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Corporate restructuring

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Meaning

Is a comprehensive process by which a companycan consolidate its business operations andstrengthen its position for achieving its long

term objectives of synergies, efficiencies,profitability and shareholder wealth

Restructuring involves a process ofmodification of strategic variables to achievedisproportionately favourable variance in totalorganizational performance

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2

The idea of restructuring is to achieve a critical massin the desired variable that leads to a break- out inperformance-attaining a new level of performance

Till the opening up of the Economy via The IndustrialPolicy Resolution in 1991,restructuring was at best aninternal reorganization exercise. It is only after thisperiod that, restructuring has often become a Multi-

tasking, cross-border, cross cultural integration exercise

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3 Needs scope and modes-of restructuring

Changing the Focus & depth of existing activities

Re-orientation Creating new lines of activities Redeployment of Monetary and Non-Monetary

resources to cut costs, attain synergies, build-inefficiencies and improve the size of the Balance sheet Risk reduction through creating a Minimum Variance

Portfolio in the corporate group ExploitingCore competenciesslide 3 a)

Exploiting strategic assets acquired over timenaturalmonopolies, goodwill etc3M has a Naturalmonopoly in Innovations

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3a)

Core competencies

Is the internal strength of a firm reflected in form of its abilitythat catapults it to a new level of performance-such abilitybeing the consequence of the firm possessing a competence that

is not at all easy for competitors to emulate, that is strategicand not mundane, that can provide benefits to consumers andthat which can often be leveraged to many products and servicesEx. The c/c of Honda car company is Engine capability whichthey have leveraged to snowmobiles and even Lawnmowers

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4-Reconstruction contd.-scope

Attaining the critical mass and hence scale economies

Financial engineeringto arrive at the optimal mix ofresources, avail of Tax benefits etc

Technological upgradation

calling for a paradigmshift in -work methods, degree of automation, designsetc

Reduction of Corporate Obesity- create a lean structure

by divesting loss making assets, debt rescheduling,varying the rights of the shareholders, debt write-offafter bargaining etc (Scheme of Arrangement)

Brand acquisition

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5-Reasons for C/R The Organization for Economic Co-operation and Development

(OECD)

Economy of Scales 1.Obtain Real

Efficiency Variance Economies 2.Capacity acquisition at {[ Brown field vs

Greenfield]]reduced capital costs

Market share 1. Market penetration 2.Expand product range 3 Acquire BrandsFinancial synergies 1. Tax advantages-U/s 72 A

2 Cost reduction3. Use Complimentary resources

Risk Diversification 1. Unrelated product production2 Avoid technology risksin the field of

Electronics

Internal reasons See slide #5B

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5(b)

Internal reasons for restructuring

Business downsizing and Optimal sizing-SICAL retail unitsoffloaded

Organizational Restructuring For better performance& result

monitoring--NIIT Ownership restructuring---Reliance Industries Restructuring of empowerment---relationship between Managers

& Owners---common---Management Buy Out (M.B.O) Restructuring of Heavy Loss making divisions- Cement of L&t

Restructuring for Mega Take offGMR Industries Restructuring for superior Bench marking-Tata Steel&Corus-

Monolithic later?

Operational & Accounting Restructuring for Overseas FundIssues (GDR/ADR)

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5-Symptoms for restructuring

A few symptoms that an Organization exhibits thatwarrants a restructuring exercise are---:

Operational 1)Reducing employee productivity-Returns per

employee at Constant prices, decreasing 2)Increasing confusion in performances of the

Responsibility Centres 3) High Employee turnover 4) High Asset Maintenance costs 5)Ratio of time and efforts spent on-Core activities and

Support activities

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5d-Strategic symptoms

Glaring mismatch between strategies formulatedby Owners and Managers

Imbalance in Value additions by major ValueDrivers (individuals, strategic Inputs)

Heavy subsidizations of weak products by theValue adding products; Product cannibalizations

Imbalance between short term tactics and Longterm strategies

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5e-Financial symptoms

Falling margins

Share prices in a bear mode for extendedperiods

Increasing costs both in the supply and demandside of value chain

Huge mismatch between Direct & indirect

Taxes; low income tax due to low margins Imbalance between Core and Support costs

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6-0ptions

To achieve the objectives stated earlier, the

following are the options available

Reorganization/ Reconstruction of existingbusiness. Such Reorganization can be Externalor Internal

Formation of a new company

Acquisition of an existing company

Merger with existing company (companies)

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7-The choice of the route

The choice would be decided by such considerations as

The comparative Costs visa vis Benefits

The Proprietary nature of the variables desired to beincorporated in the company (Brand, Technology etc)

Core competencies- existing and desired The result Time frame-early results?( Merge?) The ease with which the strategy can be implemented (Take

overs can be Time consuming ,Costly , with a fair degree ofstrategy failure)

The funds that are required-consequent leverage risks etc The legal issues-especially for cross border acquisitions Sections

390-394 & 396 of the Companies Act for domestic acquisitions

The probability of the strategy success-sacrifices necessary in aScheme of Arrangement

The extent of controlling interest & the possibility of acquiring

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5-Routes to Corporate

Restructuring Amalgamation

Merger

Take-over

De- merger

Slump sale

Acquisition

Joint Venture

Divestment

Strategic Alliances

Franchises

External & Internal Reconstruction

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6

Amalgamation----General understandings

Is the blending of one or more companies into a newcorporate entity in such a way that, the shareholders (all

or almost all) of the merging company (ies) become theshareholders of the Amalgamated company and themerging company (ies) loses its existence

The key factors that create amalgam- consideration is

by way of a share swap leading to final extinguishmentof the shares of the merging companies, almost all theshareholders of the merging cos, become theshareholders of the Amalgamated company. Obviouslyall the Assets and Liabilities of the merging cos becomethe Assets and liabilities of the Amalgamated company

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6(a)-Amalgam u/s 2(i b) of I.T.Act

For merger to qualify as an amalgamation under Section 2(I b)

the following conditions must be fulfilled :1. All the properties of the amalgamating companyimmediately before the amalgamation should become theproperty of the amalgamated company by virtue of

amalgamation.2. All the liabilities of the amalgamating company immediatelybefore the amalgamation should become the liabilities of theamalgamated company by virtue of amalgamation

3.Shareholders holding not less than ths invalue of theshares in the amalgamating company ( other than sharesalready held by the amalgamated company or by its nominee)should become the shareholders of the amalgamated company

by virtue of amalgamation.

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6(b)-contd. Ex: Where A Limited merges with X ltd. in a scheme of

amalgamation, and immediately before it, X ltd. held20% of the shares in A Ltd. , the conditions will befulfilled if shareholders holding not less than ths in

value of the remaining 80% of the shares in A Ltd. thatis 60% in value thereofbecome the shareholders of X

Ltd. by virtue of amalgamation. Transaction not treated as amalgamation :

(a) Where the property of a company which merges withanother , is sold to the other & the merger is the result

of a transaction of sale(b) Where the company which merges is wound up inliquidation & the liquidator distributes its property to theother company

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8

3) The consideration for the amalgamationreceivable by those equity shareholders of theamalgamating companies who became the

shareholders of the amalgamated company byvirtue of amalgamation, is discharged by thetransferee company wholly by the issue of

equity shares in the transferee companyexcept, that cash may be paid for any fractionalshares

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9

4) The business of the transferor company isINTENDED to be carried on after the amalgamationby the amalgamated company

5)No adjustment is INTENDED to be made to thebook values of the assets and liabilities of the transferorcompany when they are incorporated in the financialstatements of the transferee company except, to ensureuniformity of accounting principles

Accounting for amalgam andSec72a of IT Act will bedealt with later

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10-

The Transfer of assets pursuant to a Scheme of

Amalgamation is not a transfer and does notattract Capital gains tax u/s 47(vi) The shares

allotted to the shareholders of the amalgamatingis therefore not taxable as Capital gain

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12-Merger

Merger means the absorption of one or morecompanies to form a single conglomerate

While the Companies Act does not distinguish

between Merger and Amalgamation, the Incometax Act does. Only a Merger in the nature ofAmalgamation qualifies for benefits u/s 72A

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13-Kinds of Merger

Categories of Merger

1) Co-generic---Merger between firms in the sameindustry and at the same level of Economic activity

2) Conglomerate

Merger between firms in unrelatedindustries/businesses

3) Concentric A mild version of Conglomerate mergerwhere a company extends its product mix with loosely

connected or competitive products

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14-Co-generic

These are of two types---

1) Horizontal merger

2) Vertical merger

Horizontal Merger : Is a merger of competing firms----manufacturers or Distributors of the same Product orSuppliers of the same type of service. This type ofmerger results in expansion in product capacities,

increase in product range, reduction in the number offirms in the Industry and elimination of duplicateservices. This merger could create monopolies

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15-Vertical merger

Occur between firms in the same Value Chain-Supplier,Distributor etc

The merger could be a Forward Integration or

Backward Integration When a company combines with a supplier of raw

material or Intermediates it is Backward Integration.

