Atmanirbhar Bharat with Current Equity M&A Tax Rules?
“Mergers are like marriages. They are the bringing together of the two individuals. If you wouldn’t marry someone for the operational efficiencies they offer in the running of a household, then why would you combine two companies with unique culture and identities for that reason?”
Simon Sinek
The world was unrehearsed for the deadly pandemic and its under way aftermath. The COVID 19 has shaken the operations of economy and its operators. India is experiencing its worst economy depression since 1961. It is now no more confidential that India’s economy has shrunk by 23.9% in the 1st quarter of financial year 2020-2021[1]. The government has claimed it to be an act of god and the recovery of the pandemic to be dependent on the business operations and decisions. The migrants working in different states have returned to their respective root states and it has created the unavailability of the third wheel of any manufacturing, business, industry, etc. thereby stating Labour. Farming has become the cushion for the laborers, and the constant support by the government in providing the basic needs have made them a little less vulnerable.
India needs a call attention to the business operations, which contributes the highest to cumulative GDP of India. The COVID has led to elevated inflation in the economy which in turn has knock-backed the business and created the need to one-eighty the operations and the mechanism. The giant businesses needs the bold and adamant decisions which cannot be limited to stretching the brand, shifting to a new product line or undergoing the scheme of mergers and acquisition. The schemes opted by the business is dependent on the security and savings left with the companies. Companies like Reliance have ample operating capital and can take the risks with new business models. They have been shifting their focus on new undertakings and extending the product line.
[1] Estimate of Gross Domestic Product for the First Quarter (April-June) 2020-2021, Ministry of Statics and Program Implementation, 2020,
http://www.mospi.gov.in/sites/default/files/press_release/PRESS_NOTE-Q1_2020-21.pdf
The companies like Future Group have been acquired by the reliance-like companies with the advent of pandemic. Due to COVID, the economy has experienced fairly low M&A growth as compared to the previous year. The experts have stated that India may have a rise in the M&A transaction in the coming future. The nous behind the anticipation is the struggle and winding up of the nascent start-ups. The tussles and scuffles within the start-ups have been strangulating the desire to operate. COVID has made the start-ups leave the spirit of continuing the business and handing-over it to the efficiently operating or security-stabled companies.
Is Merger and Acquisition the Right Track?
The M&A ubiquitous influence in business is widespread. India has a discrete law for M&A mechanisms besides being additionally mentioned in acts like Income Tax Act. It has been defined in Income tax act for tax treatment and avoiding taxable income, generated from the M&A, to be evaded. The M&A is an optimal way for expanding the market growth by the synergies of two or more companies and banishing the competition either by acquiring the competitor’s company or by acquiring other company, thereby shriveling competitor market.
Following recent events, start-ups are coming to a halt or undergoing stringent loans, as a result of COVID, and unable to operate effectively and efficiently. The supreme ploy of the giant organisation have been acquiring them and expanding their product line. In the neoteric M&A transaction of Reliance and Future Group, the Reliance overtook the latter, a 7-year old company. Correspondingly, anticipate the death-bed conditions of start-ups. The financially resourceful companies could be savior for the start-ups by providing funds or going through M&A.
The Federation of Indian Chambers of Commerce and Industry (FICCI) survey, ratio analyzed the start-up’s status and operation amidst COVID. Undoubtedly in reports, 17% of the start-ups have shut their operations and only 22% have reserves to compete with fixed-cost and expense for upcoming three to six months[2], thereby portraying downfall of start-ups. Subsequently, Government has announced 100 crore budget for deserving start-ups to meet their ends and rescue them from COVID disruptions.
Conversely question arises, should only deserving starts-ups be pulled out from the under-water situations? Every start-up has a divergent modus operandi and rate of return on investment pivot on the variable factors. The contemporary scenario is not a justice to the sweat and sweet determination of the minds behind start-ups. India has to be a smarty-pants and uncover median solution, which emancipates the start-ups and economy. It will be an apposite quotation to encourage giants companies like Flipkart, Reliance, Tata, etc. in funding or acquiring start-ups and safeguarding hard-work from going in vain. Wherefore M&A transactions can make the giant companies profitable and nester the hard-work invested in start-ups.
Collapsing of the start-ups when compared with them being acquired or merged indicates the crystal clear analysis. For a start-up to flourish, a mankind invests ample operational tactics and undertakes several tax incentives bestowed by the government through tax planning. There is no harm in stating that mankind and government, by exempting tax on income which could have been used as revenue for administration, would have to jointly sacrifice. The drowning of such start-ups may not suffice the sacrifices. Whereas opting for M&A will not only redeem all the efforts but will also save giant companies from going extra mile and beginning business from scratch, when they can have ongoing business, who are in dire need of capital.
