Beruflich Dokumente
Kultur Dokumente
AMALGAMATIONS, DEMERGER
COMPROMISES, ARRANGEMENTS
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INDEX
Sr. No. Contents Nos.
1 TOOLS FOR RESTRUCTURING 3
2 RATIONALE OF RESTRUCTURING 6
3 REGULATORY ASPECTS UNDER VARIOUS STATUES 7
4 COMPANIES ACT - MERGER/DEMERGER & RECONSTRUCTION 8
5 SCHEMES- PROCEDURAL ASPECTS 13
6 TAX ASPECTS-MERGER/DEMERGER/ SLUMP SALE 23
7 VALUATION APPROACHES 34
8 STAMP DUTY ASPECTS 35
9 CASE STUDIES 39
10 MERGER SCENARIO ...UP DATES 65
11 OPPORTUNITY INSOLVENCY RESOLUTION THROUGH M&A 67
12 ISSUES & IMPACTS 69
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TOOLS FOR RESTRUCTURING 3
Consolidation
Acquiring in
Divest non- Restructuring interest in
of
core with in the new
businesses / Company business/
entities business
Entity
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TOOLS FOR RESTRUCTURING 5
TYPES OF MERGER
Vertical Merger - two or more firms, operating at different levels
within an industry's supply chain, merge operations [Cloth
manufacturing Merger with Readymade Garments Manufacturing ]
RATIONALE OF RESTRUCTURING
Business Clarity to
Operational synergies Stock and Credit Re- rating
Management
Business Clarity to
Sustainability Risk Management
others
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REGULATORY ASPECTS UNDER VARIOUS 7
STATUES
Stock Exchange
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COMPANIES ACT -MERGER/ 8
DEMERGER AND RECONSTRUCTION
INTRODUCTION OF NCLT
AAIFR
High
Court BIFR
CLB
INTRODUCTION OF NCLT
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COMPANIES ACT -MERGER/ 10
DEMERGER AND RECONSTRUCTION
INTRODUCTION OF NCLT
No
Treasury Register Corporate Fast
Shares ed Debt Track
Valuers Restructuring Merger
SEC PARTICULARS
48 Variation of Shareholders Rights
66 Reduction in Share Capital.
68 Power of company to purchase its own securities.
230 Power to Compromise or Make Arrangements with Creditors and Members. (sub
section 11 and 12 not operational till date. They are related to open offer and
SEBI has jurisdiction). (old sections 390, 391,393, 394A)
231 Power of Tribunal to Enforce Compromise or Arrangement (392).
232 Merger or Amalgamation of Companies (394).
233 Merger or Amalgamation of Certain Companies (dissenting holders, treasury
shares by company).
234 Merger or Amalgamation of Company with Foreign Company (effective from
13/04/2017)
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COMPANIES ACT -MERGER/ 12
DEMERGER AND RECONSTRUCTION
Section 237[Only case merger of National Spot Exchange Limited with Financial
Technologies Limited][Old Section 396]. Still pending for disposal.
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SCHEMES PROCEDURAL ASPECTS 13
MERGER
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SCHEMES PROCEDURAL ASPECTS 14
MERGER
C FINER POINTS
The scheme to be approved by in value in the meeting of creditors and/ or members
If creditors having at least 90% value agree and confirm by way of affidavit to the
scheme, then NCLT may dispense creditors meeting.
Members holding 10% of shareholding and Creditors holding 5% of total outstanding
debts can raise objection to the scheme of arrangement
Yearly Report on working of the scheme of compromise or arrangement.
Cross Boarder Merger with Prior approval of RBI with jurisdictions who are member
of IOSCA, or MOU with SEBI or Central Bank is member of Bank for International
Settlement, and FATF compliant.
Report of the auditor that the scheme in conformity with the accounting standard
prescribed under section 133 to be filed with NCLT
NCLT may provide in the order for Exit option to dissenting shareholders.
