corporate restructuring

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CORPORATE RESTRUCTURING Pavan Kumar Vija

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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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Page 1: Corporate Restructuring

CORPORATE RESTRUCTURING

CORPORATE RESTRUCTURING

Pavan Kumar Vijay

Page 2: Corporate Restructuring

GOVERNING PROVISION

SECTION 391-394 of Companies Act, 1956

Most liberal section in the entire

Companies Act, 1956.

By way of SCHEME you can

propose & achieve whatever you want

Page 3: Corporate Restructuring

TYPES OF RESTRUCTURING

REDUCTION OF

CAPITAL

MERGERMERGER

DEMERGER

Page 4: Corporate Restructuring

RESTRUCTURING

BIFRHigh Court

Approving AuthoritiesApproving Authorities

Page 5: Corporate Restructuring

MERGER

“Combining of two or more commercial organizations into one in order to increase efficiency and sometimes to avoid competition”.

MERGER

REVERSE MERGER

“As a commercial term, it means when a Healthy

Company (in terms of size, capital or listing status)is merging in a

Weak Company (in terms of size, or

unlisted)”.

SECTION 391-394 of Companies Act, 1956

Page 6: Corporate Restructuring

DEMERGER

“Division of a Company with two or more identifiable business units into two or more separate companies ”

SECTION – 2(19AA) of Income Tax Act, 1961.

Page 7: Corporate Restructuring

“Extinguishing or Reducing the paid-up capital, Securities Premium Account or liability of members with

respect to their unpaid calls”

-An effective way of internal restructuring

REDUCTION OF CAPITAL

SECTION – 100 – 105 of Companies Act, 1956

SECTION 100 to 105 of Companies Act, 1956

Page 8: Corporate Restructuring

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

Page 9: Corporate Restructuring

STOCK EXCHANGE’S ROLE

REQUIREMENTS

PERSPECTIVE

Listing Agreement Compliances

Stock Exchange Internal Norms

Observations

Compliance of Securities laws

Compliance of Companies Act

Page 10: Corporate Restructuring

Listing Agreement Compliances

“The Company agrees that it shall file any scheme/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.”

Clause 24(f)

Page 11: Corporate Restructuring

Clause 24(a)

“The Company 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 the shareholders of Transferor Company.”

Listing Agreement Compliances.. contd

Page 12: Corporate Restructuring

Clause 40A

Listing Agreement Compliances..contd

“The Company to comply with Continuous Listing requirements while framing a

scheme of merger/demerger.”

Page 13: Corporate Restructuring

Stock Exchange’s Norms

Presently, Stock Exchange(s) are laying various other norms before giving approval to

the Companies

for

‘Merger’, ‘Demerger’ ‘Reduction of Capital’

Page 14: Corporate Restructuring

Stock Exchange Norms..contd

MINIMUM CAPITAL REQUIREMENTS

1. Issued & paid up Equity Capital – Rs 10 crores

(if there is a change in management/control)

OR

Issued & 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

Page 15: Corporate Restructuring

CONTINUOUS LISTING NORMS(Transferee Co is Listed Co. & Transferor Co is Unlisted Co.)

Non- Promoter Holding – 25% of Post -merger Capital

* (The entire holding of the shareholders of the transferor company be excluded)

If Non- Promoter Holding – Falls below 25% of Post merger capital, then the Promoters have to dilute excess portion.

*BSE Stipulations

Stock Exchange Norms..contd

Page 16: Corporate Restructuring

Stock Exchange Norms..contd

LOCK 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

Page 17: Corporate Restructuring

Compliance of Other Laws

“The Stock Exchange(s) alongside considers the compliance of

Securities laws, regulations, rules etc. applicable on the Company

and Companies Act also”

Page 18: Corporate Restructuring

Compliance of Other laws..contd

SEBI (SAST)REGULATIONS ,1997Regulation 3(1)(j)(ii) provides an exemption for

acquisition of shares:

“Nothing contained in regulations 10, 11 and 12 of these regulations shall apply to shares

acquired

Pursuant to a scheme :

(ii) of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign;”

Page 19: Corporate Restructuring

• Valuations Analysis

• No undue benefit to Promoters /

Particular group

• Investors interest not to be affected

• Back door Entry for listing

• Change in Management/Control

Page 20: Corporate Restructuring
Page 21: Corporate Restructuring

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?

ISSUES

Page 22: Corporate Restructuring

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?

ISSUES

Page 23: Corporate Restructuring

What are the repercussions in case the promoter’s shareholding goes beyond 75% of the post amalgamation capital?

Whether a Suspended Company is eligible to obtain in principle approval from stock exchange?

ISSUES

Page 24: Corporate Restructuring

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?

