In any scheme of Mergers or Demergers, the definition of Appointed date and Effective date play a very crucial role. In this article, we try to unveil the various aspects and implications of the same under various laws.
Normally appointed date is before effective date. It is sometimes ideal to have both on the same date from commercial angle particularly in the case of demerger.
As per Companies Act 2013
Section 232 (6) – “The scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date”
It is clear from the above that Appointed date shall be agreed between the parties and specified in the respective scheme of Amalgamation and the appointed date shall be the effective date for transfer of assets and liabilities of the Transferor company to the Transferee company and such transfer shall be effective from such appointed date and not any subsequent date.
Effective date is the last of the dates by which the Company in relation to which the order is made shall file a certified copy of order with the Registrar of Companies and all other required statutory authorities if any. As per Section 232(5) The order is to be filed within 30 days of the receipt of the certified copy of order. When the order has so filed, the amalgamation or arrangement becomes effective or having come into force from the ‘Appointed Date’.
Q. What are the Significance of appointed date and effective date?
Appointed Date is relevant to know in whose hand net income will be taxable under the Income Tax Act, 1961 and to determine the market value of assets and investments getting transferred under State Stamp Act of the respective state in which immovable property is situated.
Under all other laws and under procedural aspects of all the laws, Effective Date is more relevant.
Significance under The Income Tax Act, 1961:
- Taxability of Income:
As total income and its tax liability is determined for a financial year under the Income Tax Act, 1961, with effect from the appointed date, income of Transferor/demerged Company will be that of Transferee Company/Resulting Company and from the said date only one return of income will be filed disclosing income of Transferor Company in the hands of Transferee Company. Transferor Company will not file separate return starting from the Appointed Date. Taxes paid by the transferor company in form of advance tax, fringe benefits tax, tax deducted at source etc after the appointed date, shall be deemed to be paid by the Transferee Company and shall, in all proceedings, be dealt with accordingly. This conclusion is based on observation of Honourable Supreme Court in ‘Marshall Sons & Co’. Annexure I.
Refer: Excerpts from Scheme of Amalgamation Motilal Oswal Securities Limited With Motilal Oswal Financial Services Limited & And Their Respective Shareholders Annexure-II.
- Procedural Aspects
Further, any tax deducted at source by Transferor Company/ Transferee Company on transactions with the Transferee Company/ Transferor Company, if any (from Appointed Date to Effective Date) shall be deemed to be advance tax paid or tax deposited by the Transferee Company and shall, in all proceedings, be dealt with accordingly in the hands of Transferee company (including but not limited to grant of such tax deposited as credit against total tax payable by transferee company while filing consolidated return of income on or after Appointed Date).
- Indirect Taxes (GST/Value Added Tax Act/Excise Laws/Service Tax/Customs Law)
One must note that liabilities for indirect taxes are on transaction and hence liability for the same is ascertained on each transaction. So, until transfer as a result of merger/demerger is completed, liability of transferor remains. Transferor Company continues to pay tax, file returns as if there is no proposal for merger/demerger as the case may be. In most cases, for past pending assessments both transferor and transferee remain jointly and severally liable. Appointed Date is of no significance under the law. Till final merger/demerger order is received and filed with ROC to give effect to the scheme, Transferor/demerged Company continues to pay and files all the applicable indirect tax returns under its registration number. The Liability relating to indirect taxes on the Transferor/demerged company remains till the effective date. The transactions between the Transferor Company and Transferee Company will be carried out on principal to principal basis. The Transferor Company continues to claim set-off in respect of transactions with Transferee Company up to the effective date. Similar provisions apply as regards payment and set off of customs and service tax and filing of various returns under the relevant acts. Export obligations will also get transferred and on non-fulfilment of the same, exemption given in respect of import of machineries will be withdrawn with all penal consequences, as if there is no merger/demerger. Transferee Company needs to obtain new registration numbers under all these laws, and specifically in case of GST Section 87 provides that wherever necessary, the registration certificates of the Transferor company would stand cancelled with effect from the date of the order. Hence from effective date Transferee company will have to apply for new GST registration. Refer: Excerpts from the Scheme of Amalgamation Motilal Oswal Securities Limited with Motilal Oswal Financial Services Limited & And Their Respective Shareholders Annexure III
Significance Under Indian Stamp Act/State Stamp Act
Every state has different stamp law, rates applicable and ceiling of stamp duty. Stamp Duty is determined with reference to date of transaction and value of assets getting transferred on the said date. However, liability arises only of the document which purports to transfer assets is executed. In case of merger/demerger the scheme becomes executed and binding once it is filed with Registrar of Companies. Thus, Stamp duty liability arises on Effective Date but it is worked out and determined with reference to Appointed Date. Stamp Duty is levied with reference to the market value of immovable property on appointed date and if charging entry provides for with reference to value of shares issued as consideration then based on the same. As stamp duty on property is subject, in the course of merger, the company may have to pay stamp duty in all states where immovable property is situated subject to set-off if any available to it.
