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, childrens 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-cyclesacquires-uk-based-cycle-firm-avocet-sports/118197/ )

Expansion into the European market will play an important role in realising
the Hero Cycles Groups plans for growth.
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

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.

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)
(ii)

negotiated specific tax indemnities in the deal documents

have approached the Authority for Advance Ruling ("AAR") to seek

(iii)

clarity on their tax liabilities

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.