Asset Sale

In this article, Kashish Khattar, currently pursuing Lawsikho Diploma In M&A, Institutional Finance and Investment Laws (including PE And VC Transactions), discusses on Asset Sale.


An asset sale is one of the methods that is used for business transfers. It is preferred by the acquiring company because it can cherry pick the assets that it needs to diversify its business or increase its stronghold in a particular area. Individual assets are assigned a value in this kind of a sale. It can also be called a price meal sale of the assets of the company.

Typically, an asset sale is considered by a company when it wants to clean up its balance sheets which is burdened with bad loans. Data from a Thomson Reuters Eikon report shows that Indian companies have sold more assets in 2016 than in any year since the liberalization. The asset sales announced, pending or completed in 2016 amounted to a whooping USD 40.85 billion. Asset sales in India are mostly forced through a bank when it has to recover the debt owed by the borrower company. Asset sale includes any type of property that a company wants to sell to the acquirer. It can be a plant, factory, land or some intellectual property rights. In an Indian scenario, an Asset sale is done through an agreement to sell or a conveyance deed.

An agreement to sell is an agreement where the sale of goods is going to take place at a later date. A conveyance deed is a more formal agreement which authorises the sale of goods, the list of goods to be sold are mentioned and listed. Eventually, the goods are sold on the basis of this deed.

An asset sale is typically undertaken through a Business Transfer Agreement (“BTA”), where the individual assets are listed down which the acquirer wishes to acquire. The specific liabilities are also listed which the acquirer has cherry-picked. The terms and conditions of the acquisition are listed down. The representation and warranties of the transferee company are also given in the BTA. The indemnity payable by the transferee company is also listed down.

Checklist for an Asset Purchase Agreement

The counsel drafting the agreement should be clear on various aspects that should be covered:

  1. They should have full knowledge of what assets are going to be transferred;
  2. what liabilities are going to be taken up;
  3. T&C concerning the transfer needs to be crystal clear;
  4. The considerations that are payable against which particular asset needs to be clear;
  5. What kind of a BTA it is – (i) Agreement to sell, (ii) Conveyance Deed
  6. Looking out at the Stamp Duty implications on the BTA. The stamp duty is state specific.

For the basic understanding, the basic steps of an M&A Transaction would be

  1. A typical seller will open its data room and attract bidders,
  2. The potential acquirer does its various due diligence on the specific business, asset and possibly enter into a non-binding term sheet,
  3. If the things keep going well, the acquirer moves ahead and formalises the transaction with a formal term sheet, and
  4. This leads to the execution of formal documents such as the Shareholders Agreements, BTA, Scheme of arrangement.

Documents needed for an Asset Sale

The parties first enter into a non-binding term sheet, do the required due diligence required, then move ahead to formalise their arrangement in the form of a legal agreement. The legal agreement can range from a Business Transfer Agreement, Asset Purchase Agreement and a Shareholders Agreement etc.

Internal Approvals

Internal approvals needed for an Asset sale are achieved with the help of the Companies Act, 2013. The steps required for an asset sale or a stock sale can be as follows:

  1. The Board of Directors must pass a resolution to the effect of the sale of assets/undertaking of the company as per Section 179.
  2. The following steps are only applicable to public companies where the asset in question constitutes more than 20% of the total net worth of the company or the asset/undertaking is generating more than 20% of the total income of the company in the previous financial year. Section 110 of the Companies Act, 2013  is to be read with Rule 22 of the Companies (Management and Administration) Rules, 2014.
  3. Board of directors of every listed companies and all public companies – i) with paid-up capital of Rs. 10 crores or more; (ii) having a turnover of Rs. 100 crores or more; (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crores or more will refer to the Audit Committee for valuation of the undertaking and assets of a company (Section 177(4)(vi) of the Companies Act, 2013).
  4. Notice must be given to the members that the resolution for asset sale is proposed to be passed as a special resolution by way of postal ballot / electronic voting. The notice must be accompanied by an “Explanatory Statement”, pertaining to the said Resolution, mentioning the material facts concerning the item and the reasons should also be enclosed along with a Postal Ballot Form (See Section 102 of the Companies Act, 2013).
  5. The Resolution will have to be passed by a special resolution (received through postal ballot). Vote must be received within thirty days from the date of dispatch of the notice to be considered as a valid vote.
  6. If the resolution is successfully passed, the Board will authorize a person to finalise and execute necessary documents including but not limited to definitive Agreements, deeds of assignment / conveyance and other ancillary documents, with effect from such date and in such manner as is decided by the Board.
  7. Form MGT – 14 along with the resolution and notice given under Section 102 must be filed with the ROC within 30 days along with required fees.
  8. The following steps are not to be followed for private companies and for asset sale of public companies where the valuation of the asset is less than the mentioned threshold. Although, some companies can frame their own procedure for an asset sale within their constitutional documents of the company i.e. the MoA & AoA. The only steps relevant for the above mentioned companies will be Step 1, 6 and 8.

