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Dealtracker Providing M&A and PE deal insights


Dealtracker Half Yearly 2012

2

Contents

Foreword 3

Introduction 5

Half yearly deal snapshot 6

M&A deal round up 7

PE deal round up 11

IPO snapshot 13

Sector insight 15

Regulatory insight 18

Deal list 25



3

Foreword

We have come to the middle of a turbulent year in India’s

Corporate World. We called this the Year of the M&A at the

beginning of 2012 and predicted that volumes of M&A will grow

though values will remain subdued. The first half has shown a

significant growth in M&A with the number of deals increasing from

508 to 544 while values have dropped from $ 35.4 to 28.3 Billion

as expected.

We foresee continued growth in M&As in the remaining half of

2012 with robust activity across sectors and we expect continued

level of dealmaking in the active sectors of IT/ITES, Pharma and

Healthcare, Auto components, Media, Telecom and Financial

Services.

We saw a clear reversal of trend in 2007 where outbound deals

overtook inbound deals and saw a reversal in 2011. The trend

continues in the first half with Inbound Deals dominating the cross

border activity both in value and volume. We expect this trend to

continue in the second half but forecast the gap to narrow with

increased outbound activity by India Inc given the economic

uncertainties and policy/procedural hassles of doing business in

India.

Harish HV

Partner- India Leadership Team

Private Equity (PE) continues to increase deal making efforts

inspite of the overall economic environment and the difficult exit

situation. We have seen a robust increase in volumes of PE deals

from 195 to 218 transactions but a fall in values indicating that

average deal sizes have dropped. We see continued activity in PE

space driven by the long term potential of the Indian economy

since investors are looking at the medium term and PEs to focus

on the consumption story more than infrastructure story given the

policy related issues that plague the infrastructure industries.



4



5

Introduction

We are pleased to present the ‘Half-yearly” Deal Tracker which

captures the deal activity in India in the 1st 6 months of 2012

(January to June), our analysis and trends as well insights around

deal activity. This edition includes a special feature around deal

trends and outlook in the healthcare and e-commerce sector as

well as implications of GAAR (General Anti-Avoidance

Regulations) on the M&A and PE deals.

As we take stock of the half-way mark, we clearly see deal

momentum continuing in 2012 with 544 deals as compared to 508

deals in 2011. However, the economic headwinds in Europe,

overall tightening of liquidity in the market and the impact of the

recent Tax Regulations have impacted the value of deals.

Deal value in H1/12 was US$ 28.3 Billion, which declined by 20%

compared to H1/11. H1/12 witnessed US$ 14.4 Billion of domestic

internal mergers and restructuring driven by Sesa Sterlite and

TechMahindra –Satyam mergers. If we exclude the domestic

internal mergers and restructuring, deal value in H1/12 declined by

60% over H1/11.

Larger M&A deals in 2012 included HSBC’s acquisition of RBS,

Sesa Sterlite merger, TechMahindra-Satyam merger, Piramal’s

acquisition of Decision Resources Group.

In the Private Equity space, investor interest appears to be

focused on the domestic consumption story and companies in Raja Lahiri

Partner, Transaction Advisory Services

healthcare, e-commerce and non-banking financial services sector

attracted PE and VC investments. Some of the large deal included

Advent’s investment in Care Hospital, Olympus Capital’s

investment in DM Healthcare, Accel Partners investment in Flipkart

and Warburg Pincus investment into Future Capital.

Government’s intervention on policy issues, especially, Tax

Regulations and FDI in sectors like retail, aviation etc will play a

role in driving large transactions, especially, inbound deals. India’s

growth story remains intact and we hope to see deal momentum

rebounding in 2nd half of 2012.

Happy reading !



