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CORPORATE RESTRUCTURING
Pavan Kumar Vijay
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
TYPES OF RESTRUCTURING
REDUCTION OF
CAPITAL
MERGERMERGER
DEMERGER
RESTRUCTURING
BIFRHigh Court
Approving AuthoritiesApproving Authorities
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
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.
“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
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
STOCK EXCHANGE’S ROLE
REQUIREMENTS
PERSPECTIVE
Listing Agreement Compliances
Stock Exchange Internal Norms
Observations
Compliance of Securities laws
Compliance of Companies Act
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 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
Clause 40A
Listing Agreement Compliances..contd
“The Company to comply with Continuous Listing requirements while framing a
scheme of merger/demerger.”
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
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
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
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
Securities laws, regulations, rules etc. applicable on the Company
and Companies Act also”
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 listing
•Change in Management/Control
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
MERGER THROUGH BIFR MERGER THROUGH BIFR
AN EFFECTIVE
WAY
TO
REVIVE
YOUR
SICK COMPANY
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);
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.
DEMERGER DEMERGER
Reliance Natural Resources Ltd
Reliance Capital Ventures Ltd
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
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)
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
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….
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.
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….
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……
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.
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.
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.
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
@125
12500
@694
69400 Shares in MTL 51.5
shares @80
4,120
@100
5,150 Total (B) 16,620 74550
Net benefit (B-A) 11,120 69,050
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
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
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
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 @928
92800
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
REDUCTION OF CAPITAL REDUCTION OF CAPITAL
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.
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
RESTRUCTURING STRATEGIES
RESTRUCTURING STRATEGIES
What's Your
Move??
Strategy I
LISTING (Without offer to Public)
FEW STRATEGIC MOVESFEW STRATEGIC MOVES
Strategy II
RAISING PROMOTE
RS’ HOLDING
(Beyond 55%)
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
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
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
Strategy IB
LISTING THROUGH MERGER
Acquisition of Regional Listed Company(RSE)
Acquisition of Regional Listed Company(RSE)
Merger of financially
sound unlisted co with listed co
Merger of financially
sound unlisted co with listed co
Now your Company is
ready for Listing
Now your Company is
ready for Listing
INDONEXT LISTING
INDONEXT LISTING
DIRECT LISTING DIRECT LISTING
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%
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.
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.
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……
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……
Thanks a lot…
Pavan Kumar Vijay
Past President, ICSI
