m and a

1. Hero Cycles acquires UK-based Cycle firm
Avocet Sports
1. Significant drivers for the acquiring company to resort to such a move
given the current Industry scenario in India and in the global market
The main significant driver for hero cycles company to acquire a European based company is to
expand their market into globally as avocet is one of the leading European countries which is
ranked among top three in Europe , since hero cycles is planning to expand globally this is a
significant opportunitie for hero to enter into European countries like uk because Avocet is one
of the top three distributors of bicycles, e-bikes, bicycle parts and accessories in the UK and it
offers an extensive range of products including hybrid, folding, road, children’s bikes, e-bikes,
Mountain bikes, BMX and roadster incorporating contemporary technology and design. Its
leading brands include Viking, Coyote, Rooster, Ryedale, Lectro, Concept and Riddick.
As said by Pankaj Munjal, Chairman and MD, Hero Cycles, “This acquisition marks our entry into
the European market and plays an important role in realising our ambition of becoming one of
its key players. We are very excited by our association with Avocet Sports which is one of the
most renowned and trusted names in the cycle segment in the UK,”
( http://www.financialexpress.com/article/industry/companies/hero-cycles-acquires-uk-based-
cycle-firm-avocet-sports/118197/ )
Expansion into the European market will play an important role in realising the Hero Cycles
Group’s plans for growth.

2. The other drivers for this acquisitions is as follows
• Right to entry: Acquisitions that take place abroad permit Indian companies to gain
access to developed markets across the globe.
• Technology transfer: This is one of the main advantages and drivers that urge
companies to get into M&A deals. Many times corporations require technologies to
manufacture particular product or a service which is not available in India. In such
situations by acquiring/collaborating companies abroad they get access to the
technologies.
• New Product Mix: Many times it is not profitable for companies to manufacture
products themselves either due to cost constraints or requirement of huge investments.
In such a scenario alliance with another company can give them the right to sell and
diversify their product range.
• Hedging Country Risks: Merger and Acquisitions are also attempted to reduce the
reliance on the Indian markets and escape the local business cycles.
• Synergy effect
i. Economics of scale
ii. Cost reduction
iii. Benefits the company gains through horizontal integration
• Eliminating inefficiencies
• Industry consolidation

3. Are there any tax issues involved in such deals given the current tax structure in
India?
Taxation is always one of the most challenging issues in the practice of business. The taxation
challenges are magnified in cross border mergers and acquisitions. In most cases the acquiring
firm, being that it operates in a foreign land will have to pay higher taxation rates than its
competitors in business that will be classified as local businesses. The unequal tax rates
between the foreign owned business and the locally owned business in cross border mergers
and acquisitions often work against the ambitions of the acquiring firm. As there develops an
unfair playground in relation to tax remittance to the authorities of the country where the
transaction is to take place, realizing sustainable profitability always becomes elusive.
Therefore, it becomes an important requirement that the taxation aspect of business is keenly
considered before venturing into cross border mergers and acquisitions.
In addition to this, it is important that all the specifications and guidelines on how and when tax
should be remitted to authorities once the cross border merger and acquisition venture has
been initiated should be fully understood. History has it that some businesses have been
penalized, fined or banned from operating in some countries due to their failure to remit taxes
as per to the laid down procedures. Therefore, it is important that all taxation practices as
spelled out in taxation laws and guidelines of various countries are keenly studied before
initiating cross border mergers and acquisitions. This is the best way to ensure that the
acquiring business in a cross border merger and acquisition exercise will fully benefit from the
venture.
For M&As, primarily the principal tax consideration is income tax which is governed by the
Income Tax Act, 1961 ("ITA").16 The ITA permits a tax neutral merger or spin-offs in the form of
demergers if certain conditions are satisfied.

4. In the last few years, India has witnessed several high profile M&A tax controversies. The
income tax authorities have been very aggressive and proactive in scrutinizing deal structures
on the grounds of tax avoidance. While the new Government has promised to address the issue
of overreach by the tax authorities, it still remains unclear whether the general anti avoidance
rules ("GAAR") will be implemented from April 1, 2015. GAAR gives wide powers to the income
tax authorities to challenge the "commercial substance" of a transaction and thereafter re-
characterize the transaction if the deal structure is found to be an "impermissible avoidance
arrangement".
Apart from GAAR, the other areas where parties have had to be watchful are
o the incidence of tax in the case of indirect transfers i.e. transfer of foreign
securities which derives substantial value from underlying Indian assets
o undervaluation of shares
o tax withholding obligations
o Transfer pricing adjustments in the case of group transfers.
In order to mitigate some of the tax risks, parties have in the past
(i) negotiated specific tax indemnities in the deal documents
(ii) have approached the Authority for Advance Ruling ("AAR") to seek clarity on their
tax liabilities
(iii) Get a legal opinion from a reputed law firm
(iv) Held back a certain portion of deal consideration in escrow
(v) Have taken tax insurance to cover potential tax risk.