Corporate Restructuring

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This presentation enumerates the practical aspects of merger, demerger and reduction of capital and the strategies involved therein. It also highlights certain key issues involved in corporate restructuring.

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<ul><li> 1. CORPORATE RESTRUCTURING Pavan Kumar Vijay </li></ul><p> 2. GOVERNING PROVISIONSECTION 391-394 of Companies Act, 1956 Most liberal section in the entire Companies Act, 1956. By way of SCHEME you canpropose &amp; achieve whatever you want 3. TYPES OF RESTRUCTURING MERGER DEMERGER REDUCTION OF CAPITAL 4. RESTRUCTURINGApproving Authorities High Court BIFR 5. MERGERMERGER REVERSE MERGER Combining of two or As a commercial term, it morecommercialmeans when a Healthy organizations into one in Company (in terms of size, ordertoincreasecapital or listing status)is efficiency and sometimesmerging in a Weak Company to avoid competition.(in terms of size, orunlisted).SECTION 391-394 of Companies Act, 1956 6. DEMERGERDivision of a Company with two or more identifiable business units into two or moreseparate companies SECTION 2(19AA) of Income Tax Act, 1961. 7. REDUCTION OF CAPITALExtinguishing or Reducing the paid-up capital, Securities Premium Account orliability of members with respect totheir unpaid calls -An effective way of internalrestructuringSECTION 100 to 105 of Companies Act, 1956SECTION 100 105 of Companies Act, 1956 8. A FEW VARIETY OF MERGER Unlisted with Listed Listed with Unlisted Merger of Subsidiary with Holding Company Merger with Group Company Healthy Company with Weak Company Merger through BIFR 9. STOCK EXCHANGES ROLE REQUIREMENTSListing Agreement Compliances Stock Exchange Internal NormsCompliance of Securities lawsCompliance of Companies ActPERSPECTIVEObservations 10. Listing Agreement Compliances Clause 24(f) The Company agrees that it shall file anyscheme/petition proposed to be filed before any Court or Tribunal under Sections 391, 394 and 101 of the Companies Act, 1956, with the stock exchange, for approval, at least a month before it is presented to the Court or Tribunal. 11. Listing Agreement Compliances.. contd Clause 24(a) TheCompany to obtain in-principle approval for listing from the exchanges having nationwide trading terminals where it is listed, before issuing shares or other securities to theshareholders of Transferor Company. 12. Listing Agreement Compliances..contdClause 40A The Company to comply with Continuous Listing requirements while framing a scheme ofmerger/demerger. 13. Stock Exchanges Norms Presently, Stock Exchange(s) are laying various othernorms before giving approval to the Companiesfor Merger, Demerger Reduction of Capital 14. Stock Exchange Norms..contdMINIMUM CAPITAL REQUIREMENTS1. Issued &amp; paid up Equity Capital Rs 10 crores(if there is a change in management/control) OR Issued &amp; paid up Equity Capital Rs 3 crores(If there is no change in management/control)AND 2. Minimum Net Worth 20 crores(Post amalgamation) *BSE Stipulations 15. Stock Exchange Norms..contd CONTINUOUS LISTING NORMS(Transferee Co is Listed Co. &amp; Transferor Co is Unlisted Co.) Non- Promoter Holding 25% of Post -merger Capital * (The entire holding of the shareholders of the transferor company beexcluded) If Non- Promoter Holding Falls below 25% of Post merger capital, then the Promoters have to dilute excess portion.*BSE Stipulations 16. Stock Exchange Norms..contdLOCK IN REQUIRMENTS 25% of the newly issued capital pursuant to the scheme of amalgamation should be kept under lock in for 3 yrs from the date of listing The lock in period are varied by the stock exchange on case to case basis*BSE Stipulations 17. Compliance of Other Laws The Stock Exchange(s) alongside considersthe compliance of Securities laws, regulations, rules etc. applicable on theCompany and Companies Act also 18. Compliance of Other laws..contdSEBI (SAST)REGULATIONS ,1997 Regulation 3(1)(j)(ii) provides an exemption for acquisitionof shares: Nothing contained in regulations 10, 11 and 12 of theseregulations shall apply to shares acquired Pursuant to a scheme :(ii) of arrangement or reconstruction includingamalgamation or merger or demerger under any law orregulation, Indian or foreign; 19. Valuations Analysis No undue benefit to Promoters /Particular group Investors interest not to be affected Back door Entry for listing Change in Management/Control 20. ISSUES Whether application under Clause 24(f) of the Listing Agreements is an approval or information? Whether no communication from Stock Exchange within 1 month amounts to approval? 21. ISSUES Whether Merger without approval under Clause 24(f) of the Listing Agreement is valid considering that the High Court approved the same? Whether varied lock in period stipulations imposed by Stock exchange are valid? 22. ISSUES What are the repercussions in case the promoters shareholding goes beyond 75% of the post amalgamation capital? Whether a Suspended Company is eligible to obtain in principle approval from stock exchange? 