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SCHEMES PROCEDURAL ASPECTS 16
FAST TRACK MERGER
Small Holding
Company Company
Wholly Owned
Small Company Subsidiary
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SCHEMES PROCEDURAL ASPECTS 17
FAST TRACK MERGER
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SCHEMES PROCEDURAL ASPECTS 18
DEMERGER
DEMERGER
Demerger involves a vertical split of company hiving off a division/unit whereby
business is transferred on a going concern basis into a new/existing company
This division may either: Form a new company and operate separately from the
original one, or May get merged into another existing company
PRE POST
Shareholders Shareholders
B
Undertaking AB Undertaking Undertaking AB Undertaking
Ltd
A Ltd B A
Ltd
B
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SCHEMES PROCEDURAL ASPECTS 19
DEMERGER
BENEFITS OF DEMERGER
Unlocking shareholder value and Streamlining business segments
To make financial and managerial resources available for developing
other more profitable opportunities
Selling unwanted and surplus parts in the business as a restructuring
strategy to get rid of sick part of the company
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SCHEMES PROCEDURAL ASPECTS 20
DIFFERENCE- MERGER / ACQUISITION
ACQUISITIONS / TAKEOVERS:
An acquisition, also known as a takeover, is the buying of a business or a company
(the target) by another
MODES
Business Purchase: This type of Share purchase: The buyer buys the
transaction leaves the target company shares, and therefore control of the
as an empty shell. It is further divided target company:
into: Example: Mahindra and Mahindra
Slump Sale acquires stake in Rewa Electric Car
Itemized Sale Company Ltd.
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SCHEMES PROCEDURAL ASPECTS 21
DIFFERENCE- MERGER / ACQUISITION
Merger Acquisition
Consideration discharged by issue of Consideration may be by cash or
shares of Transferee co. shares
Shareholders of Transferor co. become Acquirer co. gains controlling
shareholders of Transferee co. interest in the Target co.
Usually by negotiations May be friendly or hostile
Friendly Takeovers: Acquirer's contacts target's management & proposes a
deal. Target agrees and cooperates. [Say Takeover of Ranbaxy
Laboratories Ltd by Dai Ichi Sanknyo Ltd, Reliance ADAG Group acquires
Pipavav Defence and Offshore Engineering Ltd.]
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SCHEMES PROCEDURAL ASPECTS 22
DIFFERENCE- MERGER / ACQUISITION
SLUMP SALE
The term slump sale connotes the sale of an entire business
undertaking, comprising of various assets net of liabilities relating to the
undertaking for a lump sum or slump consideration. (Section 2(42C) of
IT Act)
The consideration may be discharged by issuing shares and/or cash to
the Transferor co.
A sale in order to constitute a slump sale must satisfy the following tests:
Business has been sold off as a whole and as a going concern
Sale for a lump sum consideration
Materials available on record do not indicate item-wise value of the
assets transferred
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TAX ASPECTS MERGER/ 23
DEMERGER/ SLUMP SALE
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TAX ASPECTS -MERGER 24
Amalgamating Amalgamated
All Assets & Assets &
Liabilities Liabilities
Section (47(vi) & (vii) Transactions is not regarded as Transfer for Capital Gains Tax.
Section32, Depreciation at WDV of Transferor Co. on date of amalgamation for
remaining period. Depreciation to Transferor Co and transferee company in the year
of merger shall be apportioned in the ratio of the number of days for which the
assets were used.
Section 72A Carry forward and set off of accumulated losses.
Qualifying Companies - Companies Owning Industrial Undertaking or Ship or
Hotel, Manufacturing Companies and Banking Companies
Business Losses8 Years(Fresh Life)
Unabsorbed depreciation No time limit
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TAX ASPECTS -MERGER 26
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TAX ASPECTS -DEMERGER 27
Demerged Resulting
All Assets &
Liabilities Assets &
Liabilities
Shareholders 75% value of
shareholders
Capital Gain Tax Sec 47(vid)- Not a transfer - no liability for capital gains tax in
the hands of shareholders of Transferee Co
Cost of Acquisition Section 49 (2C) and (2D) :
Cost of acquisition of shares in the Resulting co. will be the amount which
bears to the cost of acquisition of shares in the Demerged co. the same
proportion as the net book value of assets transferred bears to the net worth
of the Demerged co. immediately before the demerger
Cost of acquisition of shares of the Demerged co. will be the original cost of
shares of Demerged co. after reducing the cost of shares of the Resulting co.
as computed above.