Significance under Companies Act, 2013
Transferor Company (amalgamating company) continues to carry out its normal business during the tenure of the scheme being approved and complies with various provisions of the Act. The transferor company should not without prior consent of the transferee company declare any dividend whether final or interim, alter its capital structure by issuing any shares or otherwise.
Thus, all day to day compliances are carried out by the Transferor Company up to the effective date. In case of Demerger, the demerged company exists so there is no implication as above.
Significance of Labour Law
The scheme must provide for transfer of employees. The scheme must provide that due to the scheme, rights of employees of Transferor Company will not be adversely affected. If such a provision does not exist in the scheme then, the NCLT can refuse to sanction the scheme. Typical clause which may be included in the scheme is as under: –
On the Scheme becoming effective, all employees of the Transferor Company in service on the Effective Date shall be deemed to have become employees of the Transferee Company, without any break in their service and the terms and conditions of their employment with the Transferee Company shall not be less favourable than those applicable to them with reference to the Transferor Company on the Effective Date. The Transferee Company undertakes to continue to abide by any agreement/settlement, if any, validly entered into by the Transferor Company with any union/employee of the Transferor Company recognized by the Transferor Company. It is hereby clarified that the accumulated balances, if any, standing to the credit of the employees in the existing provident fund, gratuity fund and superannuation fund of which the employees of the Transferor Company are members shall be transferred to such provident fund, gratuity fund and superannuation fund of the Transferee Company or be established and caused to be recognized by the appropriate authorities, by the Transferee Company.
Pending the transfer as aforesaid, the provident fund, gratuity fund and superannuation fund dues of the employees of the Transferor Company would be continued to be deposited in the existing provident fund, gratuity fund and superannuation fund respectively of the Transferor Company.
Upon transfer of the aforesaid funds to the respective funds of the Transferee Company, the existing trusts created for such funds by the Transferor Company shall stand dissolved and no further act or deed shall be required to this effect. It is further clarified that the services of the employees of the Transferor Company will be treated as having been continuous, uninterrupted and taken into account for the purpose of the said fund or funds.
Without prejudice to the aforesaid, the Board of the Transferee Company, if it deems fit and subject to applicable laws, shall be entitled to retain separate trusts or funds within the Transferee Company for the erstwhile fund(s) of the Transferor Company.
It is further clarified that the employees of the Transferor Company who are eligible for options under the employee stock option scheme(s) of the Transferee Company shall continue to be so eligible and their period of service in the Transferor Company shall also be considered for determining compliance with vesting or any other condition under the employee stock option scheme(s) of the Transferee Company.
Significance according to Accounting Standards
It is better to provide in the scheme, which of the accounting methods i.e. Pooling of interest Method or Purchase Method will be followed as per AS 14 Accounting for Amalgamations or applicable Ind AS. To suit its requirements, the company may provide any treatment which takes care of its specific needs. If such treatment is not in accordance with AS 14/Ind AS, then auditor will qualify the accounts of merged company.
Q. What are the factors which need to be decided before deciding upon the appointed and effective date?
- Commercial reasons
- Transferability of assets or liabilities
- Stamp duty liability
- Tax (direct and indirect) liability
- Loss or gain of Tax benefits
Q. In which laws appointed date and effective date are defined?
Appointed date is mentioned in Section 232(6) of the Companies Act 2013, however, there is no specific definition of appointed date under any law. These have been interpreted with reference to various case laws and interpretation of laws.