6

Half yearly deal snapshot Deal Snapshot

Deal Value Half Yearly Trend – H1 12

Highlights

• The 1st half of 2012 witnessed M&A of US$ 24.6 billion

which has been the lowest in the last 3 years and about

19% down compared to 1st half of 2011

• Internal mergers and restructuring deals have gained

momentum over the years. The first 6 months of 2012

have seen a number of large and historic restructuring

deals like Sesa Goa - Vedanta , Tech Mahindra –

Satyam and UB – Scottish & New Castle India

• A long awaited acquisition of RBS's retail and

commercial banking business in India by HSBC was

also seen during this period. Other key deals in the first

half have been Piramal Group's acquisition of Decision

Resources Group, US and Mitsui Sumitomo Insurance’s

investment into Max New York Life Insurance

• Private Equity deal value was US$ 3.8 Billion) in 1st half

of 2012 which was about 45% down in value terms

compared to 1st half of 2011.

• The key PE deals in 1st half of 2012 included Morgan

Stanley’s investment in Continuum Energy, Accel and

Tiger Global’s investment in Flipkart and Temasek’s

investment into Godrej Consumer

• Sectors like healthcare and internet space appears to

be sectors liked by some of the players and these

sectors continues to attract good investor interest

Note: Above represented M&A deals (excluding internal mergers and restructuring)

Domestic39%

Inbound70%

Outbound30%

Crossborder61%

Deal summary

First half H1 2010 H1 2011 H1 2012 H1 2010 H1 2011 H1 2012

Inbound 44 58 77 5.4 20.5 4.9

Outbound 108 87 48 17.9 6.0 2.1

Cross border 152 145 125 23.3 26.5 7.0

Domestic 137 83 158 5.6 3.4 3.1

M&A 289 228 283 28.9 29.9 10.1

Internal mergers & restructuring 96 85 43 0.0 - 14.4

Total M&A 385 313 326 28.9 29.9 24.6

Private equity 125 195 218 3.0 5.5 3.8

Grand Total 510 508 544 31.8 35.4 28.3

Volume Value in billion



7

M&A deal round up Continent – Inbound Continent – Outbound

Europe55.2%

Asia23.5%

North America20.4%

South America

0.4%Australia

0.4%

Africa0.12%

Europe48.6%

North America

38.5%

Asia6.9%Australia

3.9%Africa1.2%

South America0.93%

M&A Sector Break Up

M&A trends (excluding Internal merger & restructuring) H1 10

US$ 28.8 bn H2 10

US$ 9.9bn

H1 11

US$ 29.8 bn H2 11

US$ 14.3 bn

H1 12

US$ 10.1 bn

Note: Above represented M&A

deals (excluding internal mergers

and restructuring)

Banking & Financial Services

24%

IT & ITeS19%

Pharma, Healthcare &

Biotech12%

Telecom8% Media,

Entertainment & Publishing

7%

Others30%

17.4

11.4

2.5

7.4

17.9

11.9

6.9 7.4

3.9

6.2

139150

96

118

99

128 121

146 150

133

0

20

40

60

80

100

120

140

160

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

Nu

mb

er

of

de

als

Va

lue

in

US

$ b

illi

on

Value Volume



8

M&A deal round up Top internal merger & restructuring deals Top M&A deals( excluding internal merger & restructuring)

Top M&A deals (excluding internal merger &

restructuring) accounted for 48% of the Total M&A

(excluding Internal merger & restructuring) deal values.

Top 4 internal merger & restructuring deals accounted

for 99% of the total Internal merger & restructuring deal

values.

* Sesa Goa and Vedanta internal merger & restructuring deal has been

considered as a single deal

Acquirer Target US$ mn

Sesa Goa Ltd (Sesa Sterlite)

Sterlite Industries

Vedanta Aluminium

The Madras Aluminium Company

Cairn India

12,769*

Tech Mahindra Satyam Computer Services Ltd. 1,400

United Breweries Scottish & Newcastle India 77

Empee Sugars & Chemicals Empee Distilleries 26

Acquirer Target US$ mn

Hongkong and Shanghai

Banking Corporation - UK

The Royal Bank of Scotland - retail

& commercial banking businesses

in india

1,895

Piramal Healthcare Decision Resources Group - USA 680

Piramal Healthcare Vodafone Essar 618

Mitsui Sumitomo Insurance

Company - Japan

Max New York Life Insurance

Company 530

TV18 Broadcast Eenadu Television Network 395

Watson Pharmaceuticals Inc -

USA

Ascent Pharmahealth Ltd - (division

of Strides Acrolab)393

Binani Industries 3B - fibreglass - Belgium 360



9

Top M&A deals by sector


Top M&A deals in top sectors

Acquirer :