ISSUES

Page 25: Corporate Restructuring

MERGER THROUGH BIFR MERGER THROUGH BIFR

AN EFFECTIVE

WAY

TO

REVIVE

YOUR

SICK COMPANY

Page 26: Corporate Restructuring

MERGER THROUGH BIFR MERGER THROUGH BIFR

EXEMPTION FROM TAKEOVER CODE Regulation 3(1)(j) of SAST Regulations, 1997

provides that: Nothing contained in Regulation 10, 11 & 12 shall applies to

acquisition:

j) Pursuant to a scheme :

(i) framed under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);

Page 27: Corporate Restructuring

MERGER THROUGH BIFR 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 the total capital of the company

pursuant to BIFR order in any rehabilitation scheme.

Page 28: Corporate Restructuring

DEMERGER DEMERGER

Reliance Natural Resources Ltd

Reliance Capital Ventures Ltd

Page 29: Corporate Restructuring

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

Page 30: Corporate Restructuring

1. At least 10 per cent of securities issued by a company was offered to the public through advertisement & following conditions 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 building allocation of 60 % of the issue size to QIBs

2. It shall offer at least 25 % of each class to the public through Advertisement & Shares applied in pursuance of such offer were allotted

CONDITION FOR LISTING

(Rule 19 (2) (b) of SCR Rules)

Page 31: Corporate Restructuring

EXEMPTION FROM CONDITION OF RULE 19 (2) (b)

Listed Company merging with Unlisted Company.

In case of a demerger of a Listed Company,the Resultant Company to get the benefit of listing.

LISTING UNDER CL. 8.3.5.1 OF DIP GUIDELINES

Page 32: Corporate Restructuring

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.

Exemption u/c 8.3.5.1 of DIP Guidelines Cont….

Page 33: Corporate Restructuring

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.

Page 34: Corporate Restructuring

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.

Exemption u/c 8.3.5.1 Cont….

Page 35: Corporate Restructuring
Page 36: Corporate Restructuring

Whether Demerger & Merger are possible in one scheme?

One of the pre - condition of Inter-se transfer is transferor & transferee should be holding shares for three years. What is the status of shares held in the Resultant Company? Whether the three years condition will be deemed to be fulfilled in case the transferee & transferor are holding shares since last 3 years in the demerged company?

ISSUES……

Page 37: Corporate Restructuring
Page 38: Corporate Restructuring

Morarjee Goculdas Spg. & Wvg. Co. Ltd. (MGC)

-Demerger Scheme-

FACTS

i. MGC was engaged in two separate business:

• Real Estate Development

• Manufacturing of various kind of fibers & fabrics

ii. The two businesses were quit distinct - it was desired to segregate the two.

Page 39: Corporate Restructuring

Salient Features of the Scheme

• Before merger MGC transferred its complete Textiles Business to MTL in lieu

of which MTL allotted shares to a SPV, MGC Shareholders Trust. MGC changed its name as Morarjee Realty Ltd. (MRL)

• .   The investment by MGC (Now MRL) in MTL was distributed among the

shareholders of MGC in the ratio of 10:21.

• .     The equity shares in MTL held by MGC Shareholders Trust was also

distributed among the shareholders in the ratio of 1:25, free of cost

• .     The Preference shares held by MGC Shareholders Trust were also offered to

the shareholders at a discounted price.

• .     The new shares received by the shareholders of MGC (MRL) got listed on

BSE & NSE under the provisions of Clause 8.5.3.1 of SEBI (DIP)Guidelines in exemption of Rule 19 (2) (b) of SCRR.

• Through the same scheme MTL reduced its share capital by 80% to wipe-out

the past losses and hence cleaned up its balance sheet.

Page 40: Corporate Restructuring

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 & 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.

Page 41: Corporate Restructuring

Financial Benefits to Shareholder

Particulars Amount (Rs.) as on 24th March

2005

Amount (Rs.) as on

26th May 2006

Value of the shares held by a shareholder as on record date (5th Jan,2004) (A)

100 shares

@55 5500

Shares in MRL 100 shares

@12512500

@69469400

Shares in MTL 51.5 shares

@804,120

@1005,150

Total (B) 16,620 74550Net benefit (B-A) 11,120 69,050

Page 42: Corporate Restructuring

Reliance Industries Limited

- A Unique Scheme of Arrangement-

FACTS

PRE –ARRANGEMENT SCENARIO

Reliance Industries Limited was engaged in various businesses:

(i) Coal based power business;

(ii) Gas based power business;

(iii) Financial services business;

(iv) Tele-Communication business

Page 43: Corporate Restructuring

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 control of Mr. Mukesh Ambani were transferred to a wholly owned subsidiary, Reliance Industrial Investments and Holdings Limited (RIIHL) along with a Private Trust (Petroleum Trust).

