Chapter 18: Deal Structuring and Financial Strategies (CAIIB – Paper 3)
1. In merger negotiations, what is usually the first step before discussing valuation?
A. Determining the payment method
B. Drafting the merger agreement
C. Signing a Non-Disclosure Agreement (NDA)
D. Filing with SEBI
Before valuation discussions, parties typically sign an NDA to protect confidential information exchanged during negotiations.
2. Which of the following is not a common method of payment in mergers and acquisitions?
A. Cash payment
B. Share swap
C. Debt instruments
D. Government subsidy
Government subsidy is not a direct payment method in M&A. The usual methods are cash, share swaps, or debt/convertible instruments.
3. Which legal document outlines the detailed terms and conditions of an M&A deal after negotiations are completed?
A. Definitive Agreement
B. Letter of Intent
C. Term Sheet
D. Due Diligence Report
A Definitive Agreement (DA) is the final legal contract that specifies all terms and conditions of the merger or acquisition.
4. In a share swap arrangement, the acquiring company pays by:
A. Issuing debentures to the target company
B. Exchanging its own shares with shareholders of the target company
C. Paying cash upfront
D. Providing bank guarantees
In a share swap, shareholders of the target company receive shares of the acquiring company instead of cash.
5. Which of the following is a key legal consideration in cross-border M&A transactions?
A. Dividend payout policy
B. Employee bonus schemes
C. Compliance with FEMA and FDI guidelines
D. Loan restructuring norms
Cross-border M&As must comply with FEMA, RBI, and FDI guidelines along with local corporate and tax laws.
6. In a merger transaction, which of the following is a tax-neutral event under Indian Income Tax Act if certain conditions are met?
A. Amalgamation of one Indian company into another
B. Cash payout to shareholders
C. Dividend distribution post-merger
D. Buyback of shares
Amalgamation of one Indian company into another is tax-neutral if conditions under Section 2(1B) of the Income Tax Act are satisfied.
7. In a merger, how is the difference between the purchase consideration and the net asset value of the acquired company treated in accounting?
A. Always recorded as a capital reserve
B. Adjusted through reserves and surplus
C. Directly written off in profit and loss account
D. Recorded as goodwill or capital reserve depending on the case
If purchase consideration exceeds net assets, the difference is treated as goodwill. If it is lower, the balance is capital reserve.
8. Under Indian tax law, which type of merger qualifies for carry-forward of accumulated losses and unabsorbed depreciation of the amalgamating company?
A. All mergers automatically qualify
B. Only those mergers meeting conditions of Section 72A of the Income Tax Act
C. Only cross-border mergers
D. Mergers approved under Companies Act, 2013
Section 72A allows carry-forward of accumulated losses and unabsorbed depreciation if specified conditions are fulfilled.
9. Deferred tax liability (DTL) in mergers and acquisitions typically arises due to:
A. Cash component in purchase consideration
B. Share swap ratio adjustments
C. Difference between book value and tax value of assets/liabilities
D. Issue of preference shares
Deferred tax arises due to timing differences between accounting treatment and tax treatment of assets/liabilities.
10. In accounting for amalgamations, which method reflects the transaction as if the companies have always been a single entity?
A. Purchase Method
B. Fair Value Method
C. Consolidation Method
D. Pooling of Interest Method
Pooling of Interest Method treats amalgamation as if the combining companies had always been one entity, with assets and liabilities recorded at book values.
11. Under Section 47 of the Income Tax Act, transfer of assets in a scheme of amalgamation is:
A. Taxable as capital gains
B. Not regarded as transfer, hence exempt
C. Taxable in the hands of the amalgamated company
D. Taxable in the hands of shareholders only
Section 47 specifies certain transactions, including transfer of assets in amalgamation, which are not considered as transfer for capital gains purposes.
12. Which section of the Income Tax Act allows carry-forward and set-off of accumulated losses and unabsorbed depreciation in case of eligible amalgamations?
A. Section 72A
B. Section 35
C. Section 80G
D. Section 10AA
Section 72A provides that accumulated losses and unabsorbed depreciation of the amalgamating company may be carried forward by the amalgamated company, subject to conditions.
13. For shareholders of the amalgamating company, receiving shares in the amalgamated company is:
A. Always taxable as dividend
B. Taxable under capital gains
C. Considered as income from other sources
D. Exempt under Section 47(vii), subject to conditions
Section 47(vii) exempts capital gains tax on transfer of shares by shareholders in an amalgamation if conditions like receipt of shares in amalgamated company are satisfied.
14. One condition for availing tax relief under Section 72A in case of amalgamation is that:
A. The amalgamated company must increase dividend payout
B. The amalgamating company should have foreign operations
C. The amalgamated company should hold at least 3/4th of the book value of fixed assets of amalgamating company for 5 years
D. The amalgamating company must be listed on stock exchange
Section 72A relief requires that the amalgamated company continue to hold at least 75% of fixed assets of amalgamating company for a minimum of 5 years.
15. In case of amalgamation, depreciation on assets of the amalgamating company is available to the amalgamated company:
A. As if the amalgamated company had owned the assets from the beginning of the year
B. Only from the next financial year
C. Only if approved by CBDT
D. Depreciation benefit lapses on amalgamation
The amalgamated company is entitled to claim depreciation on transferred assets as if it owned them from the beginning of the financial year.