Effective date is the last of the dates by which the Company in relation to which the order is made shall file a certified copy of order with the Registrar of Companies and all other required statutory authorities if any.
Q. Which date should come first from execution point of view? Can appointed date be after the effective date?
Normally, appointed date after the effective date is not seen, as effective date gives effect of the appointed date to transfer the assets and liabilities of the transferor/demerged company as on the appointed date. But appointed date may be after the effective date theoretically.
Q. Can both the dates be same? When is it advisable to keep the dates same?
Appointed date and effective date can be same. This is to give flexibility and easement to transfer the assets and liabilities as on date without any errors or accounting treatments which might be pending to be effected in the books of the transferor company.
Q. Can the effective date be some other date specified by the management after NCLT order is filed with ROC? When comes the Record date?
Management cannot have discretion over choosing some other date as effective other than the date on which the NCLT order is filed with ROC. However, record date ascertains shareholders of Transferor Company who are entitled to shares, dividend, rights and other benefits as and from record date to be fixed by the Board of Transferee Company upon scheme becoming effective. Record date is normally later than effective date.
Q. Which one is the effective date- when transferee company files the order or when transferor company files?
As per the provisions of the Companies Act, 2013 every company in relation to which the order is made shall file a copy of order with the Registrar within 30 days of receipt of order. It may happen that transferor and transferee company file order with ROC on different dates. There is no clarity in the laws regarding the same. But practically the latest date should be considered effective date.
Q. Can appointed date be any date in the middle of the financial year of the transferor/demerged company? What are the implications (+ and -)?
Yes. Appointed date can be any date in the middle of the financial year of the transferor/demerged company. If appointed date is any date middle of the financial year, the transferor/demerged company will be filing Income tax returns for the period beginning the 1st day of the financial year till the appointed date. Books of the transferor/demerged company will be prepared for that period also.
Q. Can appointed date be very far in earlier years? For example, suppose that the company has filed the application in the middle of FY 2007-08, then can appointed date be 01st April 2004 or so?
Yes. It can be. But there may be practical problems. If this is the case as mentioned above, books for the financial years 04-05, 05-06 and 06-07 are closed and assessment under income tax for one or more years is also completed. After the scheme becomes effective, the Transferee Company and Transferor Company will have to inform IT department about the said merger/Demerger and the appointed date. For those financial years combined return with Transferee Company along with the business of Transferor Company will also be filed. The benefits availed by the transferor/demerged company will be available to the transferee/resulting company. If NCLT finds that the scheme is against the public policy because of the chosen date, the scheme may be rejected or NCLT may suggest some other date. For example, refer to the Scheme of Arrangement between Hind Lamps Limited and Bajaj Electricals limited as stated below, in which on 9th November 2017, the board of directors of both the companies approved of the revised share allotment ratio in compliance to para 8 of SEBI Circular no: CFD/DIL3/CIR/2017/21 dated 10th March 2017. And the scheme was reflecting on BSE on 23rd November 2017, even though on 23rd November 2015, the Board of Directors of Bajaj Electricals Ltd and Hind Lamps Ltd approved the scheme of arrangement for demerger of manufacturing business of Hind Lamps Ltd into Bajaj Electricals Ltd. And from Taxation and Commercial angle the Appointed Date was kept as 31st March 2014.
Q. Is it necessary to mention appointed date and effective date in the scheme? If it is not mentioned in the scheme then what are the implications?
As a matter of prudence, appointed date should be mentioned in the scheme. If it is not mentioned then NCLT will suggest any date which may not be commercially beneficial for the companies. Similarly, mentioning the effective date is advisable to avoid debate and hurdles at various stages during the course of implementation of scheme.
Q. Can there be more than one appointed date/Effective Date? If yes then, what will be the implications of the varying dates?
There are no cases seen where appointed date is more than one. But based on the commercial reasons, the scheme may be drafted that way to give practical effect of more than one appointed date.
Similarly, there will be ideally only one effective date, but to have certain advantages under various laws it is possible to provide transfer of assets on the date other than effective date.