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TAX ASPECTS -DEMERGER 29
Carry forward accumulated business losses (for unexpired period) Section 72A(4)
& Section (72A)(5)
Where it is directly relatable to undertaking transferred, it should be such
relatable amount
Where it is not directly relatable to the undertaking transferred, it should be
apportioned in the ratio of assets retained by the demerged company and
transferred to resulting company
Business Losses
Brought forward loss of Demerged undertaking to be carried forward and set
off in hands of Resulting co.
Allowed to be carried forward for set off in the hands of the Resulting co. for
the unexpired period.
Unabsorbed depreciation- Unlimited period
Unlike merger, no conditions prescribed for availing the benefit of set off of loss
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TAX ASPECTS -SLUMP SALE 30
Slump Sale: Section 2(42C) of the Income Tax Act, 1961 defines Slump Sale as
the transfer of one or more undertakings as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and
liabilities
a) sale of an undertaking; (b) lump sum consideration; and (c) no separate
values being assigned to individual assets and liabilities
Example: Primal Healthcare sold its domestic formulation business to US
based multinational drug major Abbott in a deal worth Rs. 17,000
Crores.
Itemized Sale: Sale of assets & liabilities with values assigned separately
for each item of assets & liabilities
Slump Sale vs. Itemized Sale: In case of itemized sale, unlike slump sale,
it is possible to pick and choose assets and liabilities. Also, the
consideration is identifiable against each item
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TAX ASPECTS- SLUMP SALE U/S 50B 31
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TAX ASPECTS SLUMP SALE 32
Only transfer as a result of sale within the ambit of slump sale and has
expressly not covered transfers by any other means
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TAX ASPECTS -SLUMP SALE -GST 33
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STAMP DUTY ASPECTS
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STAMP DUTY ASPECTS 36
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STAMP DUTY ASPECTS
A B
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Case Study A... 40
Birth of Ultratech Cement
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Case Study A...Birth of Ultratech Cement
12% 8.5% of C
(3) sold to B
A
20%
12+8.5+30
Bs ultimate
(1)
shareholding
Engineering Cement C Ltd.
51%
(2)
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Case Study A...Birth of Ultratech Cement
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Case Study B...Consolidation without 43
diluting shareholders economic interest
MECHANICS
G Ltd and U Ltd are listed companies
Cement Division of G Ltd was demerged into S Ltd.
Consideration for Demerger is discharged by way of issue of shares
to the shareholders of G Ltd
Post demerger the shareholders of G Ltd. would hold 35% in S Ltd.
and the holdings of G Ltd. would be diluted to 65%
No change in economic interest of G Ltds shareholders
S Ltd. gets automatic listing without IPO (vide SCRR Circular dated
September 3, 2009)
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Case Study 2...Consolidation without 44
diluting shareholders economic interest
75% 75%
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Case Study B...Consolidation without 45
diluting shareholders economic interest
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Case Study C...Slump Sale with 46
Amalgamation Ultratech / JP Associates
In last two years Reliance [ADAG] Group is involved in more than 10 schemes to re
organise its business and reduce debt.
1. Reliance 1. Western Region Transmission (Gujarat) Private
Infrastructure Limited
Limited 2. Western Region Transmission (Maharashtra)
Private Ltd.
3. Reliance Concrete Private Limited
4. Reliance Electric Generation and Supply
Private Limited
2. Zee Entertainment 1. Reliance Big Broadcasting Private Limited
Limited. (RBBPL)
[Adag group exited 2. Big Magic Limited (BML)
from media business 3. Azalia Broadcast Private Limited (ABPL)
for Rs. 1860 Crores]
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Case Study ...2 48
RELIANCE ADAG GROUP
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Case Study ...2 49
RELIANCE ADAG GROUP
Reliance Communications Ltd
Reliance Communications has Liability of around Rs. 45,000 Crores.
Through schemes and structures, to reduce debts to Rs. 10,000 Crores.