23. ISSUES Whether Shares placed to QIB's in an Unlisted Company prior to merger will be counted in the post merger non -promoter shareholding of a Listed Company? 24. MERGER THROUGH BIFRAN EFFECTIVE WAY TOREVIVEYOUR SICK COMPANY 25. MERGER THROUGH BIFREXEMPTION FROM TAKEOVER CODERegulation 3(1)(j) of SAST Regulations, 1997 providesthat: Nothing contained in Regulation 10, 11 &amp; 12 shall applies to acquisition: j) Pursuant to a scheme :(i) framed under section 18 of the Sick Industrial Companies (SpecialProvisions) Act, 1985 (1 of 1986); 26. MERGER THROUGH BIFR EXEMPTION FROM CL40A OF LISTING AGREEMENT Clause 40A as amended on 13th April, 2006 gives exemption to BIFR referred companies:The Non-Promoters shareholding can be below 25% of thetotal capital of the company pursuant to BIFR order in any rehabilitation scheme. 27. DEMERGER Reliance Capital Reliance NaturalVentures Ltd Resources Ltd 28. TYPES OF DEMERGER Listed Company demerging into two companies (both could be listed). Listed Company is demerged into two companies and another unlisted entity is merging with the one of the demerged entity. Distribution of shareholding in a Wholly owned Subsidiary among shareholders 29. CONDITION FOR LISTING (Rule 19 (2) (b) of SCR Rules) 1. At least 10 per cent of securities issued by a company wasoffered to the public through advertisement &amp; followingconditions were fulfilled:(a) minimum 20 lakh securities was offered to the public;(b) the size of the offer to the public Rs. 100 crores ; and(c) the issue was made only through book buildingallocation of 60 % of the issue size to QIBs 2. It shall offer at least 25 % of each class to the public throughAdvertisement &amp; Shares applied in pursuance of such offerwere allotted 30. LISTING UNDER CL. 8.3.5.1 OF DIP GUIDELINESEXEMPTION FROM CONDITION OF RULE 19 (2) (b) Listed Company merging with UnlistedCompany. In case of a demerger of a ListedCompany,the Resultant Company to getthe benefit of listing. 31. Exemption u/c 8.3.5.1 of DIP Guidelines Cont. CONDITIONS FOR AVAILING EXEMPTION Shares have been allotted by the unlisted company (transferee- company) to the holders of securities of a listed company (transferor- company) pursuant to a scheme of reconstruction or amalgamation under the provision of the Companies Act, 1956, and such scheme has been sanctioned by the High Court/s of Judicature. The listing of the shares of the unlisted transferee-company is in terms of scheme of arrangement sanctioned by the High Court/s of the Judicature. At least 25% of the paid-up share capital, post scheme, of the unlisted transferee-company seeking listing comprises shares allotted to the public holders of shares in the listed transferor-Company. 32. Exemption u/c 8.3.5.1 Cont.The unlisted company has not issued/reissued any shares, not covered under the scheme. There are no outstanding warrants /instruments/ agreements which gives to any person to take the shares in the unlisted transferee company at any future date. That the shares of the transferee-company issued in lieu of the locked-in-shares of the transferor-company are subjected to the lock-in for the remaining period. 33. Exemption u/c 8.3.5.1 Cont. Promoters shares shall be locked-in to the extent of 20% of the post merger paid-up capital of the unlisted company, for a period of 3 years from the date of listing of the shares of the unlisted company. The balance of the entire pre-merger capital of the unlisted company shall also be locked-in for a period of 3 years from the date of listing of the shares of the unlisted company. The Company shall give an advertisement in one English and one Hindi newspaper with nationwide circulation and one regional newspaper with wide circulation at the place where the registered office of the company is situated, giving details as specified in Schedule XXVIII. 34. ISSUES Whether Demerger &amp; Merger are possible in one scheme? One of the pre - condition of Inter-se transferis transferor &amp; transferee should be holdingshares for three years. What is the status ofshares held in the Resultant Company? Whetherthe three years condition will be deemed to befulfilled in case the transferee &amp; transferor areholding shares since last 3 years in thedemerged company? 35. Morarjee Goculdas Spg. &amp; Wvg. Co. Ltd. (MGC) -Demerger Scheme- i. MGC was engaged in two separate business: Real Estate DevelopmentFACTS Manufacturing of variouskind of fibers &amp; fabricsii. The two businesses werequit distinct - it was desiredto segregate the two. 36. Salient Features of the Scheme Before merger MGC transferred its complete Textiles Business to MTL in lieuof which MTL allotted shares to a SPV, MGC Shareholders Trust. MGC changedits name as Morarjee Realty Ltd. (MRL). The investment by MGC (Now MRL) in MTL was distributed among theshareholders of MGC in the ratio of 10:21.. The equity shares in MTL held by MGC Shareholders Trust was alsodistributed among the shareholders in the ratio of 1:25, free of cost. The Preference shares held by MGC Shareholders Trust were also offered tothe shareholders at a discounted price.. The new shares received by the shareholders of MGC (MRL) got listed onBSE &amp; NSE under the provisions of Clause 8.5.3.1 of SEBI (DIP)Guidelines inexemption of Rule 19 (2) (b) of SCRR.Through the same scheme MTL reduced its share capital by 80% to wipe-outthe past losses and hence cleaned up its balance sheet. 