Merger with a Product user industry a Customer,

Distributor it is Forward Integration Enlarges the Value Chain & creates Efficiency in

business

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16-Conglomerate Merger

Involves coming together of two or morecompanies in different industries or services

The companies lack commonality either in

their end product, or in the rendering of anyspecific type of service

The companies are not competitors, not

distributors or suppliers of the companiesfinished products or raw material

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17

Conglomerate mergers may be--: Down stream/ Upstream mergerie parent company merging

into subsidiary or merger of the subsidiary into the parentcompany

Triangular mergermeans merger of two or more companies bywhich the extinguishing company is merged into subsidiary ofsurviving company and shareholders of the extinguishingcompany receive shares of the merged companyEx. Cos A & Bare merged into Co.S which is the subsidiary of Co. H

Short form merger: Merger of the subsidiary into the parentcompany , by adoption of a resolution of merger by the parentcompany and mailing a copy of the plan of merger to all theshareholders and filing the executed documents with theprescribed authority

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18-

Reverse merger : This term is loosely used toconnote either---:

1)Merger of the Acquirer into the Targetlike

what is expected to happen in the case ofReliance Communication and M.T.N or

2) Merger of a healthy company INTO a Sick

company

Entitled to benefits u/s 72A

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19-Methods of merger

1) Merger under a Scheme of Compromise orArrangementSec394

2)Merger by Purchase of shares-Sec 395

3 )Merger in public interests by the order of the CentralGovernment-Sec 396

4) Merger through a holding companyof thesubsidiary-

5)Merger by a Scheme of Winding up See slide on legal aspects for a better understanding-

Slide#26

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20-Takeover

Takeover implies acquisition of control of acompany which is already registered, throughthe purchase or exchange of shares

Management control is acquired by acquiring amajority stake in the Target company unless theshares are very widely distributed, with the targetpromoter group being the single largestshareholder

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21-Takeover

Usually the target company is smaller than theAcquiring company. Where it is the other way

around, the process is Reverse takeover

Basically there are three types of Takeover1)Friendly takeover 2) Hostile takeover 3) Bail-out take over

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22

Friendly Take- over: The promoters of the Targetcompany normally bless this attempt. This takeover isdone through Negotiations between the acquirer group

and the target group Hostile take-over ; Is an Acquisition attempt that does

not have the approval of the Target promoters. TheAggressive public rejection of the takeover offer, is the

first indication of a possibly long drawn out battle:usually leading to a negotiated settlement in mostcases and a White knight response in others

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23-

Bailout take over

Companies which are sick and on the verge of awinding up, look for a bailout if the stakeholders face

the prospects of a huge loss and there are possibilitiesthat the company can be revived by strategic planning.Banks, Financial institutions and other stakeholderscould invite proposals for resuscitating the company.

The Acquirer in these cases normally are givenMonetary and Non-Monetary benefits to undertake thisbail out

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25-consideration for T/O

In form of cash : Cash is paid for acquiring shares inthe company as also for attaining Management Controlof the Target company

Consideration in the form of shares

A) Share swap The acquirer acquires Managementcontrol through exchanging shares of his company for,the shares of the Target company. The share swapcould include a cash component, a Debenture

component , a convertible bond issue etc B) Share purchasecash payment for acquiring the

shares of the Target company

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26-Legal Aspects of T/O

The Major Legal requirements that are to befulfilled in the case of a Take-over pertain to theprovisions of---:

Clause 40A& 40B of the Listing Agreement-S/E

Section 372A of the Companies Act

SEBI (Substantial Acquisition of shares &Takeovers) Regulations 1997for widely heldcompanies

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Section 372(a)

(Inter-corporate Loans & Investments)

(1) No company shall , directly or indirectly ;-

(a) make any loan to any other body corporate

(b) give any guarantee or provide security ,in connection

with a loan made by any other person to , or to anyother person by , any body corporate ; and

(c) acquire , by way of subscription , purchase orotherwise, the securities of any other body corporate ,

exceeding60% of its paid-up share capital and freereserves, or 100% of its free reserves, whichever is more:

( td )

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(contd.)

Provided that where the aggregate of the loans &investments so far made, the amounts for which theguarantee or security so far provided to or in all otherbodies corporate , along with the investment , loan,

guarantee or security proposed to be made or given bythe board , exceeds the aforesaid limits , noinvestments or loan shall be made or guarantee shall

be given unlesspreviously authorizedby a specialresolution passed in a general meeting :

( d )

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(contd.)

Provided further that the board may give guarantee , without

being previously authorized by a special resolution , if-(a) a resolution is passed in the meeting of the board,authorising to give guarantee in accordance with theprovisions of this section ;

(b) there exists exceptional circumstances which prevent thecompany from obtaining previous authorisation by a specialresolution passed in a general meeting for a given guarantee ;

and(c) the resolution of the board under clause (a) is confirmed

within 12 months , in a general meeting of the company orthe annual general meeting held immediately after passing of

the boards resolution , whichever is earlier

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(contd.)

Provided also that the notice of such resolution

shall indicate clearly ,the specific limits , theparticulars of the body corporate in which theinvestment is proposed to be made or loan or

security or guarantee to be given , the purposeof such investment , loan or security orguarantee , specific sources of funding & suchother details .

( d )

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(contd.)

(2) No loan or investment shall be made or security given by the

company unless the resolution sanctioning it is passed at themeeting of the board with the consent ofall the directorspresent at the meeting & theprior approval of the publicfinancial institution referred to in Section 4a where any term loanis subsisting , is obtained:

Provided thatprior approval of a public financial institution shallnot be required where the aggregate of the loans & investmentsso far made , the amounts for which the guarantee or security sofar provided to or in all other bodies corporate , along with theinvestments ,loans , security or guarantee proposed to be made

or given does not exceed the limit of 60% specified insubsection(1) , if there is no default in repayment of loaninstallments or payment of interest thereon as per the terms &conditions of such a loan to the public financial institution .

( d )

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(contd.)

(3) No loan to any body corporate shall be made at a rate

of interest lower than the prevailing bank rate , beingthe standard rate made public under Section 49 of theReserve Bank of India Act ,1934 (2 of 1934)

(4) No company , which has defaulted in complying withtheprovisions of Section 58a ,shall , directly or indirectly ,

-(a) make any loan to any corporate body(b) give any guarantee , or provide security, in connection

with a loan made by any person to , or to any person by,

any body corporate ; and(c) acquire , by way of subscription, purchase or

otherwise , the securities of any other body corporate ,

till such default is subsisting

( d )

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(contd.)

(5)(a) Every company shall keep a register showing the

following particulars in respect of every investment orloan made , guarantee given or security provided by itin relation to any body corporate under Subsection (1)namely :-(1) The name of the body corporate ;

(2) the amount, terms and purpose of investment orguarantee;(3) the date on which the investment or loan has beenmade ; and

(4) the date on which the guarantee has been given orsecurity provided in connection with a loan

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(contd.)

(b) the particulars of the investment , loan,guarantee or security referred to in clause (a)shall be entered chronologically in theregister aforesaid within 7 days of making

of such investment or loan , or giving of suchguarantee or the provision of such security.

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(contd.)