Q. Can appointed date be changed- after the scheme is sanctioned- after e form INC 28 is filed?
Appointed date cannot be changed after the scheme is sanctioned. If the company is not clear on the appointed date, it may insert in the definition of the appointed date that the appointed date may be decided by the BODs of the companies to give enough flexibility.
We give below examples from some schemes and the stated definitions from schemes.
- “Appointed Date” means 1st April 2017 or such other date as may be agreed by the Boards of the Transferor Company and the Transferee Company;
- “Effective Date” means the last of the dates on which the conditions specified in Clause 21 of this Scheme are complied with or are waived by the Board of both the Transferor Company and the Transferee Company. References in this scheme to the date of “coming into effect of this Scheme” or “upon the Scheme being effective” shall mean the Effective Date;
|Assets and Liabilities||On and from appointed date i.e. 1st April 2017, all assets and liabilities of ZRL shall be recorded in the Books of Accounts of EIL at their existing carrying amount and in the same form as they appear in the Books of Accounts of ZRL as on the effective date.|
|Retained earnings||The balance of retained earnings appearing in the financial statements of ZRL is added to the corresponding balance appearing in the financial statements of EIL. Further in the absence of any retained earnings in the books of EIL, the retained earnings of ZRL should be transferred to General reserve, if any.|
- On 23rd November 2015, the Board of Directors of Bajaj Electricals Ltd and Hind Lamps Ltd approved the scheme of arrangement for demerger of manufacturing business of Hind Lamps Ltd into Bajaj Electricals Ltd.
- Appointed date taken for all tax and other regulatory purposes is 31st March 2014.
Example No. 4: Composite Scheme of Arrangement under Section 230 to 232, Read with sections 66 and other applicable provisions of the Companies Act 2013 amongst HSIL Ltd (The Demerged Company) and Somany Home Innovation Limited (Resulting Company 1) and Brilloca Limited (Resulting Company 2).
- Appointed date is 1st April 2018.
- And as per the scheme it is stated that ‘upon the scheme becoming effective and with effect from the appointed date, the demerged undertaking shall stand demerged and transferred and be vested in the resulting company, each on going concern basis, without any further act or deed, so as to become as and from appointed date, the undertaking of resulting company, and to vest in resulting company, all the rights, title, interest or obligations of the demerged undertaking therein’
Excerpts from case of MARSHALL SONS & CO. (INDIA) LTD (SC)
…………… courts had not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme.
The business carried on by the Transferor Company (Subsidiary Company) should be deemed to have been carried on for and on behalf of the Transferee Company from the appointed date as specified in the scheme This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the Court before the Registrar of Companies, the allotment of shares etc. may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in circumstances of this case would be 1-1-1982 i.e. Appointed Date, being beginning of the accounting year of Transferor Company.
Excerpts from The Scheme of Amalgamation Of Motilal Oswal Securities Limited With Motilal Oswal Financial Services Limited And Their Respective Shareholders
All the tax payments/ compliances (including, but without limitation to income tax, service tax, excise duty, central sales tax, applicable state value-added tax, etc.) whether by way of tax deducted at source, advance tax, all earnest monies, security deposits provisional payments, payment under protest, or otherwise howsoever, by the Transferor Company after the Appointed Date, shall be deemed to be paid by the Transferee Company and shall, in all proceedings, be dealt with accordingly.
Excerpts from the Scheme of Amalgamation Motilal Oswal Securities Limited With Motilal Oswal Financial Services Limited & And Their Respective Shareholders
Upon scheme becoming effective, the Transferor Company (if required) and the Transferee Company are expressly permitted to revise their financial statements and its income tax returns along with prescribed forms, filings and annexures under the Income-tax Act, 1961 and other statutory returns, including but not limited to tax deducted/collected at source returns, service tax returns, excise tax returns, sales tax / VAT / GST returns, as may be applicable. The Transferee Company has expressly reserved the right to make such provision in its returns and to claim refunds, advance tax credits, credit of tax under Section 115JB of the Income-tax Act, 1961, i.e. credit of minimum alternate tax, credit of dividend distribution tax, credit of tax deducted at source, credit of foreign taxes paid/withheld, etc., etc. if any, as may be required for the purposes of/consequent to implementation of the Scheme. All compliances done by Transferor Company will be considered as compliances by Transferee Company.
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