37. Benefits achieved.. Two unrelated businesses were separated to make it possible to determine the Industry of the Company. It is desirable to attract Industry specific investors. The shareholders received shares to two listed entities with separate business profile, thus, providing better valuation &amp; liquidity. There was no tax implication in the hands of the companies involved or the shareholders. It also helped MTL to wipe out past losses, making the balance sheet clean and attractive. No loss of carry forward of past losses. 38. Financial Benefits to Shareholder Particulars Amount (Rs.) Amount as on 24th March(Rs.) as on 2005 26th May 2006 Value of the shares held100@55 by a shareholder as on shares recorddate (5th5500 Jan,2004) (A)Shares in MRL100@125@694 shares 12500 69400 Shares in MTL51.5@80@100 shares 4,120 5,150Total (B)16,62074550 Net benefit (B-A) 11,12069,050 39. Reliance Industries Limited- A Unique Scheme of Arrangement-PRE ARRANGEMENT SCENARIO Reliance Industries Limited was engaged in various businesses: (i) Coal based power business; FACTS (ii) Gas based power business; (iii) Financial services business; (iv) Tele-Communication business 40. RIL demerger The family arrangement aims at Segregation between the two Ambani Brothers Provision for Specified Investors was made: Holdings of RIL and other companies in the controlof Mr. Mukesh Ambani were transferred to a whollyowned subsidiary, Reliance Industrial Investmentsand Holdings Limited (RIIHL) along with a PrivateTrust (Petroleum Trust). RIIHL and Petroleum Trust were described asSpecified Investors which renounced their rightsin the scheme itself. 41. RIL demerger As a result of demerger the shareholders of RelianceIndustries Ltd. other than Specified Investors got oneshare each in the following four resulting companies foreach share held in RIL as on the record date: Reliance Energy Venture Ltd. (REVL) Reliance Communication Venture Ltd. (RCOVL) Reliance Capital Venture Ltd. (RCVL) Reliance Natural Resources Limited (RNRL) The shares of all these resulting companies got listed onthe stock exchanges under the provisions of Cl 8.5.3.1of the SEBI (DIP) Guidelines. 42. Benefits achieved..ParticularsAmountAmount (Rs.) (Rs.)24th March 200626th May 2006 Value of the shares held100 shares@928 by a shareholder as on recorddate(25th 92800 Jan,2006) (A) Shares in RIL100 (@708) 70800 (@950)95000 Shares in REVL 100 (@38)3800 (@37) 3700 Shares in RCOVL100 (@290)29000 (@270)27000 Shares in RCVL 100 (@24)2400 (@23)2300 Shares in RNRL 100 (@23)2300 (@27)2700Total 108300130700Net benefit15500 37900 43. REDUCTION OF CAPITAL 44. Types of Reduction of CapitalWriting off Losses &amp; Fictitious AssetsCorrection of Over- Capitalization Distinguishment of the Liability in respect ofunpaid portion of face value. Distribution of accumulated profits byPayment to shareholders a part of share capital. 45. Reduction of Capital- A Strategic Step To Clean-up the Balance Sheet To rationalize the capital baseRevival of Sick Company 46. RESTRUCTURING STRATEGIESWhat'sYour Move?? 47. FEW STRATEGIC MOVES Strategy IStrategy IILISTING RAISING (Without PROMOTERSoffer toHOLDINGPublic) (Beyond 55%) 48. FEW STRATEGIC MOVES..contd Strategy IIIStrategy IVACQUISITION CLUBINGOF LISTEDOF CO.RESOURCES(Exemption from Takeover Code) (Without raisingCapital) 49. Strategy I LISTINGDirect listing is costly &amp; complicated But Listing of Company provides for..Unlock value of businessBrings liquidityAttract investors for further growth 50. LISTING THROUGH MERGER Strategy IA Small/loss making listed companies are selected by unlisted strong companies Unlisted company is merged with listed company with maximum possible shares to promoters of unlisted Company Promoters of Unlisted Company get shares in a listed entity 51. LISTING THROUGH MERGER Strategy IB Merger of Acquisition of financially soundRegional Listedunlisted co withCompany(RSE) listed co INDONEXT LISTING Now your Company is ready for ListingDIRECT LISTING 52. RAISING PROMOTERS HOLDING Strategy IIRevised provisions of SEBI Takeover Code does not allowpromoters to acquire even a single share beyond 55% Specific exemption to Merger/Demerger An Unlisted company is created by PromotersThis entity is merged with listed company Promoters holding is raised up to 75% 53. ACQUISITION OF LISTED COMPANY Strategy IIISEBI Takeover Code does not allow acquisition of sharesof a listed company beyond 15% or Change in Control byany outsider without a PASpecific exemption to Merger/Demerger An Unlisted company is created by Acquirer This company is merged with listed company Acquirers holding may go up to 75% of increasedcapital base The Managem...</p>