Coal India Limited and Store Norske

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Table of Contents

Issues to address concerning business transactions
Acquisition/purchasing
Joint Venture
Works Cited

Store Norske is a coal mining company from Norway. The company was incorporated in 1916. The government of Norway owns about 99.9 percent of Store Norske. The company boasts of over three hundred employees. Primarily, the company supplies its coal products to factories in neighboring countries such as Germany, Britain, as well as Spain.

Coal India Limited, on the other hand, is incorporated in India. The Indian government owns about 80 percent of the company. In the last financial year, it managed to produce about 452 million tones of coal which earned the company about INR 883 billion. By market share, the company is the fifth most valuable company in India with a market capitalization of about US $36 billion. In 2011, the Indian government conferred the status of Maharatna to Coal India Limited. The award primarily recognizes companies that have an international presence or have the potential to go international through subsidiaries and joint ventures. The recognition grants the company some powers to make an equity investment in order to establish wholly-owned subsidiaries and financial joint ventures in India or even in foreign markets. It also allows the company to undertake acquisitions and mergers, in India and overseas. It is also subject to an overall ceiling of 30% on its equity investments as well as mergers and acquisitions.

Issues to address concerning business transactions

Store Norske must be aware of the varied challenges associated with this option. Store Norske is a Norwegian Company and Coal India Limited is an Indian-based company, thus, there are differences in culture, market complexities, and exchange rates. The joint venture between Store Norske and Coal India Limited would be subject to higher taxation. Under the Companies Act in India, all foreign companies are subject to all Indian laws. This means that foreign companies wishing to make any arrangement with an Indian company through Joint Venture, or wholly-owned subsidiary must have an office or a fixed place of business and must have performed some substantial activities in the country.

Cultural differences between the two countries of origin also would be a major challenge for Store Norske (Anderson, Fedenia and Hirschey 4-10). One of the challenges that must be surmounted when working out an agreement with Coal India Limited is the variation in culture between India and Norway. Generally in India, things are carried out differently. The culture in India is very different from that in Norway in that it is a mixture of varied cultures including Islam. Store Norske will be on the safer side if it has a prior understanding of the effect of the complex patterns of communication, a hierarchical mindset, as well as a number of other subtleties.

The Company Act also restricts foreign firms to about 74 percent ownership of India-based companies. There are rigid and unnecessary labor laws in India. There some state parties work around the clock to make some of the unnecessary regulations and rules so they can benefit. For instance, companies employing over 100 employees cannot fire any employee without getting approval from the government. The impact of this is to discourage companies, especially international firms, from expanding to more than 100 employees. These practices also discourage foreign direct investment. In addition, Trade Unions in the country are well connected politically an aspect that makes it hard for the government to tackle sensitive labor issues. These practices would hurt Store Norske as it has more than 360 workers.

High debt levels are also a concern for Store Norske. In as much as lending has increased by almost 30 percent, there are concerns regarding the risk of defaulting on loans. Coupled with the risk of inflation, it may result in increased interest rates (Banerjee 2-4). For instance, if rates of interest rise appreciably it is likely to result in reduced spending and yet the Joint venture between Store Norske and Coal India Limited depends on shareholder support. That is, shareholders who have issues are likely to sell off their shares and those who have little money are likely to hold on. The company is likely to lack enough equity to roll out its plans.

In terms of disclosure levels, there is no requirement for the Indian-based listed corporations to disclose environmental measures in their annual reports (Banerjee 2-7). Given that mining companies fall under heavily polluted industries, a lack of this information in their annual reports means that they do not adopt fully the IFRS. This means that their financial statements are not transparent meaning that Store Norske is likely to agree with a company that is likely to be sued for environmental damage and this would be costly in the end(Banerjee 2-7).

The benefit is that India offers incentives without restrictions on the repatriation of capital and profits for foreign investments. Capital and profits of listed companies can be repatriated once the required tax has been paid under the Companies Act and SEBI Regulations 1997. It offers a developed infrastructure of support services and facilities, and a labor force at a lower cost than developed countries. Special incentives are also granted to companies in the mining industry.

In recent times, the Indian government has been in the process of attracting FDI through reduced corporate tax. Tax incentives in most cases apply to investors who establish tax resident businesses in India. This policy targets foreign firms such as Store Norske who wish to engage in long-term operations in India to incorporate local companies such as Coal India Limited.

Acquisition/purchasing

The second option is the consideration by Store Norske to acquire a majority stake in the Indian company in order to make use of the acquired company in their processes. Merging and acquisition of an Indian company especially in the mining sector is governed by the Coal Mines Act, 1973 which allows companies to acquire stakes in an Indian company through automatic route (Anderson, Fedenia and Hirschey 3-4). This means that the process has to be subjected to the government for approval subject to sectoral caps. The purchase will be incorporated under the Indian Companies Act meaning that all Indian operations would be carried out through the holding company. Given that Coal India Limited is a listed company, the acquisition will be subject to controls by the Securities and Exchange of India. Particularly the SEBI Regulations 1997 at protecting the interest of minority shareholders. Therefore, before taking on this option, Store Norske must evaluate its growth strategies. To achieve this, it must consider the following factors:

The agreement between them must yield success and not failures
Must establish the compatibility of services between them
The arrangement should save the company on costs
The company can afford the arrangement and will not hurt it hut financially
Any likely or resulting legal issues

Since the capital market in India is highly liberalized; it is easier for Store Norske to acquire shares than assets. Taking shares would give it managerial power an aspect that will help the company roll out its DRC plan. Acquisition of shares in the liberalized market is technically simpler than transfer of assets and may come with tax advantages.

