Govt. may grant tax sops to put broking M&As in the fast lane

24th January 2005: The finance ministry is vetting a proposal to extend tax benefits for amalgamation of broking outfits in the coming budget as a measure of broad-basing and strengthening the capital markets. Sebi has pitched for tax breaks on M&As across brokerage firms. Acquisition of a viable broking entity brings capital gains and is liable to be taxed. A tax exemption has been sought on such capital gains. For an unviable entity, the tax benefit will be in the form of carry forward and set off of accumulated losses (i.e. of the amalgamating company by the amalgamated company) said official sources. In the past, the government has provided tax breaks for M&As in the manufacturing sector, computer software, telecommunications and mining. The benefit was extended to banks in the ’03-04 Budget to help mergers of state-owned banks.

Finance minister P Chidambaram has already indicated that amendments will be made in the income tax legislation in the coming budget to extend similar tax benefits for merger of banks and financial institutions. The capital market regulator has now made out a case for extending similar tax breaks to mergers in the brokerage industry. The idea is to encourage the process of consolidation among market intermediaries. Revenue department officials, however, reckon that tax breaks on M&As are akin to amnesty schemes as there could be misuse. Currently, there are close to 10,000 stockbrokers. The regulator reckons that there is no need for such a large number of intermediaries. From the perspective of effective regulation, there was clearly a need for consolidation, they said. This is because, though business has dwindled for hundreds of brokers, they are still in existence, which means that Sebi has to regulate them.

After screen-based trading and on-line trading took off, many of these brokers, especially in the regional exchanges, were marginalised. As an official put it “Many of these brokers do not have the inherent strength to upgrade themselves to a level which will ensure that they are capable of servicing the needs of clients now. We need a manageable level of intermediaries here,” he said. Already, there are signs of consolidation with some of the brokers opting for franchisees. They probably have seen the writing on the wall, considering that the top brokers now account for a majority of trades on the bourses.

Incidentally, in his 1997 Budget, Mr. Chidambaram had provided tax sops to stockbrokers as an incentive to corporatise. Brokers were allowed a capital gains exemption if they turned corporate. This time, the proposal is to provide capital gains tax exemption when the assets of an existing viable stock broking entity are taken over by another stock broking entity. However, the move towards corporatisation may not be easy say industry insiders, citing the books of stockbrokers. The income tax law has some in-built safeguards to prevent potential misuse of tax benefits for amalgamations and demergers. Accumulated losses cannot be set off or carried forward unless certain conditions are fulfilled by both the merging entities. For instance, one of the conditions is that the amalgamating company should have been in the business — in which the accumulated loss has occurred — for atleast three years. Also, the amalgamated company should hold atleast three fourths of the book value of fixed assets of the amalgamating company for a minimum period of five years (from the date of amalgamation) to qualify for the tax break.

Pre-merger blues hit BoI, Union Bank

19th December 2005: “I don’t want to close the deal with you now,” a senior Union Bank of India official was told recently by a developer. “We don’t know in what form you will exist six months’ from now. So I would like to wait for a while,” the developer said. Talk of a merger between Bank of India (BoI) and Union Bank has affected not only their business prospects, but also motivation levels among a section of employees. “What’s the point in making an extra effort? I don’t know which organisation I will belong to after a few months,” said a BoI official requesting secrecy. The banks themselves have not considered the proposal, if any, at the board level. For the commoner, the only cue is the Union finance minister’s stated resolve to encourage consolidation in the banking sector.

Current banking laws do not permit a merger between two public sector banks. “Either the laws have to be amended — which will take a long time — or the government has to come up with a scheme of mergers,” a senior BoI official said in Mumbai. Union Bank’s newly appointed chairman and managing director, K Cherian Varghese, declined to comment. “As long as we don’t get something in hand, it is difficult to comment on the merger issue,” he said. Said a senior official of Union Bank: “If the confusion continues for long, we apprehend that we may lose both new and existing businesses”. “It is becoming difficult to motivate employees. Often, unions question us about their future in the organisation and what will be their standing in a merged entity. We do not have any answer to these questions,” a senior official said at BoI said.

Red herring prospectus says merger has to be with conditions, PNB warning on IFCI merger

19th January 2005: Punjab National Bank (PNB) has made it clear that if IFCI Ltd (IFCI), the bleeding development financial institution, is merged with it without the bank’s conditions to the merger being accepted, its business and financial strength could be adversely affected. PNB, in its red herring prospectus filed with the Securities and Exchange Board of India (Sebi) on Friday last, listed that the possibility of IFCI’s merger with it — without its own conditions being accepted — can pose a serious threat to its financial strength. PNB will offer 80 crore shares through a 100% book built issue of which 10% will be reserved for its employees and 10% will be reserved for the existing retail shareholders of PNB.

PNB said the government requested that the bank examine a proposal to merge IFCI with it and the bank’s board of directors agreed in principle to consider the proposal, subject to several conditions, which the bank conveyed to the government. These conditions include the completion of due diligence, the acquisition of only the performing assets of IFCI, and several other conditions designed to ensure that the merger does not have an adverse financial or operational impact on the bank. It has been reported in the press that the government is considering various alternatives regarding IFCI, including merging IFCI with the Industrial Development Bank of India (IDBI). No final decision in this regard has been conveyed to the bank, the prospectus further said.

The net offer will be for 64 crore shares and the post-issue holding of the bank’s main promoter, the government of India (GoI), will not be less than 61.47% of the fully diluted post-issue paid up equity share capital of PNB. The amount raised through the issue of 30 crore shares will be returned to the government. The present issue would constitute 25.37% of the fully diluted post-issue paid-up capital of the bank after giving effect to the reduction of the shareholding of the President of India, the prospectus said. PNB said in its draft prospectus that IFCI was set up by the government to provide financial support to the industrial sector in India. As of March 31, 2004, IFCI had Rs 15920 crore in assets, Rs 1100 crore in total income, Rs 3230 crore in loss after provisions and extraordinary items and gross non-performing assets of Rs 11960 crore.