Recently, when Tata Steel was acquiring the Usha Martin steel business for Rs. 4300-4700 Cr which would help in ‘significant debt reduction’ of the Usha Martin Ltd. (“UML”) group, Tata Steel, in their release, said that they have executed definitive agreements for the acquisition of the steel business of UML through a slump sale on a going concern basis.
Tata Chemical Limited acquired the businesses of precipitated silica from Allied Silica Limited for consideration of INR 123 Cr in order to enhance their focus on speciality chemical business, again, through slump sale.
Slump sale has become an effective strategy to undertake such transfers. Slump sale is considered to be one of the most preferred ways of carrying out a deal due to various tax and stamp duty implications that are associated with it.
Slump sale is simply defined as a sale where no particular value is given to the assets and liabilities of a business. It is known as a going-concern transfer or an as-is transfer.
Slump sale is the transfer of a business undertaking or some division of a company or entity to another entity as a going concern basis on an as-is-where-is basis for a lump sum amount as consideration. A going concern basis basically means that an entity will remain in business in the near future. This basically means that when a slump sale happens, all the moveable/immovable assets, debtors, creditors, stock-in-trade, investments, liabilities, contracts, licenses, obligations, rights, intellectual properties, employees, etc concerned with the business undertaking will be transferred to the purchaser.
The slump sale is an effective strategy due to the following reasons:-
Understanding the relevance of section 50B of the Income Tax Act, 1961 (“ITA, 1961”)
Slump sale is defined under S. 2 (42C) which defines slump sales to be the transfer of one or more undertakings as a result of the sale for a lump sum consideration without any specific values being assigned to assets and liabilities in such a sale. Further, Explanation 2 specifically states that the determination of the value of an asset or a liability for the sole purpose of payment of stamp duty, registration fees or any other similar taxes or any kind of fees will not be regarded as an assignment of values to individual assets or liabilities.
Section 50B is read as a special provision for computation of capital gains in case of slump sale, this section will override all the other sections regarding slump sales. A special computation mechanism was defined u/s 50B of the ITA, 1961. The key points to be taken into consideration are as follows:
Unlike in a case of a demerger or a merger, in a slump sale, these business losses or unabsorbed depreciation would not be transferred along with the business undertaking.
As slump sale is a taxable transfer, depreciation on assets acquired should be allowed to be deducted under u/s 32 of the ITA, 1961.
In the absence of any of the specific provisions providing for the transfer of MAT credit, any MAT credit of the transferor entity would not be transferred to the transferee entity.
Typically, GST is applicable on supply of “goods” or “services”. However, a transfer of “business” would neither constitute “goods” nor “services”. Hence, it will not be subject to GST.
If the undertaking is made up of more than 20% of the net worth of the seller company, then a special resolution of the shareholders of the seller company is required under S. 180 of the Companies Act, 2013. A Business Transfer Agreement is said to be effective from the date of its execution.
A slump sale is mainly affected by the way of a Business Transfer Agreement (“BTA”). BTA gives out the list of assets, liabilities, contracts, employees, etc. which would be transferred, conditions precedent, representations, warranties from the seller and the buyer and the lump sum consideration at which such a business undertaking would be transferred. BTAs are typically subject to negotiations and is effectively executed within 1-2 months of conceiving the slump sale.
However, a slump sale can also be given effect by the way of a Scheme of Arrangement under Sec 230-232 of the Companies Act, 2013 which requires the approval of the National Company Law Tribunal, the Regional Director, IT authorities, Registrar of Companies, shareholders, creditors and board of directors of the transferor entity. This entire process takes around 6 months in the case of an unlisted seller or about 8-9 months if the seller is a listed entity since it would require the approval of SEBI and stock exchanges. A scheme of arrangement is typically advantageous if the slump sale is to be made retrospectively effective.