(6) The register referred to in subsection 5 shall be keptat the registered office of the company concerned & -

(a) shall be open to inspection at such office; and

(b) extracts may be taken therefrom & copies thereof

may be requiredby any member of the company to the same extent , inthe same manner , and on the payment of the same feeas in the case of register of members of the company ,and the provisions of Section 163 shall applyaccordingly .

( ntd )

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(contd.) (7) The Central Govt. may prescribe guidelines for the purposes

of this section.

(8) Nothing contained in this section shall be applicable:-(a) to any loan made , any guarantee given or any securityprovided or any investment made by:-

(1) A banking company , or an insurance company, or ahousing finance company in the ordinary course of its

business , or a company established with the objective offinancing industrial enterprises or of providing infrastructuralfacilities;

(2) A company whoseprincipal business is the acquisitionof shares , stock, debentures or other securities;

(3) A private company , unless it is a subsidiary of a publiccompany

(b) to investments made in shares allotted in pursuance ofclause (a) ofsubsection 1 of section 81;( Rights issue)

( d )

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(contd.)

(c) to any loan made by a holding company to its

wholly owned subsidiary; or

(d) to any guarantee given or security provided bya holding company in respect of loan made to its

wholly owned subsidiary ; or

(e) to acquisition made by a holding company ,by way of subscription , purchases or otherwise,

the securities of itswholly owned subsidiary

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(contd.)

(9) If default is made in complying with the provisions

of this section , other than subsection 5 , the company& every officer of the company who is in default shallbe punishable with imprisonment which may extend to2 years or with fine which may extend to Rs 50000 :

Provided that where any such loan or any loan inconnection with which any such guarantee or securityhas been given , or provided by the company , has beenrepaid in full , no punishment by way of imprisonment

shall be imposed under this subsection , & where anysuch loan has been repaid in part, the maximum whichmay be imposed under this subsection by way ofimprisonment shall be accordingly reduced.

( td )

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(contd.)

Provided further that all persons who are

knowingly parties to any such contraventionshall be liable, jointly & severally , to thecompany for the repayment of the loan or, for

making good the same which the company mayhave been called upon to pay by virtue of theguarantee given or the securities provided bysuch company.

( td )

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(contd.)

(10) If default is made in complying with the

provisions of subsection 5 , the company &every officer of the company who is indefault shall be punishable with fine which

may extend to 5000 rupees and also afurther fine which may extend to 500rupees for every day after the first day after

which the default continues.

( d )

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(contd.)

Explanation :

For the purposes of this section :-

(a) loan includes debentures or any deposit ofmoney made by one company with anothercompany, not being a banking company ;

(b) free reserves means those reserves which,as per the latest audited balance sheet of the

company , are free for distribution as dividendand shall include balance to the credit of thesecurities premium account but shall not include

share application money.

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27-Take-over of Closely held cos

These cos are Unlisted cos exempted from theapplicability of the provisions of SEBI(S.A.S.T) 1997

If an Acquirer is able to strike an Agreement to acquire100% of the Equity in the Target company, there is no

need to go through the provisions of Sec395 The Advantage of going through Sec 395 is that it will

serve the purpose of an Acquirer, who intends toacquire 100% of the Equity of the Target company; ifand only if he is able to acquire shares in excess of90%.In this case the other shareholders get reducedto a hopeless minority and the Law mandates that the

Acquirer acquire their holdings compulsorily

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28-Sec 395 route (closely held)

The following points are to be noted 1) The company that intends to acquire another

company is the TRANSFEREE company and thecompany whose shares is being acquired is the

TRANSFEROR company 2) the Transferor and the Transferee company, through

their Board, present the scheme of take-over and thecontract (between the two companies)

3)The Board of Directors are entitled to advise theirrespective shareholders to accept the scheme andparticipate in it ---29

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29-Sec 395 route (closely held)

4) Every Offer by a Transferee company shall containinformation as to the steps it has taken to ensure thatCASH necessary for the merger is available

5) No letter or scheme can be made available to theshareholders of the Transferor company unless it is

registered with the Registrar of Companies. TheROC will refuse to give his approval if the scheme

contains false information, or does not give theparticulars required u/s 395

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30-Sec 395 (closely held)

6) An appeal can lie in the Court against the Refusalorder of the ROC

7) Any person issuing information that is false or,misleading is punishable with a fine

8)After the Scheme, contract letter from the Board iscirculated (like a Circular resolution) to the members ofthe transferor company;--- approval from the membersbeing NOT LESS THAN 9/ 10 ths (90%) in Valuemust be got within 4 months from the date of thecircular

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31-Sec 395 (closely held)

9) The M.O.A of the transferee company must providefor Corporate acquisition Otherwise a meeting of the

members of the transferee company may have to be

held to carry out this modification 10)Once the approval of the required number of

shareholders is available, the transferee becomes eligibleto use its ;RIGHT OF COMPULSORY

ACQUISITION to acquire the remaining (minority) atthe price offered to and with the other benefits if anyattached to the shares of the majority shareholders

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33-T/o of listed co.( contd.)

Clause 40 B ; Under this clause the company isexpected to follow the relevant provisions of SEBI(Sast) whenever there is a change in the Management orthere is a takeover

The Take over code {SEBI (Sast)} These are basically Disclosure requirements that the

various participants in the takeover process have tomandatorily comply with

Regulations 7&8 in chapter II of the Regulations dealwith the responsibilities of the Acquirer and theCompany concerned to make disclosures at variousstages

34 Chapter II of the Regulations

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34-Chapter II of the Regulations

contd. Regulation 7; Acquisition of 5% or more of shares or,

voting rights 7(1) Any acquirer who acquires shares or voting rights

which, taken together with, the shares and the voting

rights already held by them, if any, would entitle him tomore than 5%/ 10%/14%/ 54%/74% of shares orvoting rights in a company in whatsoever manner, shalldisclose at EVERY STAGE, the Aggregate of hisshareholding or voting rights in the company, to the

company, and to the Stock Exchange where the sharesof the Target company are listed

35 Take over code Chapter II

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35-Take over code-Chapter II

contd. Regulation 7(IA); States that any acquirer who has

acquired shares or voting rights of a company underRegulation 11(1), shall disclose purchase or sale,aggregating to 2%or more, of the share capital of the

Target company, to the Target company, and to thestock Exchange where the shares of the Targetcompany are listed, within a period of 2 days of suchpurchase or sale, along with the aggregate shareholding

after such acquisition or sale Regln11 next slide

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35A

The latest amendment to the SAST act says thaton acquiring 5% or more shares, after alreadyhaving reached the limit of 55%, the Acquirer

will have to make a mandatory Public offer of15%. On reaching the acquisition limit of 75% ,further acquisition can be made only on a

conscious decision to de list the shares of theacquiring company or at the risk of bring delisting.

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36-T/O code-Chapter II contd.

Regulation11(1); No Acquirer who, together with thepersons acting in concert with him, has acquired inaccordance with the provisions of law, 15% or more,but less than 55% of the shares or voting rights in a

company, shall acquire , either by himself or through orwith persons acting in concert (S# 82)with him,additional shares or voting rights entitling him toexercise more than 5% of the voting rights, in any

Financial year ending on 31st March, unless suchacquirer makes a public announcement to acquireshares in accordance with Regulations (20%)

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37-Chapter II contd.

The net effect of Regulation 7(1) read with Regulation 11(1) isthat any person who acquires either for himself, or in concert

with a person acting with him, shares in a company aggregatingto 2% or more of the capital of the company (and if he together

with or without this acquisition, either on his own or along withthe person acting in concert, owns between 15& 55%), shalldisclose the sale or purchase to the target company and to thestock exchanges where the shares of the target company arelisted and he can acquire not > 5% per financial year ,in this

process

The acquirer for the purposes of sub-Regulations 7(1) and 7(1A)shall include a pledgee,other than a Bank or a Financial Institution

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38-Chapter II contd.

