‘Project Pluto’ leaves only Anirudh Patni free. 14 others locked out of IT for a year

As the pioneering Patni brothers bow out of the IT sector for at least a year, one member of the clan has the leeway to go full steam ahead with his dream project in the technology space.

‘Project Pluto’ —- the secret codeword for iGate Corporation’s acquisition of Patni Computer Systems, a company three times its size —- saw one member of the immediate Patni family being specifically excluded from a list of 15 family members that iGate named could not do business in the sector for a year.

That was Anirudh Patni, the son of chairman Narendra Patni.

An SEC filing by iGate said, “for the avoidance of doubt, it is clarified that “Immediate Patni Family” shall exclude Anirudh Patni.”

Anirudh Patni till last year was one of the senior managers at Patni Computer before he exited.

Rumours in the industry attributed his resignation then to a plan to start his own outfit called Patni Technologies Pvt Ltd.

Excluding Anirudh from the definition of “immediate family” has raised many eyebrows.

Among the 15 members of the Patni family, even their wives were included. This can only mean that Patni junior has been given the nod, to start his new venture immediately, without waiting for a year, unlike others in the family.

The sellers shall also be entitled to use the “Patni” name but not the company’s logo and marks in any businesses or company so long as the seller is able to differentiate between the company and such seller’s entity; the filing said.

This was not the only improvisation made by Phaneesh Murthy’s iGate Corporation to consummate the deal with the Patnis.
By conducting parts of the transaction through a Mauritius-based subsidiary, the US IT services firm iGate may make its $921 million deal a tax-efficient one.

A week before the announcement of the deal, DNA Money had reported that certain tax issues related to overseas investors were causing last minute hold-ups in the deal.

Pan-Asia iGate Solutions, the Mauritius based subsidiary is the vehicle through which iGate wants to purchase the American depository shares (ADS) worth $224 million and shares worth Rs138.6 crore held by a Mauritius-based subsidiary of private equity firm General Atlantic Partners as well as shares owned by iSolutions Inc, a US entity through which one of the promoters Narendra Patni holds his 16% equity stake.

iSolutions holds a third of the total equity held by promoter group, which includes Ashok Patni and Gajendra Patni. For the entire promoters’ stake, iGate is paying about Rs3,025.6 crore.

iGate’s Securities Purchase Agreement, relating to the purchase of ADS from General Atlantic Mauritius Ltd —- a GAP subsidiary —- states, “the Seller (GA Mauritius) shall bear all taxes, including any capital gains tax on the sale of the Sale ADSs, relating to the Transactions.”

The tax on sale of shares by sellers (Patni brothers and General Atlantic) is on the sellers and not the buyer (iGate),” an iGate spokesperson said in response to a query.

“The taxes will be deducted from the payments to the sellers at the applicable TDS rates based on their respective tax status as prescribed by the Indian Income Tax Act.”

The agreement, which was reviewed by DNA, goes on to add that “the Seller represents to the Purchaser that it is not a resident of India for Tax purposes and that the sale of the Sale ADSs is not subject to any withholding Tax.”

India has a double taxation avoidance treaty with Mauritius, which has extremely low tax rates.

However, Indian tax authorities are in the process of reviewing and revising the treaty to plug what it perceives to be significant revenue loss on account foreign institutional investors routing their investment into India through tax such havens.

The agreement also provides a guarantee that GAP will take responsibility for any tax related obligation that may occur in the future related to the transaction.

“This is a standard practice for companies, as a way of reducing tax incidence on such transactions,” said a senior executive with one of the Big Four accounting firms who advises clients on cross-border transactions.