RIIHL and Petroleum Trust were described as “Specified Investors” which renounced their rights in the scheme itself.

RIL… demerger

Page 44: Corporate Restructuring

As a result of demerger the shareholders of Reliance Industries Ltd. other than “Specified Investors” got one share each in the following four resulting companies for each 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 on the stock exchanges under the provisions of Cl 8.5.3.1 of the SEBI (DIP) Guidelines.

RIL… demerger

Page 45: Corporate Restructuring

Benefits achieved……..

Particulars Amount (Rs.)

24th March 2006

Amount (Rs.)

26th May 2006

Value of the shares held by a shareholder as on record date (25th Jan,2006) (A)

100 shares @92892800

Shares in RIL 100 (@708) 70800 (@950) 95000

Shares in REVL 100 (@38) 3800 (@37) 3700

Shares in RCOVL 100 (@290) 29000 (@270) 27000

Shares in RCVL 100 (@24) 2400 (@23) 2300

Shares in RNRL 100 (@23) 2300 (@27) 2700

Total 108300 130700

Net benefit 15500 37900

Page 46: Corporate Restructuring

REDUCTION OF CAPITAL REDUCTION OF CAPITAL

Page 47: Corporate Restructuring

Types of Reduction of Capital

Types of Reduction of Capital

Writing off Losses & Fictitious Assets

Correction of Over- Capitalization

Distinguishment of the Liability in respect of unpaid portion of face

value.

Distribution of accumulated profits by Payment to shareholders a part of

share capital.

Page 48: Corporate Restructuring

Reduction of Capital- A Strategic Step

Reduction of Capital- A Strategic Step

To Clean-up the Balance Sheet

To rationalize the capital base

Revival of Sick Company

Page 49: Corporate Restructuring

RESTRUCTURING STRATEGIES

RESTRUCTURING STRATEGIES

What's Your

Move??

Page 50: Corporate Restructuring

Strategy I

LISTING (Without offer to Public)

FEW STRATEGIC MOVESFEW STRATEGIC MOVES

Strategy II

RAISING PROMOTE

RS’ HOLDING(Beyond 55%)

Page 51: Corporate Restructuring

Strategy III

ACQUISITION OF

LISTED CO.

(Exemption from Takeover Code)

Strategy IV

CLUBING OF

RESOURCES

(Without raising Capital)

FEW STRATEGIC MOVES..contd

FEW STRATEGIC MOVES..contd

Page 52: Corporate Restructuring

LISTING LISTING

Direct listing is costly & complicated

But Listing of Company provides for…..

Unlock value of business

Brings liquidity

Attract investors for further growth

Strategy I

Page 53: Corporate Restructuring

Strategy IA

LISTING THROUGH MERGER

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

Page 54: Corporate Restructuring

Strategy IB

LISTING THROUGH MERGER

Acquisition of Regional Listed Company(RSE)

Merger of financially

sound unlisted co with listed co

Now your Company is

ready for Listing

INDONEXT LISTING

DIRECT LISTING

Page 55: Corporate Restructuring

Strategy IIStrategy IIRAISING PROMOTERS’ HOLDING

Revised provisions of SEBI Takeover Code does not allow promoters to acquire even a single share

beyond 55%

Specific exemption to Merger/Demerger

An Unlisted company is created by Promoters

This entity is merged with listed company

Promoters’ holding is raised up to 75%

Page 56: Corporate Restructuring

Strategy IIIStrategy IIIACQUISITION OF LISTED

COMPANY

SEBI Takeover Code does not allow acquisition of shares of a listed company beyond 15% or Change

in Control by any outsider without a PA Specific 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 increased capital base

The Management may also change.

Page 57: Corporate Restructuring

Strategy IVStrategy IVCLUBING OF RESOURCES

Basic purpose of merger is to Synergy of Resources, but the it also increases the capital

base High capital base make servicing of capital

difficult

Proposed transferee company acquires shares in transferor company

Companies are merged

Crossholdings get cancelled

Resources got clubbed, capital base remain low. Effectively , increases EPS.

Page 58: Corporate Restructuring

Restructuring offers tremendous opportunities for companies to grow &

add value to the shareholders

It unlocks the true potential of the company

It is a Strategy for Growth & Expansion

It also helps in Cleaning up & create Synergy of Resources

To sum up……

Page 59: Corporate Restructuring

It is the Company Secretary in the organisation who has to take proactive

steps

from suggesting roadmap to the company

till its implementation

to achieve the underlined

objectives of restructuring

To sum up……

Page 60: Corporate Restructuring

Thanks a lot…

Pavan Kumar Vijay

Past President, ICSI