Regulation 8-Continual disclosure Applies to two categories of persons Category1 A non-promoter holding shares or voting rights of 15% or

more

Category 2 A Promoter HAVING CONTROL , with or without the holdingsof a person acting in concert

Category 1 persons: Must disclose his holdings to the S/E within 21 daysfrom 31st March

Category 2 Must disclose his holdings along with the holdings of the personacting in concert every time --:

A) within 21 days from March 31st

B) within 21 days from the Record Date for payment of Dividend Every company whose shares are listed on a stock exchange shall, within 30

days from the end of the financial year disclose to all the stock exchangeswhere the stock is listed, the holdings of the promoters and persons havingcontrol over the company

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39-Chapter III of the Regulations

As already seen there are some disclosures to be madeon the acquisition of shares ,beyond certain limits.

There also are some Public announcements to be

made under certain circumstances, indicating theintention to acquire shares. For certain cases howeverexemption is available from making publicannouncements.

This essentially is the scope of Chapter III

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41-Regulation #3

Regulation 3 Regulations 10, 11& 12 DO NOT APPLY TO--:

A) Allotments made consequent to a PUBLIC ISSUE, unlessthepublic issue involves FIRM ALLOTMENT when, a public

announcement becomes mandatory. Even here, a publicannouncement can be avoided if, the Prospectus containsfull details of the Identity of the acquirer, the purpose ofacquisition, consequential changes in voting rights,shareholding pattern of the company and the Board of

Directors and whether such allotment would result inchange in the control of the company

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42-Regulation3

B) Allotment pursuant to a Rights issue

to the extent of his entitlement and for acquisitionof shares beyond the entitlement, if such excess was

acquired consequent to under subscription ofthe same . It is essential however that, the intention toacquire beyond the entitlement is disclosed in theoffer letter

C) allotment to underwriters pursuant to anunderwriting Agreement

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43-Exemptions from disclosure

D) Inter se transfer of shares amongst--: i) group recognized so in the annual report of the target co. (in the last

annual report) Ii) Relatives within the meaning of Sec 6 of the Companies Act Iii) Indian promoters and Foreign collaborators who are shareholders

And Promoters Iv) Acquirer and persons acting in concert with him, where such transfer of

shares takes place three years after the date of closure of the publicoffer made by them under these regulations

Exemptions under iii) and iv) are not available if the inter-se transfer

takes place at a price which is > 125% of the acquisition price E) acquisition of shares in the ordinary course of business by a i) Registered

stock broker ii) registered market maker iii) financial Institution on its ownaccord iv)A merchant banker or a promoter consequent to a scheme ofsafety net operating in the issue

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44-contd.

f) Acquisition of shares by a person in exchange of shares under a publicoffer, made under these Regulations

g) Acquisition by way of transmission on succession or inheritance h) acquisition of shares by Govt. cos. And other statutory corporations. This

exemption is not available when these companies participate in acompetitive bidding process

i) transfer of shares from state level financial institutions to the privatepromoters group or, among the promoter group inter se

J) transfer inter se betweenVenture capital funds registered with SEBI K) Transfer of shares in a sick industrial undertaking from the promoters to

another set of promoters L)Take-over of the Management of the company under SARFESI-2002 M) acquisition of unlisted shares,so long as such acquisition does not result in

gaining control over a widely held company

N) Other cases that SEBI may exempt

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45-Regulation 10

No Acquirer is authorized to acquire shares orvoting rights which (taken together with sharesor voting rights already held along with the

person (s) acting in concert with him) entitlessuch an acquirer to exercise 15% or more of thevoting rights in a company ,WITHOUT makinga Public announcement to acquire shares of

such a company in accordance with theRegulations

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46-Consolidation of holdings

Regulation 11

(1) No Acquirer who already holds between15%-55% by himself or, along with a person

acting in concert with him shall acquire shares orvoting rights in excess of 5% in any financialyear ending 31st March without, making a public

announcement to this effect

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47

(2) An Acquirer , who together with persons acting in concert , has acquired55% or more (shares) but less than 75% shall not acquire ANY share withoutmaking a public announcement of his intention to acquire shares inaccordance with the Regulations.

Provided that, no acquirer shall acquire shares or voting rights , through suchmarket purchases and preferential allotment u/s 81 or any other law if, such

acquisition along with the shares already held by him and the person acting inconcert, Exceeds 75%. If he has acquired>75% he will have toforthwith divest the same

(3) No person may acquire shares in a listed company if, the acquisition alongwith his holdings and those of the persons acting in concert reach such alevel as to reduce the public holdings to a level below what was agreed to atthe time of listing. This restriction does not apply an acquisition which comesinto being as a result of a Global arrangement

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48-Summary of Regulation 11

It is natural for the Promoters to acquire shares for the purposes ofconsolidating their Holdings. Regulations 11 governs the Compliancerequirements

1) If an Acquirer who, together with the persons acting in concert with him, isholding between 15-55% wants to consolidate his holdings, he may very welldo so by buying shares in the market without the need to make this known to

the public 2) if however the person referred to above, wishes to acquire >5% during a

Financial year, he may do so only after making a public announcement to thateffect

3)An Acquirer who already holds( or together with this acquisition holds)75% or more of shares CANNOT buy any more without making a public

Announcement. Even after the Public announcement, if his purchases createda situation where the public holding, reduced to a percentage below theMINIMUM AGREED TO AT THE TIME OF LISTING, he will have toforthwith offload the excess. This minimum cannot be breached even in aRights issue/Preferential allotmentthe only breach that is allowed is whenGlobal Arrangements make this inevitable

Any purchase >75% is through DELISTING purchases only

49-Acquisition of control over a

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49 Acquisition of control over a

company Regulation 12 If a person wants to acquire control over a company,

he may do so only by making a Public announcementto this effect

This restriction will NOT apply if he acquires theshares by way of a Special resolution passed in aGeneral Meeting of the Target companyAND by

way of a POSTAL BALLOT( so that those who cannotattend the meeting can nevertheless vote)

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52

Appointment of Merchant Banker For makingPublic announcement

Must be a Class I Merchant Banker

Must not be an Associate of theAcquirer/Target company

Must be appointed before any Public

announcement is made

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54

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54

Public announcement in one English National paperwith wide circulation and another in a local language

paper in the place where the stock exchange whichcarries the highest volume in the scrip of the Targetcompany is located

Simultaneously, a copy of the Public announcement isto be submitted to SEBI by the Merchant Banker A

copy of the public announcement is to be submitted tothe Stock Exchange and the Target company

55

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55

Deemed Date of offer The offer under these regulations shall be deemed to have been

made ON THE DATE OF PUBLICATION of the Publicannouncement in any of the News papers

Some contents of the public offer documents The Minimum offer price payable for each fully paid or partly

paid share

The Identity of the Acquirer

The Existing holding of the Acquirer and the Person (s) acting inconcert with him

The salient features of the agreement with the person (s) whosold the shares

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56

The highest and the Average price paid by the Acquireror the person (s) acting in concert with him, during the12 months prior to the date of the publicannouncement

The object and the purpose of acquisition of the sharesand future plans if any, of the Acquirer of the targetcompany, including disclosures whether the acquirer

proposes to dispose off or, encumber any assets ofthe acquired company, in the succeeding 2years,except in the ordinary course of business

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59

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59

The relevant price for infrequently traded shares is the highestprice among 1) The Negotiated Price 2) The Highest Price paidby the Acquirer(s) or persons acting in concert with him for

Acquisition , including the Rights Price or the Public issue Priceor the Preferential issue price 3)Price based on fundamentals like

EPS, P/E, ROI etc .SEBI may insist on a Valuation by aChartered Accountant or other Professional Valuers

Where the Acquirer has acquired shares through any mode, afterthe offer letter has been prepared but before the date of

opening of the offer, the Offer price shall stand revised price if itis greater than the previously worked out Offer price

60

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60

Specified Date Regulation shall mention a date as the Specified date

for determining the names of the shareholders towhom the Letter of Offer should be sent.This date

should not be later than the 30th day from the dateof announcement

It is important to realize that any sum paid as Non-compete price that is greater than 25%( over and

above the Offer price ) shall be added to the offerprice

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61

The minimum size of the offer to the public is20% of the voting capital of thecompany .However the Open offer could be less

than 20%where the offer results in the PublicHolding going below the minimum level

agreed to earlier, with the S/E

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62

Creeping Acquisition

Is a process of acquisition of shares through theS/E, by the promoters of a listed company.