HSBC

Target :

RBS - retail & commercial banking

businesses in India

Deal Value

US$ 1,895 mn

Acquirer :

Mitsui Sumitomo Insurance

Target :

Max New York Life Insurance

Deal Value

US$ 530 mn

Acquirer :

Nippon Life Insurance

Target :

Reliance Capital Asset Management

Deal Value

US$ 290 mn

Metals & Mining

Acquirer :

Sesa Goa

Target :

Sterlite Industries , Vedanta Aluminium

The Madras Aluminium Company

Cairn India

Deal Value

US$ 12,769 mn

Acquirer :

Vedanta Aluminium

Target :

Raykal Aluminium

Deal Value

US$ 40 mn

Acquirer :

Jindal Steel & Power

Target :

Gujarat NRE Coking Coal Ltd -

Australian arm

Deal Value

US$ 25 mn

Although the Eurozone is less

optimistic about the growth

prospects of their own economies a

large proportion of businesses within

Europe are actively seeking

opportunities abroad and expanding

into higher growth markets such as

the BRIC economies. Following the

financial crisis of 2008, the flow of

economic power from ‘west’ to ‘east’

has undoubtedly sped up. It is

therefore encouraging that

enterprising corporates in mature

markets appreciate that M&A remains

a vital strategic tool to enable them

to benefit from these trends.”

Munesh Khanna,

Senior Partner, M&A



10

Top M&A deals by sector Top M&A deals in top sectors

IT & ITeS Pharma, Healthcare & Biotech

Acquirer :

Tech Mahindra

Target :

Satyam Computer Services

Deal Value

US$ 1,400 mn

Acquirer :

Ybrant Digital

Target :

PriceGrabber, LowerMyBills

ClassesUSA.com

Deal Value

US$ 175 mn

Acquirer :

NTT Communications

Target :

Netmagic Solutions

Deal Value

US$ 128mn

Acquirer :

Piramal Healthcare

Target :

Decision Resources Group

Deal Value

US$ 680 mn

Acquirer :

Watson Pharmaceuticals Inc

Target :

Ascent Pharmahealth

Deal Value

US$ 393 mn

Acquirer :

Radiant Life Care

Target :

Guru Harkishan Hospital

Deal Value

US$ 77 mn



11

5966 58

7075

120

90 88

120

98

1.6 1.4

1.7

1.6

2.6 2.9

1.9 1.4

2.1

1.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

20

40

60

80

100

120

140

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

Nu

mb

er

of

de

als

Val

ue

in U

S$ b

illio

n

Volume Value

PE deal round up

PE Quarterly & Half yearly Trends

Pharma, Healthcare &

Biotech16%

IT & ITeS14%


13%Real Estate 10%

Power & Energy

9%

Others 38%

PE Sector Break Up Top PE Deals

H1 10

US$ 3.0 bn

H2 10

US$ 3.3 bn

H1 11

US$ 5.5 bn H2 11

US$ 3.2 bn

H1 12

US$ 3.8 bn

Investor Investee US$ mn

Morgan Stanley PE Continuum Wind Energy 210

Accel Partners and Tiger Global Flipkart Online Services 150

Temasek Holdings Godrej Consumer Products 137

APG - Pension Fund Lemon Tree Hotels 130

General Atlantic Fourcee Infrastructure Equipments 125

Advent PE CARE Hospital 105

Olympus Capital DM Healthcare Pvt Ltd 100

GIC Vasan Healthcare 100

Morgan Stanley PE Sheth Developer's Mumbai Project 90

Warburg Pincus Future Capital Holdings 84



12

Top PE deals by sector


Top PE deals in top sectors

IT & ITeS Pharma, Healthcare & Biotech

Investor:

