Merger and Tax Savings

Tata Chemicals has found a convenient way to prop up its bottom line and reduce tax liability in a difficult year by merging its wholly owned subsidiary, Sabras Investment, with itself. The company's shareholders had approved the merger at an extraordinary meeting. With merger, profits on sale of investments held by Sabras will directly accrue to Toto Chemicals.

Sabras held 65.65 lakh ACC shares at the end of March 2000. This block of ACC ':shares is to be sold to Gujrat Ambujo group at Rs 370 a share during the current year, in line with the plans of the Toto group to completely divest its stake in ACC. The sale of the block of ACC shores will lead to a capital gain of Rs 207.75 crores. After paying capital gains tax the net profit on sale of ACC shares would have gone to Toto Chemicals by way of dividend. Sabras would have paid dividend tax of 22 per cent on the amount paid to Toto Chemicals as dividend.

In the hands of Tata Chemicals, the dividend from Sabras would have been tax free. But, if Toto Chemicals distributed the dividend it received from Sabras as dividend to its shareholders, it would again be required to pay a dividend tax of 22 per cent. This can be construed as some form of double taxation. With the merger, double payment of dividend tax on profit on sale of investments, including that on ACC shares, is avoided. The merger is effective from April 1, 2000.

Sabras earned pre - tax: profit of Rs 160 crores for 1999 - 00. Of this, Rs 153.41 Gores was on account of sale of investments. Sabras paid a dividend of Rs 200 per share (Rs 100 paid-up) and distributed Rs 17.60 crores for 1999-00. Toto Chemicals earned dividend income of Rs 37.07 crores including Rs 17.60 crores from Sabras.

Sabras Investments, average cost of the ACC holding is around Rs 53.58 per share, which will translate into profit of Rs 31 6.42 per s ha re in the cement company. Also, Toto Chemicals holds 5:65 lakh ACC shares (0.33 per cent), which will generate another profit of Rs 20.85 crores. Out of the Toto group's stoke of 3 per cent plus in ACC, Sabras Investments has the largest share at 1.39 percent.

Tata Chemicals is in the process of finalizing a major restructuring programme after its profitability took a severe hit during the last financial' year ended March 31, 2000. Toto Chemicals reported a lower profit of Rs 117.29 crores against Rs 18l.67 crores in the previous year. Heavy dumping from China and reduction in retention prices of urea have negatively impacted its core soda ash and fertilizer businesses. With global soda ash capacities lying unutilized, the pressure on prices will continue in the current year. The bleak outlook has forced the management to refocus the operations of the company. 

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