allotment Price ≥ Registered
Valuer’s valuation
Maximum allottees – 200
per FY across all securities
Invitation sent to select group of
persons
Ongoing allotments of
other securities to be completed
before new issue
Consideration not to be collected in
cash
Allotment within 60 days or refund
within 15 days
Application money cannot be
utilized until allotment
Minimum size of allotment per
person – INR 20k Face Value
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Preferential Issue/ Private Placement – Key Points
• Covers allotment of Equity Shares, Convertible Preference Shares and
Convertible Debentures
• These provisions apply to private companies as well
• Applicable to new companies as well (2 year time limit done away)
• QII and employees excluded from 200 limit
• Valuation to be carried out by a CA with 10 years in practice, until Registered Valuer
provisions are notified
• Delay in refund of application money beyond 15 days – 12% interest p.a.
• No public advertisement can be given
• Partly paid-up securities cannot be allotted on preferential basis
• Consideration for non-cash allotment to be valued by Registered Valuer
• List of select group of persons to whom invitation was sent to be filed with RoC
• Return of allotment to be filed with RoC within 30 days
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Modes of Allotment of Shares to New Shareholders
Rights Issue and Failure of the same
Rights Issue and Renunciation by Existing Shareholders
Preferential Issue/ Private Placement
OR
OR
Preferential Allotment
Conditions Not Applicable
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Preference Shares
• Shares with have preferential right with respect to:
• Payment of dividend
• Repayment of capital, in the case of a winding up
• Possible to have participating preference shares – dividend and/ or capital
• Authorized by Articles and approved through Special Resolution
• Maximum tenure – 20 years
• Infrastructure companies can issue with maximum tenure of 30 years
• Minimum 10% annual redemption after 20 years , at the option of preference shareholders
• Redemption out of free reserves or proceeds of fresh issue
• CRR requirement for redemption out of free reserves
• CRR can be utilized for allotment of bonus shares
• Fresh preference shares can be allotted for redemption of earlier preference shares
• 3/4th shareholders approval
• Tribunal approval
Section 8
Issue of Debentures – Companies Act Section 71
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Issue of Debentures
Whether Debentures qualify as Deposits
Comply with Acceptance of Deposit Rules
Yes
Comply with Issue of Debenture Rules
No
No explicit compliance requirements
If Deposits are covered under Exceptions
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Deposits
• Deposit includes any receipt of money by way of deposit or loan or in any other form,
by a company
Key exceptions to deposits – Amounts received from:
• Foreign collaborators, foreign bodies corporate and foreign citizens in compliance
with FEMA
• Inter-corporate loans
• Share application money or advance towards allotment of securities – upto 15 days
after lapse of 60 days
• By a company from a director – declaration
• Bonds/ debentures fully secured with first charge on non-intangible assets
• Debentures convertible within 5 years
• Promoters by way of unsecured loan in pursuance of the stipulation of any lending
financial institution or bank – post repayment of bank loan, loans by promoters
become deposits
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Issue of Debentures
Covers allotment of convertible/ non-convertible debentures
Debentures shall not carry voting rights
Possible to cap liability of the Debenture Trustee
Prior appointment of Debenture Trustees – Invitation to public or members exceeding 500
Debentures to be mandatorily Secured?
Debenture Redemption Reserve to be created
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Issue of Debentures
Tribunal on application by Debenture Trustee may restrict the company from incurring further liabilities
Tribunal can intervene on failure to redeem Debentures
Specific enforcement for redemption possible
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Issue of Debentures – Secured (Rules)
Restrictions on who can be a Debenture Trustee
Secured against specific movable or immovable property Value of Security > Debenture Amount
Maximum tenure – 10 years Infrastructure companies – Upto 30 years
Power to appoint nominee director – 2 consecutive defaults in interest payment or default in creation of security or redemption
DRR specifics: 50% of value before commencement of redemption 15% of debentures to be redeemed to be invested in specified securities
DRR not required for convertible portion
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Deposits/ Debentures – Points for Discussion
• CCD from companies, convertible after 5 years – Deposit or Debentures
• Unsecured Debentures issued to corporates – 10 year tenure applicable or not
• Share application money received from corporates, outstanding for more than 75 days
– Deposit or general corporate exemption applicable
• Advance for supply of goods or services > 365 days from corporates – whether deposit
Section 9
Repatriation Options
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Repatriation Options
Royalty/ FTS
Interest
Dividend
Regulatory Challenge
Tax Efficiency
Buy-back
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Tax on profit repatriation
Indian Sub Co
Parent
100% equity Profit 100.00 Tax 34.61 65.39 DDT [17.30% of PAT] 11.32 Dividend 54.07
Dividend No Indian WHT
45.93%
Other efficient modes of repatriation like Interest, Royalty, Fees for technical services etc. may be
considered
Outside India
56 Amithraj AN & Krishna Prasad VC & PE
Repatriation of funds – Tax cost analysis
Instrument Mode Jurisdiction Effective Tax Cost
Decision Making
Equity (Revenue) Dividend Any 40%
Equity (Capital) Capital Gains Cyprus/ Singapore/ Mauritius/
0%
Debt (Revenue)
Interest Cyprus 5%
Singapore 5%
Mauritius 5%
Debt (Capital) Repayment Any 0%
Technical Services/ Royalty
Technology fees to JV Partner
Any Treaty rate/ 10%*
* Proposed by Budget 2015 to be reduced from 25% to 10%
57 Amithraj AN & Krishna Prasad VC & PE
Buy-back of Shares
• Buy-back of shares by domestic unlisted companies taxable at 20%++
• Tax will be levied on the company buy-back shares on ‘Net Consideration’
• Net Consideration = Buy-back consideration Less Consideration received on allotment of shares
• DTAA benefits neutralized – Mauritius, Singapore structures stand nullified
Particulars INR in Crs.
Share Capital 100
Free Reserves 400
Shareholder Funds 500
Particulars INR in Crs.
Max. permissible buy back (25% on Share capital & Free reserve)
125.00
Less: Amount received at time of issue of shares (Assuming share issued at face value)
25.00
Distributed income 100.00
Tax on buy back of shares @ 22.66% 22.66
Repatriation of Fund by Dividend or Buyback of Shares?
58 Amithraj AN & Krishna Prasad VC & PE
Repatriation Option – Capital Reduction
India Co.
F Co.
Outside India
India
India Co. to reduce capital
100%
Capital Reduction - Effective tool for restructuring
• Modes of effecting capital reduction
• Repaying paid up equity capital, which is in excess of
needs of the Company
• Cancel paid up equity capital which is lost and
unrepresented by assets
• Cancel equity capital by reducing liability on unpaid
share capital
• Tax implications
• Distribution attributable to accumulated profits -
Company to pay dividend distribution tax to the extent
of accumulated profits as per the provisions of section
2(22)(d)
• Distribution attributed to capital (except capitalized
profits) - Capital gains tax for shareholders
CIT v G. Narasimhan, (1999) 236 ITR 327 (SC)
Thank You
CA. Amithraj AN
+ 91 (0) 98861 20086
Views expressed in the presentation are personal
CA. Krishna Prasad
+ 91 99802 66200