Advent International

Investee :

CARE Hospital

Deal Value

US$ 105 mn

Investor:

Olympus Capital

Investee :

DM Healthcare

Deal Value

US$ 100 mn

Investor:

GIC

Investee :

Vasan Healthcare

Deal Value

US$ 100 mn

Investor:

Accel Partners and Tiger Global

Investee :

Flipkart Online Services

Deal Value

US$ 150 mn

Investor:

Sequoia Capital

Investee :

Just Dial

Deal Value

US$ 61 mn

Investor:

eBay Inc., Norwest Venture Partners,

Matrix India Fund, Warburg Pincus

Investee :

Quikr India

Deal Value

US$ 32 mn

Investor:

Warburg Pincus

Investee :

Future Capital Holdings

Deal Value

US$ 84 mn

Investor:

Warburg Pincus

Investee :

AU Financiers

Deal Value

US$ 50 mn

Investor:

NYLIM Jacob Ballas

Investee :

Religare Finvest

Deal Value

US$ 40 mn



13

IPO snapshot

IPO half yearly Trend – Volume & Value IPO's

10

3,325

2,317

5,649

672 531

268 2

15

27

35

1416

8

0

5

10

15

20

25

30

35

40

45

50

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012

Nu

mb

er

of

de

als

Va

lue

in

US

D m

illi

on

Value Volume

Investor US$ mn

MCX India 132.7

Tribhovandas Bhimji Zaveri 40.0

Speciality Restaurants 35.2

National Building Construction 25.4

MT Educare 19.8

BCB Finance 5.8

Monarch Health Services 4.8

Olympic Cards 4.7



14

Grant Thornton India Corporate Finance has a vast experience of

over 800 due diligences,1000 valuations and 50 completed

transactions.

`



15

Sector Insight



16

Sector Insight Pharma, Healthcare & Biotech

Private Equity focus back on multi-specialty healthcare?

The first half of 2012 has seen some of the largest private equity

investments in the healthcare delivery sector. Three $100 million deals

(GIC's investment in Vasan Healthcare, Advent Private Equity's

investment in Care Hospitals and Olympus Capital's investment in DM

Healthcare), a Rs 100 crore + investment by Orbimed and Ascent Capital

in KIMS Trivandrum and a Rs 100 crore investment by Sequoia Capital in

Moolchand Healthcare has really raised the question –

"Are Multi-Speciality Hospitals back in business as far as PE

investments are concerned?".

Vasan Healthcare of course is the largest chain of eye-care surgical

centres in the country, whereas Care Hospitals, KIMS Trivandrum, DM

Healthcare and Moolchand Healthcare are all multi-specialty healthcare

operators.

Vasan Healthcare, as already highlighted, focuses on single specialty

care (ophthalmic surgeries). Single specialty healthcare (eye care,

dental, day-surgeries, birthing etc) has been of huge interest for PE funds

in the last few years due to better return on capital parameters and

greater scalability.

The only reported PE investments in multi-specialty hospitals in all of

2011 were in Apollo Hospitals and Vaatsalya Healthcare, both of which

cannot be taken as representative – Apollo being the largest Indian

healthcare operator in terms of market capitalization and Vaatsalya

Healthcare being differentiated because of its focus on primary and

secondary care in the rural and semi-urban areas.

So what has changed in 2012?

We take a closer look at these transactions to understand what is likely to

have been the driving factor behind these deals.

Care Hospitals is among the largest chain of multi-specialty hospitals in

the country with a strong presence in several non-Metro cities such as

Bhubaneshwar, Raipur, Nagpur, Surat and Vishakapatnam. DM

Healthcare and KIMS Trivandrum have significant presence in Kerala

and GCC, with the added attraction of being able to capitalize on medical

tourism from the GCC region into Kerala.

Moolchand Healthcare is located in the heart of Delhi, which is

considered to be the most lucrative healthcare delivery market in the

country, and has demonstrated an ability to add beds and operate more

efficiently than several operators in the region.

