Role of Stock Exchanges

CORPORATE RESTRUCTURING

- Role of Stock Exchanges

Pavan Kumar Vijay

TYPES OF RESTRUCTURING

REDUCTION OF

CAPITAL

MERGERMERGER

DEMERGER

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 listed

company)is merging in a Weak Company (in

terms of size, or unlisted)”.

SECTION 391-394 of Companies Act, 1956

DEMERGER

“Separation of a large Company into two or more

smaller organisation”

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

“ Extinguishing or Reducing the liability of members to the extent it is in excess of the

needs of the Company”

REDUCTION OF CAPITAL

SECTION – 100 – 105 of Companies Act, 1956

SECTION 100 to 105 of Companies Act, 1956

TYPES OF MERGER

Unlisted with Listed

Listed with Unlisted

Merger with Holding Company

Merger with Group Company

Healthy Company with Weak Company

STOCK EXCHANGE’S ROLE

REQUIREMENTS

PERSPECTIVE

Listing Agreement Compliances

Stock Exchange Norms

Observations

Compliance of Other laws

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)

Clause 24(a)

“The Company agrees to obtain ‘in-principle’ approval for listing from the

exchanges having nationwide trading terminals where it is listed, before issuing

further shares or securities.”

Listing Agreement Compliances.. contd

Clause 40A

Listing Agreement Compliances..contd

“The Company should pursuant to merger & demerger should comply with

Continuous Listing requirements.”

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’

Stock Exchange Norms..contd

MINIMUM CAPITAL REQUIREMENTS

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

Minimum Net Worth – 20 crores(Post amalgamation)

*BSE Stipulations

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 – is less than 25% of Post merger capital, then the company has to go for offer for sale of the excess portion.

*BSE Stipulations

Stock Exchange Norms..contd

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

Compliance of Other Laws

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

laws, regulations, rules etc applicable on the Company ”

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;”

•Valuations Analysis

•No undue benefit to Promoters/Particular group

•Investors interest not to be affected

•Back door Entry for the benefit of listing

•Change in Management/Control

Stock Exchange’s Views

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

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

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

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

DEMERGER DEMERGER

Global Fuel Management Ltd

Reliance Capital Ventures Ltd

TYPES OF DEMERGER

Listed Company demerging into two listed companies.

Listed Company is demerged into two companies and another unlisted entity is merging with the one of the demerged entity.

AVAILABILITY OF EXEMPTION

Listed Company merging with Unlisted Company.

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

Exemption u/c 8.3.5.1

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

Exemption u/c 8.3.5.1

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.

The share certificates have been dispatched to the allottees pursuant to the scheme of arrangement or their names have been entered as beneficial owner in the records of the depositories.

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.

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

Whether Demerger & Merger are possible in one scheme?

ISSUES

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

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

-Demerger Scheme-

FACTS

i. MGM 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.

Salient Features of the Scheme

• Before merger MGM transferred its complete Textiles business to MTL in lieu of which MTL allotted shares to a SPV, MGM Shareholders Trust. MGM changed its name as Morarji Realty Ltd. (MRL)

•.   The investment by MGM (Now MRL) in MTL was distributed among the shareholders of MGM in the ratio of 10:21.

•.     The equity shares in MTL held by MGM Shareholders Trust was also distributed among the shareholders in the ratio of 1:25 free of cost

•.     The Preference shares held by MGM Shareholders Trust were also offered to the shareholders at a discounted price.

•.     The new shares received by the shareholders of MGM (MRL)were 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.

Benefits to Company

• 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.

Benefit to Shareholder

Particulars Amount (Rs.)

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

(A)

100 shares @Rs 55 5500

Shareholder's value on allotment & Listing of shares of MTL (as on

24th March 2005 ) Shares in MRL 100 shares @ Rs125 12,500 Shares in MTL 51.5 shares @ Rs 80 4,120

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

Benefit to Shareholder- Current Worth

Current Worth (as on 25th May 2006)

Shares in MRL 100 shares @Rs 945 94500

Shares in MTL 51.5 shares @ Rs 105

5,407

Total 99,907

REDUCTION OF CAPITAL REDUCTION OF CAPITAL

Types of Reduction of Capital

Types of Reduction of Capital

Writing off Losses & 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.

Reduction of Capital- A Strategic Step

Reduction of Capital- A Strategic Step

Use to Clean the Balance Sheet

To rationalize the capital base

Revival of Sick Company

RESTRUCTURING STRATEGIES

RESTRUCTURING STRATEGIES

What's Your

Move??

FEW STRATEGIC MOVESFEW STRATEGIC MOVES

LISTING

CONSOLIDATION OF RESOURCES

INCREASING PROMOTERS’ HOLDING

LISTING LISTING

OBJECTIVES

• In today’s scenario, restructuring results into unlocking of shareholders’ value.

• Key strategy for achieving liquidity.

Strategy I

Strategy IUnlisted Co. Merging with Listed

Co.

Benefit for the shareholders of the unlisted company as they will get the shares of a listed Company.

Example: Reliance Infocomm is in the process of merging with Reliance Communication Ventures Ltd.

Merger