Ruchi Soya-Patanjali Ayurved deal: What is a slump sale and what’s its biggest advantage?

Why not a demerger then? In a slump sale, the buyer and seller have more discretion in deciding the sale price, according to Vinod Jain, a senior chartered accountant based in New Delhi. In short, the two parties can decide the price between themselves. In a demerger, valuation has to be done through a legal process by an independent valuer, approved by the Insolvency and Bankruptcy Board of India (IBBI). Also, a slump can be done faster, even sometimes in a month, while a demerger is a much lengthier process with more compliance requirements. A demerger can take six to nine months or even longer because it has to be approved by the National Company Law Tribunal (NCLT). 

Also, why not an acquisition? Because they don’t want the company. They just want the company’s business. 

Huh, meaning? A company isn’t a business. A company is a legal entity and it can do anything, including run a business. In an acquisition, you buy a company but, in a slump sale, you aren’t buying the company or its shares but you are buying its business, which is basically all the actions and tools (assets and liabilities) that are needed to make a profit. And if you want to buy only the business, you can choose between a slump sale and demerger, and we know why demerger wasn’t picked.  

So, slump sale is basically business off-the-rack. That’s one way to put it. The crucial part is that you buy the business as a whole for a lump-sum and don’t value its parts (assets and liabilities) separately to arrive at the sale price. Here’s the legalese for this, given under Clause 42C of Section 2 of the Income Tax Act: slump sale is “the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to individual assets and liabilities in such transfer”. This gives a lot of room for the buyer and seller to decide the selling price. 

How is this taxed? The seller has to determine the fair market value or FMV of the transaction, and then pay capital gains on that. Goods and Services Tax (GST) does not apply on a slump sale since this is a transfer of a business, and assets and liabilities just come as a part of it.

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What’s the fair market value? There are two ways to calculate it. Broadly–one (let’s call it FMV1) is based on the book value and market value of a few capital assets, and the other (FMV2) is based on the lump sum the buyer is paying and the value of fixed and capital assets. The value of the assets are done as per Rule 11UAE of the IT Act. The capital gains will then be taxed on whichever of the two–FMV1 or FMV2–is higher. If you think about it, assigning values to assets wasn’t part of the slump sale idea. But this change was brought in last year, through an amendment made to the Finance Act 2021, because people were using a slump sale to avoid paying taxes altogether. 

How were they doing that? Earlier the capital gains wasn’t based on this fair market value. It was simply the difference between the price that was being offered by the buyer (sale consideration) and the net worth of the business. The net worth of the business was determined by the book value of its assets. If the net worth of the business was recorded as more than what was offered, then no taxes were paid, since capital gains would have been negative. Therefore, last year, the Act was amended to include the concept of FMV. Another crucial amendment regarding slump sales was also made last year…

What was the other one? It was regarding the definition of slump sale. Earlier a slump sale could be considered one only if there was a sale. After the amendment, a slump sale could include transfer by any means, for example if a business is being transferred against issuance of bond or preference shares. These are called slump exchanges.