Currently companies can acquire shares up to 5%of voting powers, per financial year , throughthis route, till they acquire up to 55% of the

voting capital

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63

The Minimum Price for Creeping AcquisitionAs per Regulation 21A, a person who has made a public

offer and who seeks to make a creeping acquisitionwithin 6months from the date of the closure of

the Open offer, can do so onlyat a price which isnot less than the price at which the open offer wasmade.

This stipulation does nothowever bind acquisition

through the stock exchanges-( purchases throughthe Stock Exchanges can be done at prices lowerthan the Open offer price )

64 M d f t f ff i

1) In cash

2) By issue, and /or transfer of shares (other than Preference shares) of theAcquirer company, if the person seeking to acquire the shares is a BodyC

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64-Mode of payment of offer priceCorporate 3 )By issue Exchange, and /transfer of SECURED instruments of the

Acquirer company with a minimum A grade rating from a credit ratingAgency registered with SEBI

4) a combination of clauses 1, 2,3 Provided that--: a) Where Payment has been made in cash to any class of shareholders

for acquiring their shares during the immediately preceding12 monthsfrom the date of public announcement, the letter of offer shall provide an

OPTION to the shareholders to accept payment either in cash OR inexchange of shares, OR in other secured instruments Provided further, that the mode of payment of consideration MAY BE

ALTERED, IN CASE OF REVISIONS in offer price or, size SUBJECT TOTHE CONDITION THAT the amount payable In CASH IS NOTREDUCED

If the Offer price consists of consideration payable in the form ofsecuritiespayable after issuance of the same, with the shareholder approval comingwithin 21 days of the closure of offer ,. if the Requisite approval is notobtained,THE ACQUIRER SHALL PAY THE ENTIRECONSIDERATION IN CASH

65-General obligations of the

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g

Acquirer

A glimpse of the Obligations--- The letter of Offer must not be sent to the parties who are a part of the Agreementacquiring shares from the same entities is not equitable

---The letter of offer must be sent to the Custodians of GDR/ADR to enable them toparticipate in the Offer, if entitled to

----The Acquirer must ensure that the date of opening of the offer is not later than 60 daysfrom the date of date of public announcement

----The Acquirer must also ensure that the letter of offer is dispatched to Warrant holdersand the Holders of Convertible Debentures IF the PERIOD of the EXERCISE OF THEOPTION, FALLS WITHIN THE OFFER PERIOD

----If the Acquirer is a Company ,the Board of Directors must state that they acceptRESPONSIBILITY for the information contained therein . In case any Directorwishes not to accept responsibilities for the information contained therein, he maystate so, with reasons for doing so

----The AcquirerOther than the one who has made his Acceptance conditional uponbeing offered a minimum quantum of sharesafter assuming full acceptances, hasdeposited in an escrow a/c,100%of the financial obligations, IF PAYABLE INCASH, and in the form of securities where the consideration was payable by way ofissue, exchange or transfer of securities or, a combination thereof, he may be entitledto be appointed on the Board of the Target company AFTER A PERIOD OF21 DAYS from the date of public announcement

66-General obligations

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g

(CONTD.) The Acquirer shall notAcquire , during the offer period, ANY

shares in the target companyexcept by way of FRESH issueof shares

Non-Fulfillment of obligations can lead to the FOREFEITUREOF THE ENTIRE balance in the ESCROW a/c

The Acquirer is Expected to have financial arrangements in placebefore the Opening date of the Issue

In the event ofWithdrawal of offer, the acquirer should notmake a bid for the shares of the target company for a period ofanother 6months from the date of announcement of the

withdrawal of the offer Thus a withdrawal of an offer before the opening , is

permissible for plausible reasons

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67

In the event of NON-Fulfillment of the obligations bythe Acquirer, he is barred from making an offer foracquisition of the shares for a period of 12 monthsfrom the date of closure of the offer

If the Acquirer in pursuance of an agreement is likely toacquire shares beyond the 15% limit, such an

Agreement shall contain a clause that to the effect that

non-compliance of any of the provisions shall result ina conscious decision that the seller and the acquirershall not act on this deal

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68 A Legal provisions under Cos Act

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68-A-Legal provisions under Cos. ActAll the legal provisions under the Companies

Act 1956 so far as Amalgamation and Merger isconcerned are covered in a special set of slides

Legal provisions under the Companies Act

which is to be dealt with now( in pen drive)

69-General obligations of the Board

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g

of Directors of the Target company

Unless the Shareholders approval is obtained AFTERthe date of the public announcement, the BOD of the

Target company, SHALL NOT, DURING THEOFFER PERIOD--:

Sell, transfer, encumber or otherwise dispose off or,enter into an agreement for sale, transfer,encumbrance, or, for the disposal of assets otherwise,

not being sale or disposal of assets in the ordinarycourse of business of the company or, of itssubsidiaries or

70 contd

b) issue or allot any un -issued securities carrying voting rightsduring the offer period

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70-contd.during the offer period c) enter into any Material contracts

Once the public announcement has been made, the BOD of theTarget companyshall not

a) appoint additional directors or, fill casual vacancy on the BOD,by any person (s) representing or, having interest in the acquirer tillthe full consideration for the deal has been paid by the Acquirer

b) allow a person representing the acquirer or having any interest inthe Acquirer, IF HE IS ALREADY A A DIRECTOR ON THEBOARD OF THE TARGET COMPANY, BEFORE THE DATEOF PUBLIC ANNOUNCEMENT to participate in any matterrelated to the offer

The board of directors of the Target may, if they so desiresend un-biased comments on the offer to their shareholders

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72 Competitive bid

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72-Competitive bid

A bid for the shares of the same target company andaddressed to the same body of shareholders is considered aCompetitive bid notwithstandinga variation in the number of sharesto be acquired and the price of Acquisition

A Competitive bid-in the form of another public announcement-has to be made within 21 days of the public announcement ofthe first offer

The size of the Competitive bid must at least equal to the HOLDING OFTHE FIRST BIDDERplusthe quantum of shares for whichthe first

bidwas made

73 upward revision

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73-upward revision

The acquirers who have made the public announcement areentitled to revise upwards theprice and the size of the offer atany time PRIOR TO 7 WORKING DAYS before theCLOSURE of the original offer

Any such Upward Revision may be made only by the acquirer:

Making a Public announcement of the REVISION in all theNews paper in which the original offer was made Simultaneously informing ALL Stock exchanges , where the

stocks of the Target company are traded, SEBI, and theregistered office of the company

Increasing the Escrow a/c: The date of closure of original bidas also the date of closure of all subsequent competitive bidsshall be the DATE OF CLOSURE OF PUBLIC OFFER,under the last subsisting competitive bid

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The Quantum of funds in an Escrow a/c shall be 25% up to Rs. 100 croresand 10% above Rs.100 crores (Offer Value) The Acquirer has the option of tendering Bank Guarantees in place of cash

towards the Escrow a/c Payment of consideration

For the consideration payable in cash, the acquirer should within 21 days

from the CLOSURE of the offer , open a SPECIAL a/c with a SEBIregistered banker to an issue and deposit therein, such sum as would ,together with 90% of the amount lying in the Escrow a/c, if any, makeup the entire sum due and payable as consideration to the shareholders.

Where the consideration is to be satisfied by issue of securities, the Acquirershould ensure that the securities are issued and dispatched

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79-Bail out take-over-Lead Financial

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Institution

Regulation 30 refers to the take-over of companies financially weakbut NOTSICK pursuant to a scheme of rehabilitation provided by a LEAD financialInstitution

Financially weak company for the purpose of Regulation 30 means a company whoseNet worth has been eroded to an extent of 50%(but not 100% ) at the beginningof the previous financial year.