It is however important to note that there is a

shortage of healthcare franchises that are

operating to scale and profitably and can absorb

the amount of capital that PE funds typically look

to deploy in this space. Given that, we believe the

level of activity in the multi-specialty hospitals

space is likely to shift towards strategic deals, with

some PE-led buyouts continuing to happen.

Mahad Narayanamoni,

Partner, Corporate Finance



17

Fund and Investee company services Technical excellence and distinctive client services

• Target profiling

• Industry/Market scans

• Assistance with potential target identification

• Investee Company health check

• Promoter and Company background checks

• Financial and Operational Diligences

• Technology reviews

• Social & Environmental diligence

• Other Strategic Services

Investing in a Company

• Structuring

• Fund Formation

• Audit & tax services

• Deal structuring

• Estate/wealth planning

• Investor structuring

• Compensation & benefits

Managing the Fund

• Assurance

• Tax Advisory

• Operations and Process efficiency advisory/ reviews

• Corporate Governance

• Compliance with regulations – SOX, Clause 49 etc

• Compensation planning

• HR audits

• Social and Environmental /CSR reviews

• Developing MIS/ Reporting

• Assistance with monitoring accounting

• Board reconstitution advisory

Managing the Portfolio Company

• Preparation of Information Memorandum – sale document

• Exit options advisory

• Reverse Due Diligences

• Sell Side Advisory

• IPO readiness reviews and assistance

• Reporting Accountant services

• Financial Statement Conversions – IFRS/ US GAAP

• Tax Structuring

Exiting the Investment

• Investment structuring

• Assistance with price negotiations

• Commercial assessments

• Deal and Tax structuring

• Valuation Services

• Merger Integration

• M&A Advisory and Support

• Opening Balance Sheet Audits

• HR/ Personnel Strategy Advisory

• Change Management

• ESOP Services

Closing the Investment



18

Regulatory insight



19

Regulatory insight GAAR: A dynamic move in the right direction?

Internationally, tax avoidance has been recognized as an area of concern

and several countries have expressed concern over tax evasion and

avoidance. This is also evident from the fact that most of the nations

have legislated or are legislating doctrine of General Anti-Avoidance

Regulations (GAAR) in their tax code or strengthening their existing

code.

Tax payers across the world arrange their business/ affairs in a way that

gives them maximum tax advantage. On one hand, tax authorities look

through these transactions carrying reduction in tax liability with

jaundiced eye while taxpayers label those as genuine ‘tax planning’. This

difference in approach and outlook becomes the subject matter of debate

and turns into protracted litigation.

Introduction of GAAR in India

GAAR is now contained in the current Income Tax Act. The Direct Taxes

Code Bill 2010 (DTC )proposed to implement the GAAR for the first time

in domestic legislation. Given the postponement of DTC, GAAR as part of

tax reforms was introduced through this year's budget.

The Finance Minister has deferred its applicability by a year to 1st April,

2013. GAAR is introduced to counter aggressive tax avoidance schemes,

while ensuring that it is used only in appropriate cases, by enabling a

review by a GAAR panel (known as Approving Panel).

Scope of provisions

GAAR to tax an ‘‘impermissible avoidance arrangement’ which may be a

step, a part or whole of an arrangement herein referred to as

‘transaction’.

The main premise of invoking GAAR is that any transaction or step in a

transaction which has one of its main purposes i.e. the obtaining of a tax

benefit, should be disregarded, or dealt with in such a manner so as to

protect the right of the revenue to taxes. In addition to obtaining the tax

benefit, the transaction:

• creates rights and obligations which are not ordinarily created between

persons dealing at arm’s length; or

• results directly or indirectly in the misuse of the provisions of the Act;

or

• lacks commercial substance or is deemed to lack commercial

substance, in whole or in part; or

• is entered into in such a manner which are not ordinarily be employed

for bonafide purposes.

In other words, once the ‘tax benefit’ test is satisfied, the arrangement

needs to satisfy at least one of the above four additional tests.