Store Norske must as well be aware that companies that hold a majority share in another, are supposed to pay dividend distribution tax. This is based on the fact that they are allowed to use capital gains to generate some money for recurrent expenditures. For instance, a subsidiary, Coal India Limited, will deduct dividend distribution tax before distributing dividends to Store Norske (Anderson, Fedenia, and Hirschey 10-13). Similarly, payment of DDT is also mandatory if Store Norske also wants to distribute its dividend to shareholders. So, this option will be subject to double taxation. However, there are exceptions. The dividend is the key or major point of focus here. For instance, if Store Norske will only hold investments in Coal India Limited for strategic reasons like in option one, then it will be subjected to double taxation. If a majority share company will be getting some dividend from the subsidiary it acquired, then it is allowed under the Companies Act to claim the credit on it. In short, a majority of share companies are subject to dividend distribution tax though can, without restrictions, claim the credit on the amount of tax paid to the subsidiary (Anderson, Fedenia and Hirschey 10-17). This, however, is not absolute as it is subject to the following conditions: such dividend must have been obtained from the subsidiary; dividend distribution tax on dividend must have been paid by the subsidiary, and the company is given credit should be holding company and not a subsidiary.

This option would lead to increased value creation for Store Norske. This is based on the fact that every time Coal India Limited floats its shares, it as well creates value for Store Norske. In addition, in situations where there is a likely major spin-off, the shares of the holding company are secured first. This situation will alleviate several issues, particularly those associated with tax problems and cultural issues. The tax issues particularly on dividends will be taken care of by the virtue of being a holding company and cultural issues will be dealt with by the fact that it will have acquired employees of the local company and it no longer needs to use its employees.

Joint Venture

The other option is for Store Norske to form a joint venture company whereby both companies will have equal shares (Anderson, Fedenia, and Hirschey 20-24). That is fifty percent each. Here the company must evaluate its strategies and put its objectives into perspective. Factors that should be taken into consideration include:

Whether the joint ownership will prevent it from achieving its goals or help it to achieve its goals.
The mode of taxing joint ventures.
Legal implication

In DRC, SPRL and SARL are forms of establishment that are most common. They are both companies whose liabilities are limited. Whilst a minimum of seven shareholders are required for a SARL, shares are not freely transferable in an SPRL. In addition, the authorization of the Head of State is required for incorporation of an SARL and also the government must hold at least six percent of share capital in the company. Therefore, the new company will have to address some of the above-mentioned issues. In other words, it will have the challenge of choosing the best form of incorporation.

Another challenge that the joint venture will face in DRC is the difficulty to navigate the regulatory framework. That is, despite the endeavors to simplify the process of setting up new businesses, private organizations still face expensive regulatory impediments. For instance, launching a company, in the country, costs almost twice the level of its likely annual revenue, and the cost of acquiring a license is more than ten times that amount or level. Furthermore, the state controls prices thus denying companies the chance to set prices based on the prevailing conditions. The US Department of State on a scale of 0-100 percent ranks the country poorly on various levels (US Department of State par. 1-2). For instance, Government Effectiveness is ranked six percent; Fiscal Policy ranks 35 percent; Rule of Law ranks five percent, Control of Corruption ranks six percent; Regulatory Quality ranks 10 percent; Trade Policy ranks 31 percent; Land Rights and Access ranks 31 percent; Business Start-Up ranks 0 percent, and Natural Resource Management ranks 22 percent. These factors will negatively affect the joint venture and thus there is a need to find the best ways around them before establishing the business in the country.

Accounting standards in DRC also vary significantly from accounting practices followed by Store Norske and Coal India Limited (World Bank 2-10). In DRC presentation of the financial statements follows the Congolese General Chart of Accounts. There are several differences between the Congolese General Chart of Accounts (CGCA) and IFRS. The Congolese General Chart of Accounts requires that the company should make four summary tables which comprise the statement of income; the tax, economic as well as financial table; the table of financing, and the balance sheet. On the contrary, International Accounting Standard 1 indicates that all financial statements are supposed to comprise the statement of income, the balance sheet, the statement of cash flows, the statement of equity variation or changes, as well as additional notes that explain in detail what is contained in the financial statements. The notes may also embrace an explanation of the accounting standard adopted. The difference between the Congolese accounting standard and IFRS is substantive. Moreover, DRC financial laws do not recognize consolidated statements. Therefore, if each company will make its financial statement, it will mean that the objectives of Store Norske will not be achieved as each company will tend to work on its own. Therefore, the best option is through purchasing majority shares in Coal India Limited. The benefits have been discussed under option two. That is, by having the majority control, Store Norske will be able to decide on its own what is best for it. It will also have to make just one financial statement as opposed to two in the case of the joint venture.

Works Cited

Anderson, Christopher, et al. Cultural Influences on home bias and International Diversification by Institutional Investors. Wisconsin, 2010. Print.

Banerjee, Bhabatosh. Regulation of Corporate Accounting and Reporting in India. Calcutta, India: The Word Press, 2002. Print.

US Department of State. 2011 Investment Climate Statement – Democratic Republic of the Congo. 2011. Web.

World Bank. Report on the Observance of Standards and Codes (ROSC). Accounting and Auditing. Kinshasa: World Bank, 2010. Print.

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Coal India Limited and Store Norske

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