Financial Daily from THE HINDU group of publications
Monday, Dec 27, 2004
Money & Banking - Mergers & Acquisitions
`Involuntary' bank mergers to get tax breaks
Sarbajeet K. Sen
New Delhi , Dec. 26
BANKING companies that are compelled to undertake `involuntary' amalgamation transactions need not henceforth worry about their eligibility for tax breaks available under the Income-Tax Act for set off and carry forward of losses of the amalgamating company.
The Finance Ministry has decided to amend the law to make it clear that an amalgamated company can avail tax breaks under Section 72A in all involuntary amalgamations of banking companies - i.e. those amalgamations that are initiated through the action of the Reserve Bank of India.
The Ministry has decided to amend the tax law to incorporate an overriding provision that all bank amalgamations that have been cleared by the Reserve Bank of India would qualify for the benefits under Section 72A. "We would amend the law to provide that all amalgamations of banks that have the blessings of the RBI would be given tax breaks under Section 72A," a senior official of the Finance Ministry said.
Though the amendment would have long-term impact by facilitating future consolidation in the banking industry, the immediate beneficiary would be Oriental Bank of Commerce (OBC) that would be able to carry forward and set off the losses of Global Trust Bank (GTB).
"OBC expects to get a tax benefit of around Rs 350-400 crore for fiscal 2004-05 if the amendment takes place," the bank's Chairman and Managing Director, Mr B.D. Narang, told Business Line.
GTB was merged with OBC after the RBI imposed a moratorium on the former bank, thereby placing the deal under the category of `involuntary' amalgamation. The Central Bank subsequently came up with a scheme of amalgamation under the Banking Regulation Act.
Finance Ministry officials explained that the definition of `amalgamation' as provided in the I-T Act came in the way of OBC for availing the tax breaks under Section 72A.
One of the conditions specified in the definition of amalgamation is that the shareholders holding not less than 75 per cent in value of the shares in the amalgamating company (GTB in this case) should become shareholders in the amalgamated company (Oriental Bank) through the process of amalgamation.
However, since there was no share swap in the OBC-GTB case, the merger did not qualify as `amalgamation' under the I-T Act for getting tax benefits.
Mergers of banking companies are initiated either under Section 44 and Section 45 of the Banking Regulation Act. Mergers under Section 44 involve two listed entities that decide to amalgamate voluntarily - through decisions taken by their respective boards.
However, mergers under Section 45 are initiated in public interest or in the interest of depositors by definitive action by the banking regulator or the Government. The RBI is required to draw up a scheme of amalgamation for such mergers and hence these need not necessarily entail a share-swap.
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