Some of important terms used are as explained below.

“Tax benefit” means

• a reduction, avoidance or deferral of, or an increase in a refund of tax

under the Income Tax Act (“ITA” or “the Act”)

• a reduction, avoidance or deferral of, or an increase in a refund of tax

for a Tax Treaty

• a reduction in tax bases including increase in loss



20


Lack of commercial substance:

An arrangement will be deemed to lack commercial substance if

1. the substance or effect of the arrangement as a whole, is inconsistent

with, or differs significantly from, the form of its individual steps or a

part; or

2. it involves or includes –

• round trip financing; (the ordinary meaning of the word 'round-

tripping' is 'a journey to place and back again)

• an accommodating party ;

• elements that have effect of offsetting or cancelling each other; or

• a transaction which is conducted through one or more persons

and disguises the value, location, source, ownership or control of

fund which is subject matter of such transaction; or

3. it involves the location of an asset or of a transaction or of the place

of residence of any party which is without any substantial commercial

purpose other than obtaining tax benefit for a party.

Consequences if GAAR triggered:

Once treated as an impermissible avoidance arrangement, look through

is permitted by:

• disregarding or combining any step of the arrangement

• ignoring the arrangement for the purpose of taxation law

• disregarding or combining any party to the arrangement

• reallocating expenses and income between the parties to the

arrangement

• relocating place of residence of a party, or location of a transaction or

situs of an asset to a place other than provided in the arrangement

• considering or looking through the arrangement by disregarding any

corporate structure

• re-characterizing equity into debt, capital into revenue etc.

If a transaction is regarded as an impermissible avoidance transaction, it

could be disregarded, combined with any other step in the transaction or

re-characterized, or the parties to the transaction could be disregarded as

separate persons and treated as one. The provisions are drafted in a

manner to permit the application of principles relating to lifting corporate

veil, substance over form test, economic substance test, and thin

capitalization rules such as re-characterisation of debt into equity or vice

versa.

It is provided that GAAR shall be applied “in accordance with such

guidelines and subject to such conditions and the manner as may be

prescribed”. The Finance Minister had announced that a Committee was

constituted under the Chairmanship of the Director General of Income

Tax (International Taxation) to give recommendations for formulating the

rules and guidelines for implementation of GAAR and to suggest

safeguards so that these provisions are not applied indiscriminately.



21


The Committee has recently, made certain recommendations for

incorporating in the guidelines to be prescribed. These recommendations

are open for consultation and feedback from the stakeholders.

Summarily, these recommendations include setting a monetary

threshold, prescribing statutory forms for reference for invoking GAAR,

approving panel be provided the secretariat staff along with appropriate

budgetary and infrastructure support by the Central Board of Direct

Taxes, including a detailed note explaining provisions of GAAR and

illustrations for scope of GAAR.

Till the time we see a final version of guidelines, the applicability of

GAAR will continue to be a surprise.

Impact of GAAR on Mergers and Acquisitions (M&A):

Taxpayers, domestic and foreign, will witness a paradigm shift in

empowerment and approach of tax authorities in India towards taxation of

transactions, structures and arrangements. GAAR may impact cross

border deals, investments into India by foreign institutional investors and

private equity funds, domestic transactions, even within two units of one

conglomerate. ,

These provisions are substantially overriding in nature and would impact

all restructuring and acquisitions. GAAR provisions expressly clarify that

the holding period of a structure or arrangement and the fact that it

provides a legitimate exit route for investors is not relevant for the

purpose of determining commercial substance.

Some of the emerging concerns are mentioned below which are

becoming boost dampener for M&A market.

1. Wide scope: Under the present provisions, while a transaction as a

whole may be a bonafide one, however the tax authorities can invoke

GAAR if any of the steps on a standalone basis are undertaken to

obtain a tax benefit. Consequently, even genuine business

transactions might fall on the wrong side of GAAR. In fact, it seems

that while taking all commercial decisions and determining the manner

of their implementation, the tax implications of these provisions would

play a pivotal role.

