Bidders for stressed assets face income tax hurdle

The sale of stressed assets by lenders could face a serious problem if the income tax (I-T) department demands a levy on the haircut and interest foregone by them on these assets once a new owner takes over. 

Bidders, private equity companies, and lawyers said while the erstwhile Sick Industrial Companies Act (SICA) had exempted the I-T for sick companies, those under the Insolvency and Bankruptcy Code (IBC) were not getting any tax breaks. This could lead to a lower valuation of these assets by potential bidders.

Citing an example, a bidder said if a stressed company had an outstanding debt of Rs 50,000 crore and an acquirer were to bid Rs 30,000 crore to take over these loans, then the remaining portion of the debt (Rs 20,000 crore) would be treated as income of the target company, on which the acquirer would have to pay the I-T or Minimum Alternate Tax in accordance with the applicable rate. 

“This could be a big negative for the acquirer and it will have to bear this expense in mind while making a bid,” said JSW Steel’s Joint Managing Director, Seshagiri Rao. 

JSW Steel has emerged as the biggest potential acquirer of stressed assets as it plans to bid for Bhushan Steel, Bhushan Power and Steel, Monnet Ispat, and Jaypee Infratech by tying up with private equity players such Aion Capital, Piramal-Bain Capital Credit, and Jaypee’s promoter. 

Other bidders for steel companies are ArcelorMittal, Vedanta, and Tata Steel, apart from several private equity funds. 

“The I-T law says any gains that accrue due to a haircut taken by a lender or interest foregone would be treated as income and hence would be taxed,” said Bhavin Shah, partner and leader, financial services, tax, at PwC India. “This is an issue which needs clarity from the government.”
 

Section 238 of the IBC overrides other laws but at the same time another section in the code says it would have to meet all the existing laws. “We have received two contrary opinions from our lawyers and this could lead to litigation in the future,” said a bidder, asking not to be quoted.

Riaz Thingna, director, Grant Thornton Advisory, said as of now, the I-T law provided the haircut from lenders is income under the IBC and it would be taxed accordingly. 

“If there is any reduction in the interest rate by the lenders in the form of discounted debt instruments, by virtue of the provisions of Indian Accounting Standards (Ind-AS), the valuation in the financial statements will increase the company’s profit. In such cases, if the company is under MAT, it will be subject to tax on such profits. This would create a double whammy,” he said.

Another bidder said if all these hurdles were not addressed, banks would be at a loss, as potential bidders would factor in these negatives in the bid value. This means that lenders will not get a good deal. "Hence, it's in the interest of the government to push for these changes which are of public interest,” said a bidder asking not to be quoted.

Competition law also an issue 

Bidders said unlike the SICA, the IBC code makes it mandatory for a bidder to take permission from the Competition Commission of India if they take over a company which has been referred to the NCLT. 

“If the exemption was granted under the Board for Industrial and Financial Reconstruction, then why not under NCLT?” asked a bidder. 

The competition law could impact both JSW Steel, which is bidding for three steel assets, and Tata Steel, which is bidding for Essar Steel’s facilities in Gujarat. Companies now plan to write to the government seeking an exemption from CCI provisions as well.