1. Demerger of Tower Business into Reliance Telecom Ltd and further into
Towercom Infrastructure Pvt Limited. Rapid Holdings 2 Pte. Ltd., a
company which is a part of the Brookfield Infrastructure Group will
acquire 100% of Towercom Infrastructure Private Limited. Post closing,
the Company will receive B Class Non-voting shares in Tower co
providing 49% future economic upside from the business based on
certain conditions Deal Value Rs. 11,000 Crores.
2. The combination of Reliance Communications wireless business with
Airce Limited will reduce debt by Rs. 14,000 Crores.
3. Sale of some real estate for Rs. 10,000 crores
After above structuring, the companys debt will be in the range of Rs.
10,000 Crores. [Source news items]
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Case Study ...3 50
Consolidation in Telecom Sector
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Case study... 4 - Kotak Bank 51
acquiring ING Vysya Bank
Amalgamation scheme of PIPL Business Advisors and Investment Pvt. Ltd. and GSPL
Advisory Services and Investment Pvt. Ltd with NIIT Technologies Ltd [ NET] and their
respective shareholders and creditors
Most Promoters are controlling listed entity through their Limited Companies.
DISADVANTAGES of Corporate entity as Holdco.
Dividend Income is accumulated in Pvt Ltd Company. And for distribution of
income, Pvt Ltd Co. has to pay Dividend Distribution Tax.
Holding of investment by pvt ltd co. may be classified as investment activity,
Financial Asset and has income from dividend as financing activity, thereby
RBI may classify the company as an NBFC.
Inter se transfer of shares of Hodlco amongst promoters run the risk of non
compliance of SEBI of Take over code and risk of tax liability on notional
income.
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Case Study. 5 Scheme of 53
Arrangement of NIIT Technologies Ltd.
NTL
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Case Study. 5 Scheme of 56
Arrangement of NIIT Technologies Ltd.
NTL
PIPL Business Advisors and GSPL Advisory would up without liquidation
Family Trusts became direct share holders in the listed entity NTL
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CASE STUDY ...6 MERGER OF GRASIM 57
AB NUVO AND DEMERGER OF FINANCE
BUSINESS
COMPANIES
ACT 1956
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CASE STUDY ...6 MERGER OF GRASIM 58
AB NUVO AND DEMERGER OF FINANCE
BUSINESS
2 Aditya Birla
Financial Services
listed on 1-9-2017
COMPANIES
ACT 1956
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CASE STUDY ...7 HOSPITALS - 59
FORTIS AND DIAGNOSTIC - SRL
PRESENT STRUCTURE
36.9% 63.1%
100%
PUBLIC PROMOTER FHsL PUBLIC
62.4% 37.6%COMPANIES
ACT 1956
SRL FORTIS [A] MALAR
Diagnostic Hospital Hospital
Diagnostic Diagnostic
[B]
56.4%
PROMOTER
[C]
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CASE STUDY ...7 HOSPITALS - 60
FORTIS AND DIAGNOSTIC - SRL
[A] Transfer of the Hospital Business of Fortis Malar to Fortis Healthcare by way of slump
sale. Fortis Malar to retain its existing diagnostic business
[C] Merger of SRL into Fortis Malar. Name of Fortis Malar shall be changed to SRL Ltd.
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CASE STUDY 8 SLUMP SALE 61
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Case Study 9 63
MERGER FOR CAPITAL REDUCTION
Company A , sold its business and having surplus cash say Rs. 100 Cr.and wants to
distribute money to promoters
Avenues Available
Dividend 17.647% Dividend Distribution tax [Section 115O]
Buy Back Tax 20% on distributed Income [Section 115QA to 115 QC] [section 68]
IN THE ABOVE CASE MERGER CAN BE USED WITH CAPITAL REDUCTION. [section 66]
Acquire company B with similar object clause and business that of Company A
Acquire Shares of Company A as investment for furtherance of business. Say of Rs. 10
Crores from the promoter Mr. X. Who is a creditor.
Entry in the books of Company B- Investment Dr and Mr. X Cr. Rs. 10 Cr.