2. GAAR vs. Treaty provisions: GAAR would apply to a taxpayer

irrespective of the fact that the treaty provisions are more beneficial. It

may be noted that a unilateral enactment of a new domestic tax law

which is contrary to an existing treaty, without an amendment in treaty

could possibly be regarded as violation of international law and is

generally known as ‘treaty override’.

It may be relevant to note that according to rules of legislative

interpretation, specific legislation overrides general legislation.

Therefore, an argument may be taken that change of a domestic law

generally, which could be the case with GAAR, may not affect the

treaty. However, in the absence of an anti-avoidance provision under

the treaty, the reaction of India’s treaty partner countries needs to be

observed.



22


It may be noted while the limited treaty override provisions are

theoretically in line with substance over form rule or economic

substance rule (as envisaged under the OECD commentary and

global practice for anti-avoidance measures), it is unclear as to how

such interplay between the tax treaty provisions and the domestic

override provisions would be balanced by the tax administration. For

instance, if a particular transaction is eligible for tax treaty relief

(especially in where the tax treaty already has a limitation of benefit

clause), could the domestic anti-avoidance rules still be invoked by the

revenue to pierce the corporate veil and deny tax treaty relief?

3. Wide powers of tax authorities: The language of GAAR as it stands

today, provide tax authorities powers to invoke GAAR by using any

one of the criterion which are vast as well as ambiguous.

Thus there is need to lay down more objective criteria and specific

administrative guidelines for invoking GAAR and determining the tax

consequences in cases where GAAR is invoked and to establish a

reasonable level of accountability for the tax authorities.

4. GAAR vs. SAAR: There are varied international precedents when it

comes to the interaction between general and special anti-abuse

provisions, with some jurisdictions ruling out applicability of general

anti avoidance measures in cases where more specific anti-abuse

provisions have been applied such as Germany. The approach of

OECD countries is different, with common law countries espousing a

view that the existence of special anti-avoidance measures cannot

preclude overarching general anti-avoidance rules.

On interplay between SAAR and GAAR, the Committee's

recommendation is that under normal circumstances, where SAAR is

applicable, GAAR should not be invoked. However, in an exceptional

case where SAAR is defeated, applicability of GAAR provisions can

be checked.

5. Approach to AAR: All taxpayers, resident as well as non-resident,

can approach the Authority for Advance Ruling to know whether an

arrangement to be undertaken was permissible under GAAR. This

move should take care of some of the emerging concerns relating to

uncertainty as it provides opportunity for a more comprehensive

consideration of proposed transaction well in advance.

Conclusion

For a foreign investor a country’s tax regime is very significant factor if

not a decisive factor. Today businesses are looking at inorganic growth

to achieve better economies of scale, synergy and competency in form of

business reorganizations. Therefore the tax policies of the government

need to be critically framed as to achieve the purpose of tax reform and

also being positive to business environment of the country.

Worldwide, GAAR has been criticized and supported equally by

international tax experts. The rule of law requires law to be certain and

predictable, such that law abiding citizens are aware of what is permitted

and what is prohibited. While the concept of GAAR may as such be

against this principle, to some extent, GAAR is important, since it is not

humanly possible to make laws for each and every tax avoidance tool

used by a creative taxpayer.



23


The success of GAAR lies in its judicious, selective and sensible

implementation. In the Indian context, considering the aggression of tax

administration in some cases, the introduction of GAAR may be

worrisome to a tax payer unless implemented in the balanced manner

with adequate safeguards for protecting the taxpayer.

Tax payers would keenly await draft subordinate legislation, which law

makers expect would be open for public debate.

The intent of the Indian lawmakers to legislate GAAR is progressive in so

far as tax policy decisions are directed. However, an important question

is whether, in the current context, the introduction of GAAR is well timed,

or still a premature effort towards alignment with internationally accepted

principles of anti-avoidance.

Anshu Khanna,

Partner, Walker, Chandiok & Co.



24

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Dealtracker Editorial team:

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Karthik Vishwanathan

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focused practice group in the following

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