16. Which accounting standard/Ind AS specifically deals with accounting for business combinations in India?
A. Ind AS 32
B. Ind AS 115
C. Ind AS 103
D. Ind AS 109
Ind AS 103 – Business Combinations prescribes the accounting treatment for mergers, acquisitions, and other business combinations.
17. Under the acquisition method of accounting, the purchase consideration is allocated to:
A. Identifiable assets, liabilities, and goodwill
B. Only tangible assets
C. Only current liabilities
D. Shareholders' equity only
In acquisition accounting, purchase consideration is allocated to all identifiable assets and liabilities at fair value, and any excess is recorded as goodwill.
18. In consolidated financial statements, minority interest is also referred to as:
A. Share premium
B. Contingent liability
C. Retained earnings
D. Non-controlling interest
Non-controlling interest (earlier called minority interest) represents equity in a subsidiary not attributable to the parent company.
19. In a business combination, if the fair value of net assets acquired exceeds the purchase consideration, the difference is treated as:
A. Goodwill
B. Capital Reserve (Bargain Purchase Gain)
C. Deferred tax asset
D. Revenue reserve
When net assets exceed consideration paid, it is considered a bargain purchase. Ind AS 103 requires such gain to be transferred to capital reserve.
20. Which of the following is not required to be disclosed in financial reporting of business combinations?
A. Names and description of combining entities
B. Method of accounting used
C. Purchase consideration and goodwill
D. Future profit projections for 5 years
Future profit projections are not a mandatory disclosure. Required disclosures include names of entities, accounting method, consideration, goodwill, and NCI details.
21. Which of the following is a common source of deal financing in mergers and acquisitions?
A. Dividend distribution
B. Employee stock options
C. Bank loans and debt instruments
D. Corporate social responsibility (CSR) funds
Deal financing often relies on bank loans, debt instruments, and equity issues. CSR funds and dividends are not typical sources for acquisitions.
22. In leveraged buyouts (LBOs), financing is primarily structured through:
A. High proportion of borrowed funds
B. Equity infusion only
C. Government grants
D. Foreign aid
LBOs are financed primarily through debt (borrowed funds), with a smaller proportion of equity from private equity firms.
23. Which of the following is a key regulatory approval for financing cross-border acquisitions in India?
A. GST Council approval
B. RBI approval under FEMA guidelines
C. SEBI approval for all overseas deals
D. Income Tax Department clearance
For cross-border acquisitions, RBI approval is necessary under the Foreign Exchange Management Act (FEMA) guidelines. SEBI governs listed company regulations, not all overseas deals.
24. In cross-border M&A financing, the use of foreign currency convertible bonds (FCCBs) is advantageous because:
A. They avoid dilution of ownership
B. They are exempt from all RBI regulations
C. They cannot be converted into equity
D. They provide flexibility of debt and equity combination
FCCBs are hybrid instruments that combine debt and equity features, making them attractive for cross-border acquisitions.
25. Which financing route is permitted under the Liberalised Remittance Scheme (LRS) for Indian residents in cross-border acquisitions?
A. Remittance of up to USD 250,000 per financial year
B. Unlimited remittance without RBI approval
C. Only remittance in Indian Rupees
D. No remittance allowed under LRS for acquisitions
Under LRS, Indian residents can remit up to USD 250,000 per financial year for permissible capital and current account transactions, including investments abroad.
26. A company is considering an acquisition of a competitor for ₹500 crore. The deal is financed with 60% debt and 40% equity. What is the debt portion of the financing?
A. ₹150 crore
B. ₹200 crore
C. ₹300 crore
D. ₹350 crore
Debt portion = 60% of ₹500 crore = ₹300 crore.
27. Caselet: XYZ Ltd. is acquiring a European company. The deal requires €50 million. The company chooses to raise funds through External Commercial Borrowings (ECBs).
Which of the following conditions must XYZ Ltd. comply with?
A. Adherence to RBI’s ECB guidelines including end-use restrictions
B. No reporting requirement to RBI
C. Unlimited tenure with no restrictions
D. Only equity financing is allowed for cross-border acquisitions
ECBs are permitted under RBI guidelines with specific end-use restrictions, maturity requirements, and reporting obligations.
28. In a merger deal, the acquirer offers 1.5 shares of its company for every 1 share of the target company. This type of consideration is known as:
A. Cash deal
B. Asset-backed financing
C. Debt restructuring
D. Share swap deal
When shares of the acquiring company are exchanged for shares of the target, it is a share swap deal.
29. Caselet: ABC Bank is financing an Indian company’s overseas acquisition. The deal size is USD 200 million. RBI regulations require that such financing must be backed by:
A. Only fixed deposits
B. Adequate security/collateral and adherence to FEMA rules
C. A guarantee from Ministry of Finance
D. No restrictions as long as the bank approves
Overseas acquisition financing must comply with FEMA and RBI regulations, usually backed by security/collateral.
30. Which of the following is the MOST suitable financing strategy for a company aiming to reduce dilution of ownership while acquiring a foreign entity?
A. Equity issue
B. Share swap
C. Debt financing
D. Employee stock options
Debt financing helps acquire the target without diluting existing shareholders’ ownership, unlike equity issuance or share swap.