Here the LEAD financial institutionwhich is a public financial Institution appraises

the weak company( which is not a sick company) on parameters like Financial viability, its requirement of funds for revival and draws up a rehabilitation package on theprinciple of protection of the interests of the Minority shareholders, goodmanagement, effective revival and transparency

To facilitate the take over of financially weak company , the lead institution caninvite offers for acquisition of the shares of the said companyfrom at least threeparties. The lead institution evaluates the bids received with respect to the purchase

price of the shares or the exchange ratio, the track record, financial requirements andreputation of the Management of the person acquiring the shares . The offers are listedin the order of preference and after consultation with the existing management

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80

The scheme should also specifically provide for take-over in any of the forms as below

a) an outright purchase of shares or,

b) Exchange of shares or c) a combination of the two

However, the scheme may ensure that after theacquisition the erstwhile promoters DO NOT ownshares in the company

81Definitions in SEBI( s.a.s.t )

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refer slide #33 Acquirermeans any person who, directly or indirectly , acquires or agrees toacquire shares or voting rights in the Target company, or, acquires or agrees

to acquire control over the Target company, either by himself or with anyother person acting in concert with him

Control shall include the right to appoint a majority of the Directors or, tocontrol the management or policy decisions exercisable by a person orpersons acting individually ,or in concert ,directly or indirectly , including byvirtue of their shareholding or management rights or shareholders Agreementor voting agreements or, in any other manner

Explanation i) When there are 2 or more persons in control over the targetcompany, the cesser of any one of such persons from such control shall NOTbe deemed to be a change in control, nor will a change in the nature andQuantum of control amongst them constitute a change in management or

control

82Person acting in concert

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82 Person acting in concert

Person acting in concert comprises---:1)Persons who for a common objective, or, purpose of substantial acquisition of shares or voting rights or, gaining

control over the target company, pursuant to an agreement or understanding (formal or Informal) directly orindirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company orcontrol over the target company

2 ) Without prejudice to the generality of this definition, the following personswill be deemed to be persons actingin concert with other persons in the same category UNLESS the contrary is established

i) A company , its holding company or, subsidiary of such company or company under the same Managementeither individually or, together with each other

ii) A company with any with any of its directors , or any person entrusted with the management of funds of thecompany

iii) Directors of the company and their associatesiv) Mutual fund with sponsor or trustee or asset management company

v) Foreign institutional investors with sub accountsvi) Merchant Bankers with their clients as acquirervii) Venture capital funds with sponsorsviii) Banks with Financial advisers, stock brokers of the acquirerix) An Investment company with any person who has an interest as a director, fund manager etcor as a

shareholder holding 2% of the share capital of the company

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83

Offer period means the period between the date ofentering into a MOU or, the PUBLICANNOUNCEMENTas the case may be AND thedate of completion of offer formalities relating to theoffer made under these regulations

Target company means a listed company whoseshares ,or, voting rights ,or, control is directly or

indirectly acquired or is being acquired

84-Financial aspects of Mergers &

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Amalgamations

1) A&M requires a good deal of financial re-engineeringespecially for Valuation and Capital restructuring of the NewOrganization that comes into being after the merger

2) The Acquiring company has to raise funds for payingconsideration to the Target company. Such Fund raising couldbe done through the following ways

1) Issue of sharesPre or post Merger/Take-over

2)Issue of Bonds or other Securities

3) Sale of unwanted Brands, Sale of Assets

4) Fund raising by Promoters groupincluding roping in P/Einvestors

5) Funding by Investment Bankersloan funding CONTD>

85-Financial aspects-contd.

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85 Financial aspects contd.

3) Satisfying the Minority interests from both the companies could be aproblem . This problem needs to be handled along the following lines a) Valuing Minority interests b) Compensating the Minority shareholders c) Settlement of disputes in valuation and the mode of compensation d) A contract between the Minority and New Organization to estop possible

future disputes e) Handling possible charges of Insider Trading made by the Minority

shareholders f) Handling the relationships that the Minority held with the erstwhile

companies----ie the cos. now amalgamating 4) Expression of the Financial Synergies expected by the MergerIf 2+2>4,

how much greater would it be, and how much of it could one attribute it toMerger /Amalgamation?

86-Financial aspects of merger

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contd.

4) Financial projections What would the picture consequent to merger, of the following parameters a) Combined turnover, the Combined Gross profits, the growth in sales, the growth in

gross margins, the combined Operating costs, the Reserve build up, the net worthcombined, the Earnings per share of the combined entity etc

B) Sales growth of complimentary products or competitive products c) Wage parity between employees of the two companies d) Impact on Production costs, Marketing costs, Selling and Distribution costs e) Impact on Taxliability f) Amortization of Goodwill and other intangible assets g) The reaction to the merger in the Stock markets i) Positive or Negative influences of the different cultures on the Work ethos

J) Merger EconomiesIn Scale, due to cutting duplicatory work , etc Sometimes theLarge size doesnt really bring about Economy of Scales (due to poor organization,duplication , cost additions without yield etc)

86-A-Recaptulation

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86 A Recaptulation Amalgamation or merger can be effected in any of the following ways

1) Transfer of the undertaking by order of the High Court (Sec 394 ofthe Companies Act)

Under sec 394 the High court may sanction a scheme of amalgamationproposed by 2 or more companies after it has been approved by ameeting of the MEMBERS of the company convened under the Ordersof the court with a majority in number holding at least 75% of the

value of the shares and who vote at the meeting, approving thescheme of Amalgamation and the Companies make a Petition to thehigh court approving the same. The High Court serves a copy of thepetition on the Regional Director, Company Law Board and if he doesnot object to it, the court sanctions it

Once the Court sanctions it, it is binding on all the members of the 2companies

86-B-recaptulation

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86 B recaptulation 2) Purchase of shares u/s 395-already discussed

The main idea behind taking re-course to the provisionsof Sec 395 is that once a company is confident ofacquiring 90% or more of the shares of a company, it

can use this route to OBVIATE THE NEED TOTO TAKE THE APPROVAL OF THE HIGHCOURT . The company while attempting to acquire

this 90% must however go through the provisions ofthe SEBI (sast.) Act

3) Amalgamation of companies in National interest (Sec

396) contd # 86-C

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86-d

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86 d

86-e

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86 e

Attach FAQs on Stock take-overs here

87-Tools of C/R---De-merger

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De-merger is essentially a process of Downsizing or scaling down theoperations. This could happen under circumstances like i) A division of the company is performing poorly Ii) A division of the company does not fit into the Organizations Structure,

the product or technological relationship or simply into the scheme ofthings

Iii) It makes market sense to divestensures higher valuations and the Sumof the parts>> the Whole Iv) To undo a previous merger that isnt clicking v) It is a part of a Family Arrangement Vi) To make a monolithic structure with slippery Organizational structure and

disjoint units, more coherent, focused, and clear about its core competencies

88-De-merger

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88 e e ge

The Companies Act 391-394 deals withschemes of Compromises, Arrangement andReconstruction and De-merger finds a place inthis Umbrella

Sec 293(1) (a) of the Companies Act deals withsale, lease or disposal of a---

a) whole Undertaking/company

b) A Substantial part of the undertaking

De-merger is Corporate Partition

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De-merger has been defined for Incometax purposes under sec2(19 AA) of the Income tax Act.Here de-merger is a transfer , pursuant to a scheme of arrangement u/s 391-394 of the Cos. Actsuch that --;

i) All the assets relatable to the undertaking being transferred by the De-merged company,immediately before the De-merger , become the property of the Resulting company by virtue ofthe De-merger

Ii) All the liabilities relatable to the undertaking being transferred by the de-merged company ,immediately before the de-merger , become the liabilities of the resulting company by virtue of

the demerger Iii) The Assets and Liabilities of the undertaking or undertakings being transferred by the de-

merged company, are transferred at Values appearing in the books immediately before de-merger

Iv) the resulting company issues , in consideration of the de-merger, its shares to the holders ofthe De-merged company on a Proportionate basis

V) The share holders holding not less than 3/4ths in value of the shares in the de-mergedcompany (other than shares already held therein immediately before the de-merger or by anominee for, the resulting company or its subsidiary) become shareholders of the resultingcompany or companies by way of de-merger , otherwise than as a result of the acquisition of theproperty of the De-merged company or undertaking thereof by the resulting company

Vi) the transfer of the undertaking is on a going concern basis

90-De-merger

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g

Thus, De-merger is essentially a scheme of Arrangement u/s391-394 of the Companies Act 1956 requiring approval by

i) a majority of shareholders holding shares representing ths invalue in a meeting convened for the purpose and

Ii) it has the sanction of the high court

iii) De -merger involves transfer of one or more undertakings

The transfer of undertakings is by the de- merged company,which is otherwise known as Transferor company. Thecompany to which the undertaking is transferred is known as

resulting company or transferee company

91-De-merger (contd.)