[ Mr. X will have to pay Long term Capital Gains Tax]
Merge Company B into Company A. Investment [ shares of Company A ] will be
cancelled as Capital reduction and cash in the books of A will be paid to Creditors of B.
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Case Study 10 Nation Spot 64
Exchange Limited [NSEL]with FTIL
[Now 63 moon Ltd]
The only case in history in which provisions of Section 396 were applied for the first
time where [ Now section 237]
Central Government ordered for merger of National Spot Exchange Ltd. (NSEL)
with its holding company Financial Technologies India Limited[ FITL] in public
Interest.
In the above case
a systematic fraud perpetrated in the commodity market
NSEL failed to pay its investors in commodity paired contracts
FMC was of the view that the manpower and financial strength of NSEL
had been depleted and so it was financially and physically incapable of
effecting any substantial recovery from the defaulting members.
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MERGER SCENARIO 65
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MERGER SCENARIO 66
ECONOMIC TIMES [29 AUGUST 2017] India's bad loan recovery plan reaches a critical turn as big
new roadblock looms.
The bad-loans recovery exercise now has a puzzle to solve: Who pays the 20% Minimum Alternate
Tax (MAT) on book profits when assets are written down?
Where loans are written off or restructured, there would be book profits. Some of that may get
negated with the write-off of assets, but the net impact may create a book profit, attracting MAT,
In cases where a company is taken over under the insolvency code,COMPANIES and where a significant
portion of the loan liability is extinguished as part of the resolution, the question that would arise
ACT 1956
is regarding the tax impact arising out of writing back liability as income under section 41 of the
Income Tax Act.
In a normal situation, if a company has a debt of Rs 40,000 Cr. and the new buyer buys it for Rs
10,000 Cr. on going concern basis that is liability is agreed to be settled at Rs. 10,000 Cr. [ Rs
30,000 Cr. Hair cut taken by lenders will have to be recorded as write back in the companys P&L,
eventually increasing the companys book profit]. And MAT of 20% will be applicable on that
Rs.6,000 Cr. in this case. ]
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OPPORTUNITY INSOLVENCY 68
RESOLUTION THROUGH M & A
ECONOMIC TIMES [29 AUGUST 2017] India's bad loan recovery plan reaches a critical turn as big
new roadblock looms
As the rules stand today, any write downs or hair-cut taken by lenders will be treated as gains in
the company's profit and loss (P&L) statement and hence will attract 20% MAT. This may not have
been a problem under earlier accounting standards, but under Ind-AS fair value of debt is taken
into consideration,
Top 12 companies that are currently under insolvency resolution have a total debt of Rs 2.5 lakh
Cr. Within the next few months, potential buyers will bid for these COMPANIES
companies and push for
takeovers. In most cases, the lenders will have to take haircuts. ACT 1956
SOLUTION
The solution is in the scheme of arrangement/ demerger under section 230 to 234. However no
acquire would like to take the baggage / hidden liability of the target company.
The way Ultratech Jaypee Cement structure evolved which includes slump sale plus merger can be
used for acquiring the target assets.
THIS GIVES NEW OPPORTUNITY FOR STRUCTURING AND MERGERS
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ISSUES
Issues
Due to Involving of so many authorities the speed of Compromise,
Arrangement may effect
In case of fast track merger approval required form Members holding
90% Shares and Creditors holding 90% in value, this may be difficult,
Other statutory regulations need alignment;
Income Tax
RBI,
FEMA
SEBI,
TAKE OVER CODE
ACCOUNTING STANDARDS
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IMPACT
Impact
Internal Restructuring will increase due to separate provision for Small
Companies (Only Private Companies) and Holding and Wholly Owned
Subsidiary Company under Fast Track Merger,
Only relevant issue on Compromise and arrangement will be raised due
to prescribed limit for objecting the Scheme,
Dissenting shareholder will easily exit the Compromise and
Arrangement,
There will be more Cross Border Transaction in form of Merger and
Amalgamation
Role of other authority like Income Tax, RBI etc becomes important,
Now companies will have to upload the scheme documents on their
website and can use e- voting.
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THANK YOU
DMKH & C0