private equity & venture capital investments

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]

mailto:[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


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


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



Business Income

10% TDS No TDS


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


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


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


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


Capital Gains taxable in India if sold to Indian Resident

Luxembourg 22.05% Taxable @ 21.63%/ 43.26%



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


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


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



DVCF – Domestic Investors

Indian Fund

Investors

Investors

Investors

Eligible Investments



AMC Management Services & Fees



FVCI

Offshore Fund

Investors

Investors

Investors





Investment Advisor

Advisory Services & Fees

India

Overseas



DVCF with Foreign Investors

Indian Fund

Investors

Investors

Investors





India

Overseas

Indian Investors

FIPB Approval



DVCF with FVCI

Indian Fund

Investors

Investors

Investors





India

Overseas

Indian Investors

Offshore Fund

FVCI AMC Management Services & Fees

No FIPB Approval



DVCF & FVCI – Parallel Investments

Indian Fund

Investors

Investors

Investors





India

Overseas

Indian Investors

Offshore Fund

FVCI AMC Management Services & Fees

No FIPB Approval


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


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


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


Funding Instruments

Equity

CCPS

OCRPS

CCD

OCD


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


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


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


(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


OCRPS will rank lower than Creditors but higher than equity


OCRPS


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


Capital gains exemption under the treaty can be availed


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


CCD


Nature of Investor DVCF/ FVCI

Coupon Typically nominal coupon (say 0.01%)


Allotment pricing (a) Allotment of CCD at Par

Interest can be paid on entire amount invested

Possible to undertake repatriation of significant interest


Creation of DRR or CRR should not be required for CCD

(b) Allotment of CCD at Premium


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


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)


CCD



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


Capital gains exemption under the treaty can be availed – to be assessed


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


OCD


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%)


Allotment pricing (a) Allotment of OCD at Par

Interest can be paid on entire amount invested

Possible to undertake repatriation of significant interest


Creation of DRR is required

(b) Allotment of OCD at Premium


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


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)


OCD



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


Capital gains exemption under the treaty can be availed – to be assessed

Interest taxation and treaty benefit


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)


• 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


• 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


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


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)


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


Types of Share Issue

Rights Issue

Preferential Issue/ Private Placement

Public Issue

Sweat Equity Shares/ ESOPs

Bonus Shares

Preference Shares

ADR/ GDR


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


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



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


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


Modes of Allotment of Shares to New Shareholders

Rights Issue and Failure of the same

Rights Issue and Renunciation by Existing Shareholders


OR

OR

Preferential Allotment

Conditions Not Applicable


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


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


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


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


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


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


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


Repatriation Options

Royalty/ FTS

Interest

Dividend

Regulatory Challenge

Tax Efficiency

Buy-back


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


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%


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?


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

[email protected]

Views expressed in the presentation are personal

CA. Krishna Prasad

+ 91 99802 66200

[email protected]



private equity & venture capital investments

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