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g ( )

De-merger may take the shape of a) Split-off is a process of re-organizing a Companys structure

whereby the Capital stock of a subsidiary or a newly affiliatedcompany is transferred to shareholders of the parent company,in exchange for a portion of the stock of the latter or

b) Split-up is a process of re-organizing a companys capitalstructure whereby all the capital stock and assets are exchangedfor those of two or more newly established companies , resultingin the Liquidation of the parent company

92-De-merger (contd.)

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g ( )

De -merger, division, split or spin off may takeplace when a new company is formed for thepurpose ,inter alia,of taking over the residualdivision of one or more of existing companies,on the same being spun-off in pursuance of ajoint venture agreement between the existingcompany and a scheme of arrangement is

formulated in furtherance of such a joint ventureagreement

93-demerger

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g

In a :split off: some of the shareholders in the Parent company(they obviously hold shares of the Parent company) are givenshares in a division of the parent company (usually a subsidiary),

which is Split off in exchange for their shares in the Parentcompany. Ex If A held 1000 shares in a company X and was

allotted 3000 shares in x, a subsidiary in exchange for 500 sharesof X. A now holds 500 shares in company X and 3000shares inx. Company x is spun off as a separate unit. A PART ofcompany x can be offloaded to the public

Split off may be used to split divisions to make it less attractivefor Take-over bidders

94-Split-off

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p

Section 27 of the M.R.T.P Act vests powers in the Central Govt., on therecommendation of the MRTP Commission to, order the subdivision of any trade ofan undertaking, the subdivision of the undertaking or of inter-connected undertaking.Such an order may provide for all such matters as may be necessary to give effect tosuch a split in the undertaking or in the interconnected undertaking, including--;

a) the transfer or vesting of property, rights, liabilities or obligations b) the adjustment of contracts either by the discharge or reduction of any liability or

obligation or otherwise c) the creation, the allotment, surrender of shares, stock or securities d) the payment of compensation e) the Formation, or, winding up of an undertaking or, the amendment of the

Memorandum of association or the Articles or, any other Instruments regulating thebusiness of any undertaking

f) the extent to which, and the circumstances under which, the provisions of the orderaffecting an undertaking may be altered by the undertaking and the registration thereof

The Competition Act2002 now contains these provisions

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Split off refers to a Division of a Company into two ormore parts through Transfer of Stock, andthe Parentcompany ceases to exist

Spin-off is a DE-MERGER when an existing Parentcompany distributes, on a pro-rata basis, ALL theshares it owns in its subsidiary to its shareholders, as aresult of which the two companies merge into one.

There is no money transaction, no Exchange of shares,no revaluation of the Assets of the subsidiary and thetransaction is a Tax free exchange

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Forms of De-merger May be Partial or Complete When a part/Division/Department of a company is separated and transferred

to one or more companies formed with the same shareholdersa Partial de-merger is said to have occurred Here the Original company continues toexist .Ex. Cement unit was spun-off L&t to Grasim and L&T continues with

its Capital goods business Complete De-Merger occurs when the whole of the business /undertaking of

the existing company is transferred to one or more new company formed forthis purpose and, the de-merged company is dissolved by passing aSpecial Resolution for voluntary winding up and the shareholders of thedissolved company are allotted shares in the new company as per thesanctioned share exchange ratio

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Ways by which De-Merger can be effected

--De-Merger by Agreement between PromotersEx. : Reliance Industries into ADAGcompanies like Reliance

Communication ,Reliance Natural Resources etc. --De-merger under scheme of arrangement with

the approval of the court under section 391 ofCompanies Act .Ex: NIIT into NIIT & NIITTechnologies

De-merger under voluntary winding up :Sections 494 to 498 of Companies Act

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99

De merger under scheme of arrangement :

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De-merger under scheme of arrangement :

A company on the basis of its powers , in itsmemorandum of association, can carry out a de-merger of its division or split its undertaking inthe same manner as it can accomplish anamalgamation through a scheme of arrangementunder Section 391 and as laid down in Chapter 5of the Companies Act relating to compromise,

arrangement & re-construction.

100 De merger & voluntary winding up : Section 484 498

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De-merger & voluntary winding up : Section 484-498

A company which has split into several companies after division can be wound upvoluntarily pursuant to Section 484-498 of the Companies Act . Section 494 providesthat where the transferor company is to be or is in the course of beingwound upvoluntarily & the whole or any part of its business or property is proposed to betransferred or sold to another transferee company , the liquidator of the transferorcompany may, with the sanction of a special resolution of that company,conferring on the liquidator either a general or specific authority ,receive, by way of

compensation or part compensation for the transfer or sale shares , policies orother interests in the transferee company , for distributionamong the members ofthe transferor company or , enter into any otherarrangement whereby themembers of the transferor company may , in lieu of receiving cash, sharespolicies or other like interests or , in addition thereto,participate in the profitsof or receive any otherbenefit from the transferee company .

s The sale or arrangement in pursuance of Section 484-498 is binding on themembers of the transferor company

101

P ibl R dbl k d S ti 391 d 484 498

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Possible Roadblocks under Section 391 or under 484-498 :

(1) The scheme must be within the powers of the companyi.e the Memorandum of Association must provide for this

event (de-merger) . In case it doesnt, steps must be taken tofirst alter the Memorandum of Association .Cannot be

passed Ultra vires(2) Res-judicata : Where a proposed scheme of compromisehas already been rejected by the court, and the same

persons propose another scheme which is substantially

the same as the earlier one, the general principle of Res-judicata applies to bar the second scheme .

102-Tax aspects of de-merger Provisions relating to de merger were introduced in the Finance Act 1999 ( w e f

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Provisions relating to de-merger were introduced in the Finance Act, 1999 ( w.e.f.1/4/2000) .These amendments were introduced with the following aspects inconsideration :

(1) De-mergers should be tax neutral

(2) Tax benefits & concessions available to an undertaking, should be available to iteven upon its transfer to a resulting company

(3) Tax benefits to such business re-organisations should be limited to what pertainsto transfer ofbusiness as a going concern & not whatpertains to the transferof specific assets which would amount to a sale of assets rather than a re-organisation of business .

(4) The accumulated losses should be allowed to be carried forward by the

resulting company if these are directly relatable to the undertaking proposed to betransferred. However, if it is not possible to relate these to the undertaking, suchlosses & depreciation should be apportioned between the de-merged company &the resulting company in a reasonable manner.

103-Tax reliefs to de-merged company

(1) C pit l i t t tt t d S ti 47( ib)

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(1) Capital gains tax not attracted Section 47(vib)

Where there is a transfer of anycapital asset, in a de-merger, by the de-merged company, to the resultingcompany, such transfer will not be regarded as a

transfer for thepurposes ofcapital gains,providedthat, the resulting company is an Indian company.

104 Tax relief to a Foreign de-merged company :

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g g p y

Section 47(vi c) states that where a foreign company holds any

share in an Indian company & transfers the same during thecourse of de-merger, to the resultingforeign company, suchtransactions will not be regarded as transfer for the purposesofcapital gains u/s Section 45,provided the followingconditions are fulfilled:

1.The shareholders holding not less than ths in value of theshares of the de-merged foreign company continue to remainthe shareholders of the resulting foreigncompany and

2. Such transfer does not attract tax on capital gains in thecountry in which the de-merged foreign company isincorporated.

However, the provisions ofSection 391-394, are notapplicableto de-mergers referred to in this clause (Foreign companies)

105 Tax reliefs to shareholders of de-merged company :Section 47 (vi d)

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Any transfer or issue of shares by the resulting company to the shareholders of de-merged company in ascheme of de-merger, is not regarded as transfer for the purposes

of capital gains if the transfer or issue is made in consideration of the de-merger of the undertaking .

