A corporate arrangement where two or more company agrees, on terms, to exchange
the equity based asset of one with that of another like share exchange or stock
for stock exchange is called as Share Swap. Merger and Acquisitions through
share swap can be a beneficial option of investment due to the tax neutrality
scheme provided by the Indian government. M&A in cash usually requires a huge
pile of cash considerations which becomes a difficult task even for the company
who has a huge liquidity at present, in such a case the M&A through share swap
came to the rescue. To save their company against the competition of some new
players in telecom sector, Vodafone-Idea announced a merger based on share for
share structure where Vodafone acquired 50.3% and aditya birla group will be
allocated 26% of equity.
During the time of the pandemic, companies who were short of funds and some of
them who were on the verge of getting bankrupt due to the risk-averse lenders
may find the share swap merger a very attractive option. Like in December 2020,
Jindal stainless steel Hisar Ltd. was merger into Jindal stainless steel in a
share swap ratio of 1:1.95.
Legal Implication Of Share Swap M & A:
India: Prima facie, the share swap transaction seems too simple but there have
some fair regulatory compliance in the procedure. For instance, According to the
Companies Act 2013, a company which is unlisted has to obtain a report from the
registered valuer appointed by the board of directors or audit committee. This
Share swap transaction along with the share swap ratio has to disclose it in the
NCLT also came into the picture as it requires an approval by
NCLT before continuing with the merger and an approval of minimum 75% of the
shareholders. Considering all these compliances, a share swap merger may be
inconvenient than a simple acquisition of assets or shares. For instance in
2020, HUL merged with GlaxoSmithKline Consumer Healthcare Limited using share
swap structure where GSK Consumer Healthcare Limited will own 5.7% and HUL will
own 61.9% of the merged company.
The M&A transaction using share for share structure shows an
upward shift in the global economy. Recently in 2017, government of India
liberalized the cross border mergers by an Indian company. For instance,
Recently 21st century fox and Disney decided to came into the share swap merger
where the 25% stock of new entity would be owned by 21st century fox and the
rest 75% would be owned by Disney. As per the agreement, for each share of 21st
Century Fox, the shareholders were offered 0.2745 shares of Disney.
The overseas companies have to face little difficulty in share swap deals prior
to 2015 as they have to additional comply with the foreign exchange rules which
were definitely not investor-friendly. But in 2015, RBI relaxed the laws for the
companies falling under automatic route by allowing them to do share swap
transaction without government approval. However the companies under government
route still requires prior approval under Foreign Exchange Management (Transfer
or Issue of Security by a Person Resident outside India) Regulations, 2017.
Further according to Foreign Exchange Management (Cross-Border Merger)
Regulations, 2018, there has been certain regulation for inbound and outbound
mergers if they do not follow the prescribed conditions given below:
- Share issued by the amalgamated company must be in conformity with the
prescribed regulations and sectoral caps.
- The office of the amalgamated company in India will be considered as the
- All the outstanding borrowings by the amalgamated company must be repaid
according to the terms and conditions of the merger scheme.
There has been a lot of ruckus in the market with regards to the capital gain
tax applicable in the share swap transaction where share are exchanged. Think of
a case where one startup merged with another due to the lack of funds. The thing
that achieved here is giving up one instrument (share of the old company) to get
another instrument (i.e. shares of the new company). In such a case imposing
capital gains tax would be so illogical and impractical as these shareholders
will have to give tax out of pocket.
The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) held that section
68 of IT Act 1961 would not be applicable in the case of share swapping
transaction. As in share swap, the shareholders of the company are given shares
of the acquirer company as part of the deal, and hence not considered a transfer
of shares. So the capital gain tax does not arise for the shareholders of the
There have been certain conditions where the amalgamated company can be tax
- If minimum 50% of the shareholders of India became the shareholders of the
new amalgamated company.
- If all assets and liabilities of the amalgamating company are transferred to
the amalgamated company.
- Share swap merger is similar to the normal merger. There has no immediate profit
or returns in such type of merger. So these mergers should be made tax neutral
as there is no use of cash or any liquid stock. The tax should only be collected
at the time of the cash-out by the shareholder in the future.
Despite the challenges faced by the companies, the Share swap arrangement is
becoming very common. It is making M&A possible even when the companies are
facing the cash crunch problems. Share swap mergers can be seen a golden
opportunity which companies can seek to leverage each otherís market value.
These types of mergers encourage the use of cashless transactions. Here the
share swap M&A may be seen attractive and advantageous but must not ignore the
fact that through this arrangement they will not get any consideration that is
The government should try to make cross borders share swap mergers more
liberalized and ensure that the cash-strapped Indian company should be given an
opportunity and script a turnaround. A Tax neutral scheme is also a need of the
hour especially for the Indian start-ups who are cash-strapped due to the
COVID-19 crisis. While the steps taken by government is in the right direction,
there just need more liberalization especially in the cross border mergers.
Award Winning Article Is Written By: Mr.Apoorv Bansal
Authentication No: AP33643938440-13-0321