The structure is the most important thing that is to be analysed to understand the stamp duty implications in an M&A transaction. The amount of stamp duty that is to be levied on a transaction is state specific. To understand the stamp duty implication on a transaction, it is advised to read Section 5 and 6 of the Indian Stamp Act, 1889, which are as follows:
“5. Instruments relating to several distinct matters. — Any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act.
6. Instruments coming within several descriptions in Schedule I. — Subject to the provisions of the last preceding section, an instrument so framed as to come within two or more of the descriptions in Schedule I, shall, where the duties chargeable thereunder are different, be chargeable only with the highest of such duties: Provided that nothing in this Act contained shall render chargeable with duty exceeding one rupee a counterpart or duplicate of any instrument chargeable with duty and in respect of which the proper duty has been paid.”
In case of a Business Transfer Agreement, it is generally advised to use an agreement to sell instead of a conveyance deed as the stamp duty is considerably lesser for an agreement compared to a conveyance deed.
An asset sale can be defined as the sale of part or whole of assets of the target to the acquirer assigned with individual values assigned for each asset. No kind of court approval is required in the case of an asset sale. The transfer of asset or liabilities is dependent on the acquirer. He has the option of cherry-picking the liabilities. In the case of a capital gains taxes, it is typically computed on a block of asset basis and the value over and above the aggregate of the written down value of the block of assets and expenditure incurred in relation to the transfer will be treated as the capital gains and subject to tax as short-term capital gains. The stamp duty is determined on the instrument that is used for the transaction and is state specific. The stamp duty to be levied on each instrument is typically given in Schedule I of the Stamp Duty Act, 1899. There are no carry forward of losses in an asset sale.
As shares represent the complete underlying value of the assets and liabilities of a company, buying of shares looks like a logical step in an acquisition. Basically, the acquirer is trying to secure the entity which has the business side and the brand. Share acquisition is a common step by an acquirer when the target company has established a loyal customer base and a name for itself.
Amalgamation is a type of business transfer where the assets of two companies have been vested into one company, which can be one of the two original companies. The amalgamating companies lose their individual identities and the old shareholders now become the shareholders of the new amalgamated entity. Amalgamation is usually seen in an internal restructuring exercise between two subsidiaries of a large group which would reduce the administrative and compliance costs.
A demerger can be seen as the opposite of amalgamation, it is seen as a hiving off of a business through a process given by the court. Typically, demergers involve the transfer of a business undertaking by a company to another company as a going concern. The resultant company after the orders of the court concerning the demerger can be incorporated or may have legal existence. Companies opt for demergers so they can function on each of their businesses. Further, one of the main reasons for a demerger is because the parent group is not able to optimise the profits. Demergers can also happen when shareholders decide to unlock the value of their main business through the way of a demerger.
A typical seller will open its data room and attract bidders;
B. The potential acquirer does its various due diligence on the specific business, asset and possibly enter into a non-binding term sheet;
C. If the things keep going well, the acquirer moves ahead and formalises the transaction with a formal term sheet; and
D. This leads to the execution of formal documents such as the Shareholders Agreements, BTA, Scheme of arrangement etc.
The lawyer drafting the agreement should be clear on various aspects that should be covered
1. They should have full knowledge of what assets are going to be transferred;
what liabilities are going to be taken up;
2. T&C concerning the transfer needs to be crystal clear;
3. The considerations that are payable against which particular asset needs to be clear;
4. What kind of a BTA it is – (i) Agreement to sell, (ii) Conveyance Deed
5. Looking out at the Stamp Duty implications on the BTA. The stamp duty is state specific.
Slump sale is a transfer of a business undertaking or division of a company or entity to another entity as a going concern and an as-is-where-is basis for a lump sum consideration payable to the seller-entity by the purchaser. Valuation is not done for individual components or assets but is done for the whole undertaking. It can be done through the agreement to sell or through a BTA. There are various tax implications related to a slump sale which should be taken care of by a deal lawyer working through the transaction.