Consequent to the de-merger , the existing shareholders of the de-merged company will hold shares in theresulting company. In case the shareholders transfer these shares, subsequent to the de-merger, the cost ofsuch shares will be calculated as under:

The cost of acquisition in the resulting company will be the amount which bears to the cost of acquisition ofshares held by the assesee in the de-merged company , the same proportion as the net book value of theassets transferred in the de-merger bears to the net-worth of the de-merged company immediately beforesuch de-merger. In other words,

Cost of acquisition Cost of acquisition of NET BOOK VALUE of

of shares in resulting = shares held by the assessee * assets transferred incompany in the de-merged company a de-merger

--------------------------------------

net worth of the de-merged

company immediately beforede-merger

The bold letters are relevant in a PARTIAL DE-MERGER.

106-(CONTD.)

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According to Section 49 (ii d) , the cost of acquisition of the

original shares held by the shareholder in the de-mergedcompany will be deemed to have been reduced by the

amount so arrived at in slide no. 105.(The differentialwhich is now lower would be the cost of acquisition for

anytransfer subsequently)In determining the period for which any Capital asset is held by

the assessee, Sec2(42a)(g) provides that in case of a capitalasset, being a share or shares in an Indian company, whichbecomes the property of the Assessee in consideration of ade-merger, there shall be included the period for which theshare(s) held in the de-merged company were held by the

assessee

107

Tax relief to the resulting company :

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Tax relief to the resulting company :

The resulting company is eligible to tax reliefs if :(a) The de-merger satisfies ALL the conditions laiddown in Section 2(19 AA) of the Income tax Act

and(b) resulting company is an Indian company

108Section 2(19AA) : De-merger in relation to companies, means transfer, pursuant to a

scheme of arrangement u/s 391-394 of Companies Act by a de-merged company of

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scheme of arrangement u/s 391 394 of Companies Act , by a de merged company ofone or more undertakings to the resulting company in the following manner:

1. All the properties of the undertaking, being transferred by the de-merged company ,becomes the property of the resulting company .

2. All the liabilities relatable to the undertaking being transferred by the de-mergedcompany, become the liabilities of the resulting company.

3. The property & liabilities of the undertaking being transferred by the de-mergedcompany are transferred at values appearing in its books of accounts immediatelybefore the de-merger. For this purpose, any change in their values consequent to theirre-valuation shall be ignored.

4.The resulting company issues shares to the shareholders of the de-merged company ona proportionate basis as a consideration for the de-merger.

5. The shareholders holding not less than 3/4ths in value of shares in the de-mergedcompany (other than the shares already held therein immediately before the de-merger ,or by a nominee for, the resulting company or , its subsidiary) become the shareholders

of the resulting company.6.The transfer of the undertaking is on a going concern basis.7. The de-merger is in accordance with the conditions, if any, notified under Section

72(a)(5) .

109 Depreciation on assets transferred to resulting company:

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Section 32(1) of Income-Tax Act provides that in respect ofdepreciation of :

1. Buildings, machinery, plant or furniture being tangible assets

2. Know-how, patents, copyrights, trademarks, licences , franchises orany other business or commercial rights of similar nature, beingintangible assets acquired on or after 1/4/1998

owned wholly or partly , by the assessee and used for the purposes ofthe business or profession, the following deductions shall be allowed:

a. In the case of assets of an undertaking engaged in the generationand or distribution of power, such percentages on the actual cost

thereof to the assessee as may be prescribedb .For blocks of assets, such percentage on the written down value asmay be prescribed.

110-(contd.)

It l l d th t th r t d d ti i r p t f

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It also lays down that the aggregate deduction in respect ofdepreciation of buildings, machinery, plant or furniture,being tangible assets, or know-how, patents, copyrights,trademarks, licenses, franchises or any other business orcommercial rights of a similar nature , being intangible assets

allowable to the de-merged company and the resultingcompany shall not exceed in any previous year, thededuction calculated at the prescribed rates as if the de-merger had not taken place & such deductions shall be

apportioned between the de-merged company & theresulting company in the ratio of the no. of days for whichthe assets were used by them.

111

Expenditure on know-how:

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Expenditure on know how:

Section 35(AB) of the Income tax Act states thatwhere there is a transfer of an undertaking under ascheme of de-merger and the de-merged company iseligible to a deduction under this Section, then, theresulting company is entitled to claim depreciationunder this section in respect of such undertaking tothe same extent and in respect of the residual period,

as it would have been allowable to the de-mergedcompany, had such de-merger not taken place

112 Expenditure for obtaining license to operate Telecom

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p g pService: Section 35(ABB)

The amount paid for acquiring a telecommunication licensecan be amortised over the life of the license and is anallowable deduction for I.T purposes , provided:

1. Fee is paid before the commencement of business

Deduction is allowed for the previous years , beginningwith the previous year in which the business commenced.

2. Fee is paid after the commencement of business-deduction shall be allowed for the previous year beginning

with the previous year in which the license fee is actuallypaid.

113-(contd.)

Al h h li i TRANSFERRED d h

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Also where the license is TRANSFERRED and the

proceeds of the transfer, so far as they consist of capitalsums are less than the expenditure incurred & remainingun-allowed, a deduction equal to such expenditure un-allowed, as reduced by the proceeds of the transfer, shall be

allowed in respect of the previous year in which the licenseis transferred.(( Sale at a loss)

Fees paid Deduction allowed = Un-allowed

Un-allowed Sale proceeds =Allowed in theprevious years

114(contd.)

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Sale at a Profit( of the license)

Sub-section(3) provides that where the whole or any part of the licence is transferredand the proceeds of the transfer , so far as they consist of Capital sums (not revenuesums) EXCEED the amount of the expenditure incurred and remaining un-allowed,SO MUCH of the excess as does not exceed the difference between the Expenditureincurred to obtain the licence and the amount of such expenditure remaining un-allowed , shall be chargeable to income tax as Profits and Gains of Business , in thePrevious Year in which the Licence was transferred

Sale proceedsAmount remaining un allowed=Excess Expenditure on licenseAmnt. Un-allowed=Remainder The Excess upto Reminder is taxable as Profits & Gains of business Also, if the consideration for transfer results in a Profit, then a charge to the profits by

way of Amortization of the license cost as discussed earlier, is NOT allowable to theAssessee

According to Sub-section (7),where the transfer is by way of a de-merger as per Sec2(19AA) the provisions will apply to a Resulting company as they would apply to theDe-merged company, had it not transferred the licence

115-Sec 35D(5A) Amortization of certain Preliminary Expenses

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Where an Assessee, being an Indian company or, a person other

than a company,who is a resident of India , incurs, any expenditurebefore the commencement of the business or, after thecommencement of business by way of extending it, or by way ofsetting up a new Industrial unit---:

The assessee shall , in accordance with and subject to the provisionsof this section, be allowed a deduction of an amount equal to 1/10th of such expenditure for each of the ten successive previous yearsbeginning with the Previous years in which the Business commencesor, as the case may be, the previous year in which the extension ofthe industrial undertaking is completed or , the new industrial unitcommences production or operations

Thus if the undertaking of an Indian company entitled to this deductionis, de-merged within a period of 10 years, the Preliminary expensesnot yet written off will be allowed to be carried forward into thebooks of the Resulting company and dealt with as if de-merger hadnot taken place

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All expenses incurred on de-merging a company qualify for amortization anda write-off, against the profits ,over 5 years ie. 1/5 th each year

Deduction for expenditure on prospecting etc. for certain minerals Sec35 E

An Indian company is entitled to carry forward and set-off over 10 years,1/10th each year, the sums it has spent on prospecting for minerals. In casethis company is de-merged before the expiry of 10years, the Resultingcompany, shall be entitled to carry forward and set off this amount that is yetto be written off in full, just the same way the de-merged would have beenentitled to, had de-merger not taken place.

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117

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Any deduction allowed for prospecting ofMineral oil is carried over into the books of theresulting company consequent to a de-merger

and written off just the same way the de-mergedwould ,had the de-merger not taken place

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119-Sec 72 A of the I.T.Act

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Carry forward and set off of loss and unabsorbed depreciation allowanceNotwithstanding anything contained in any other provisions of the Act, in the case of de-

merger, the accumulated loss and the allowance for unabsorbed depreciation of the de-merged company shall-

a) where such loss or unabsorbed depreciation is directly relatable to the undertakingstransferred to the r