[2] Federation of Indian Chambers of Commerce and Industry (July 20, 2020), http://www.ficci.in/ficci-in-news-page.asp?nid=23493
Atmanirbhar for Employability
The M&A is a rescue key not only to start-ups but also the employment in India. Indian government bloomed with the idea of “Atmanirbhar Bharat” relying on five pillars, economy being one of them. The Atmanirbhar Bharat Program has been cleaved into five phases and the Atmanirbharta of Business is regarded to be the first phase. It depicts the government’s acknowledgement of gravity of a stable and uprising businesses, which also includes start-ups. Businesses are the fuel to the economy and thereupon given the privilege.
The M&A can be the savior to government by successfully implementing the Atmanirbhar Bharat project. The acquired or merged companies can result in saving employment besides the start-ups. The labors involved in the start-ups might pursue working in the merged or acquired companies, which is a better position than shutting start-ups and depending on the government to provide the employment. The intent here is not to believe government shrugging off their responsibilities but to find the harmonious solutions to the pandemic. The situation is the customary faced worldwide, to make a difference India needs to embrace pragmatic approach.
The M&A would be more benefitting to business and hence may be opted over funding the start-ups. The resourceful businesses can undergo the scheme of M&A in two way, by merging or acquiring the whole start-up or by becoming a partner of start-up. In both the scenarios, the issue of unemployment will not uprear. It is noted that, with the prevailing inflation in economy, the increased number of unemployment will create a rugged situation for India. Unquestionably, the scheme of M&A is the utter need of time saving start-ups from drowning.
Incentivising the Measure
The government should vouchsafe the investors (Giant Businesses) with incentives, for offering one’s service in saving the major start-ups of India. There can be reliefs, deduction, exemption or any of its genre catered to the investors while calculating their tax yearly. The tax planning is a rampant which every mankind falls for and invests the funds towards the captivated market. The investor in lure of putting their funds to good use besides saving taxes, will unquestionably invest in the start-ups. This would act as the head-stand to the economy.
In the context of the above tax analysis, an appropriate reference to the reports of the Kelkar Committee in the year 2002[3] is a problem-solver literature. The committee propounded the hypothesis of exempting Long Term Capital Gain (LTCG)[4] on equity shares deals. The rationale behind exempting the LTCG was the double taxation on the income gained from such deal, as Securities Transaction Tax was already imposed on the income. The exemption on the LTCG helps in reducing the cost of equity capital in our country and also creates a shift in the stock market on the listed securities under section 112 of Income Tax Act. The high taxes on the LTCG has been benchmarked as the reason for the circulation of black money.
It can be inferred from the reports of Kelkar Committee that exemption on LTCG on equity helps in building the stock market and attracting the household investors. It will also result in escalating the foreign direct investment. The current governance reintroduced the LTCG on the equity through Budget 2018 by then Finance Minister Late Arun Jaitley. The populace contemplated Mrs. Sitharaman to announce the exemption on the LTCG, during the Budget speech, and were left distorted. The government should commiserate with the trembled economy and exempt the LTCG, which will attract the investors.
[3] Report of the Task Force on Direct Tax, PRS Legislative Research (Dec. 2002), https://www.prsindia.org/sites/default/files/bill_files/kelkar_direct_taxes.pdf
[4] Budget Speech, Budget and Bills, Income Tax Department, 2003, https://www.incometaxindia.gov.in/Pages/budget-and-bills/finance-bill.aspx
The Conclusion
The contemporary situation is exploiting and deteriorating the mankind and economy. The WHO discovered that COVID cannot be altogether extinguished and we need to inculcate the modus operandi, with COVID as one of its attributes. The business should also shape its model as per the prevailing muddle and come forward and salvage the start-ups by undergoing the scheme of M&A and uplifting the economy.
India ranked 48th in the Global Innovation Index 2020[5], being amongst the top 50 countries for the very first time. The talent accumulated in country in form of start-ups needs to be saved by the investors. The government should exempt the LTCG for a healing economy and bringing it on tracks without circulating the black money[6]. In voyage of Atmanirbhar Bharat scheme, the government should support the individuals to be Atmanirbhar for the employment, which he could lose if start-ups are shut, by changing the M&A tax rules in relation to equity M&A.
[5] Global Innovation Index, World Intellectual Property Index, 2020, https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2020.pdf
[6] Analysis of Kelkar Committee Report, Shodhganga, 2003, https://shodhganga.inflibnet.ac.in/bitstream/10603/53204/9/chapter%205%20analysis%20of%20kelkar%20committee%20report.pdf
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The author is Shreya Bhargava and she can be reached at adv.shreyabhargava@gmail.com
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