Tax considerations

The structure is the most important thing that is to be analysed to understand the tax implications in an M&A transaction. These are the following taxes that are to be taken care of in an asset sale:

  • Stamp Duty

The amount of stamp duty that is to be levied on a transaction is state specific. To understand the stamp duty implication on a transaction, it is advised to read Section 5 and 6 of the Indian Stamp Act, 1889, which is as follows:

“5. Instruments relating to several distinct matters. — Any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act.

6. Instruments coming within several descriptions in Schedule I. — Subject to the provisions of the last preceding section, an instrument so framed as to come within two or more of the descriptions in Schedule I, shall, where the duties chargeable thereunder are different, be chargeable only with the highest of such duties: Provided that nothing in this Act contained shall render chargeable with duty exceeding one rupee a counterpart or duplicate of any instrument chargeable with duty and in respect of which the proper duty has been paid.”

In case of a Business Transfer Agreement, it is generally advised to use an agreement to sell instead of a conveyance deed as the stamp duty is considerably lesser for an agreement compared to a conveyance deed.

  • Capital Gains Tax

In case of depreciable assets, capital gains computed on a block of asset basis and the value over and above the aggregate of the written down value of the block of assets and expenditure incurred in relation to the transfer will be treated as the capital gains and subject to tax as short term capital gains. Where the block of asset basically means a group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. Such block of assets may comprise of (a) tangible assets such as buildings, machinery, plant or furniture; (b) intangible assets such as knowhow, patents copyrights etc.

In other cases, capital gains tax payable by the seller will depend on the period that the seller has held each of the assets that are transferred.

GST would also be applicable in the Asset Sale. Schedule 1 will be applicable where there is a permanent transfer of the business assets. However, Schedule II covers the situation only if a part of business assets is disposed of.

Difference between an asset sale and a slump sale

Slump sale

Asset Sale

The acquirer ends up buying the whole of the business undertaking. The acquirer can pick and cherry pick the assets that it wants to acquire.
Valuation is not done for individual component or assets but is done only for the whole of the business undertaking/asset. Valuation is done for individual component or assets but is done only for the whole of the business undertaking/asset
The rights of liabilities of the assets are transferred to the buyer. The rights and liabilities of the assets may or may not be transferred to the buyer as per the mutual agreement.
The tax incentives and benefits of the existing business can be transferred to the new owner. The tax incentives and benefits of the existing business cannot be transferred to the new owner.
GST will not be applicable. GST will be applicable.



An asset sale can be defined as the sale of part or whole of assets of the target to the acquirer assigned with individual values assigned for each asset. No kind of a court approval is required in the case of an asset sale. The transfer of asset or liabilities is dependent on the acquirer. He has the option of cherry picking the liabilities. In the case of a capital gains taxes, it is typically  computed on a block of asset basis and the value over and above the aggregate of the written down value of the block of assets and expenditure incurred in relation to the transfer will be treated as the capital gains and subject to tax as short-term capital gains. The stamp duty is determined on the instrument that is used for the transaction and is state specific. The stamp duty to be levied on each instrument is typically given in Schedule I of the act. There are no carry forward of losses in an asset sale.

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