Indian companies taking over unlisted foreign firms is under the taxman's scanner as the acquisition can be done at huge prices to siphon off money from the Indian entity.
The income tax department, which is monitoring the takeover of unlisted companies by the Indian firms, feels the issue of asset-stripping — siphoning off money from a company — is not only a corporate governance issue but has many income tax implications.
"While Asset Stripping is largely seen as a corporate governance issue; its income tax implications need to be examined. Further the allowability of any such losses need to be examined," said a government official.
He said in case of takeover of foreign unlisted firms, the main issue is about their valuation as, unlike listed companies, they are very unregulated, and the acquirer can take advantage of this.
"In the case of unlisted entities there is an additional issue regarding the valuation of the acquired entity. In most countries valuations of unlisted entities are an unregulated area as no public interest is involved," he said.
These entities can be taken over at huge prices to asset strip the Indian entity, as was done by the Satyam group or by Silverline, or to book losses at a later date.
In case of fireign firms which are listed like Corus by Tata or Novellis by Hindalco, the valuations are usually fair and based on business considerations, he added.
The other way of a takeover could be through swap of equity which usually happens through the automatic route as it theoretically does not involve any outflow of cash.
With regard to such takeovers, the tax department has to pay attention to different things as manipulated valuation of the swap ratio can also be used for transferring huge profits earned by investment or indirectly transferring substantial ownership in the acquiring company.
Meanwhile, many overseas takeovers are also a part of an exercise for an elaborate treaty shopping or tax evasion exercise, the official said.
Treaty shopping refers to routing of investment through a country like Mauritius which have a liberal tax regime and a double taxation avoidance agreement with India.
