The business entities in India are confronted by changing circumstances attributable to variation in the governmental policies and ever-growing competition requiring them to opt for corporate restructuring to maximize their profitability. In furtherance to fulfilment of the said purpose two or more enterprises may come together sharing their liabilities, responsibilities, assets and trade objectives.

Merger… A corporate restructuring

Merger is a process whereby two or more enterprises may come together sharing their liabilities, responsibilities, assets and trade objectives. In the said scenario, the merging entities cease to be in existence and a unified merged entity comes evolved. It is beneficial for many reasons including as joint acquisition of technologies, access to sectors / markets, etc.

Need for Merger

Some of the reasons requiring the need of merging of entities are listed below:

  1. Synergy of operational capabilities;

  2. Efficient allocation of managerial capabilities & infrastructure;

  3. Expansion and diversion in extended domestic and global markets;

  4. Revival and rehabilitation of a sick unit by adjusting its losses against profits of a healthy company;

  5. Acquisition of raw materials and access to scientific research and technological advancement;

  6. Capital restructuring by appropriate to reduce the cost of servicing and improve return on capital employed;

  7. Improve corporate performance.

Tax on the investors

Investors of the corporates undergoing merger after February 1, 2018, would be required to pay higher long-term capital gain (hereinafter referred to as “LTCG”) tax in respect of the stocks held more than one year.

In mergers, investors of the company getting acquired receive shares of the new company in exchange for their original shares. The benefts of ‘Grandfathering’ providing exemptions on the gains made prior to enactment of a new law from the ambit of the new law is not covered over mergers and demergers.

According the Government LTCG tax would be calculated based on original cost of purchase for the shares that were non-existent or unlisted as on January 31, 2018. Since merging of corporates subsumes the former entities such shares would be considered to be acquired post January 31, 2018 thereby making them bereft of any benefits and on the contrary subjecting them higher tax amount.