Presentation On Corporate Demerger & Divestment-For Circulation

A Case Study on Corporate Demerger & Divestment
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 1
Issues
(1) Advise on financial and other strategic issues relating to Demerger (2) The process of demerger (3) Drafting of the Joint Venture Agreement (4) Formation of JVC & commencement of operations. (5) Conversion of a company into a wholly owned subsidiary (WOS) (6) Drafting of Stock Purchase Agreement (7) Issues relating to :
(1) (2) (3) (4) (5) Sales Tax / Income Tax / Stamp Duty / FEMA-RBI and Accounting treatment
S-Global Consulting / pramod7jain@vsnl.net 2
August 17, 2007
1.Financial and strategic issues relating to Demerger for both Piaggio and Greaves
1.Financial and strategic issues relating to Demerger
1. 2. 3. 4. 5. 6. 7.
Piaggio
Entry in Indian Market Ready to use manufacturing facilities Partner with understanding of Indian Market Ready marketing set up Other infrastructure Influential partner Recovery of initial investment by Technical Know how fees and supply of Plant & Equipment
Greaves
1. Stop bleeding 2. Profitable sale of the plant 3. Partnership with international major 4. Good investment opportunity 5. Revenue from sharing of infrastructure 6. Assured customer for the engine supplies
4
August 17, 2007
S-Global Consulting / pramod7jain@vsnl.net
Approaches to Demerger
1. Process of Demerger under Section 293 (1)(a), referred as Slump Sale 2. Spinning off of one or more of the undertakings into another company. (Section 391-394), referred as Demerger.
2. Process of Slump Sale under Section 293 (1)(a)

2. Process of Slump Sale under Section 293 (1)(a)

1. 2. 3. 4. 5. 6. 7. 8. 9. In principle decision to demerge Due Diligence Valuation of the Unit Board of Directors Decision Agreement with the Buyer (JVC) Approval from the Financial Institutions Shareholders approval U/S 293(1)(a) of the Companies Act, 1956 Execution of Sale Deed and receipt of consideration. Removal of the unit from the Books. P.S.: Inform SEBI /stock Exchanges
August 17, 2007
August 17, 2007
Definition of Slump Sale

It means 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 in such sale.
August 17, 2007
Characteristics of Slump Sale Transactions

1. Approval of shareholders required. 2. Undertaking is sold as a package of assets and liabilities 3. Buyer identifiable 4. The Buyer wishes to retain control on the Equity pattern of new entity. 5. The new entity has a different shareholding pattern.
Characteristics of Slump Sale Transactions

6. The entire undertaking is sold as a going concern on as is where is basis. 7. All the fixed / currents assets and liabilities pertaining to the undertaking are transferred. 8. All the employees of the undertaking are offered option to be transferred 9. All the licenses, permits , registrations, approvals etc are transferred in the name of the Transferee company.
3. Drafting of Joint Venture Agreement

3. Drafting of Joint Venture Agreement

8. General representation and warranties 9. Term and termination 10. Rights on termination 11. Confidentiality 12. General provisions such as assignments 13. Non compete clause
August 17, 2007
1. Shareholding pattern 2. Future Financing pattern 3. Management of JVC 4. Restriction on Transfer of shares 5. Deadlock Resolution 6. Activities 7. Pre-closing
covenants
16
4. Formation of JVC & commencement of operations

1. Actions by Foreign partner 2. Actions by the Indian Partner 3. Actions by the JVC
1. Actions by Foreign partner

1. Approval from the Board of Piaggio 2. RBI Approval - Automatic Route:
1. Annexure A
Industries where 100% FDI is allowed
2. Annexure B
Industries where FDI is allowed with Sectoral caps
3. Press Note 18
2.Actions by the Indian Partner / JVC

1.

Indian Partner:
Application to ROC Receive Incorporation Certificate Pay equity subscription Receive Consideration from the JVC Handover the Unit to the JVC
2.
JVC:
Hold first Board Meeting for initial matters
Appointment of Auditors Open Bank Account Appoint Directors Allot shares and Issue Share Certificates
Pay consideration for Auto Unit Acquire the Auto Unit Commence operations Transfer of MIDC Land Tripartite Agreement with SICOM
August 17, 2007
5. Conversion of a company into a Wholly Owned Subsidiary (WOS)

What is a Wholly Owned Subsidiary (WOS)?

Conversion of a company into a wholly owned subsidiary (WOS)
1. Actions by the two partners:

1. Valuation of the JVC Share:
Report from Chartered Accountants
2. Closing date fixation 3. Stock Purchase Agreement 4. Escrow Account Agreement

Why Escrow Account?
August 17, 2007
23
How does Escrow Account work?
August 17, 2007
24

2. Actions by the selling partner (Greaves):
1. Boards approval 2. Inform SEBI /stock Exchanges 3. Obtain RBIs Approval
August 17, 2007
25

3. Actions by the acquiring partner (Piaggio):
1. Board Approval to acquire the shares from Greaves 2. SIA Approval
August 17, 2007
26
4. BODM-I of JVC: Amendment of Articles

Name change Provision relating to Quorum
Resolution for name change Convening of EOGM for the above on the same day.
5. Closing
Nominees of Selling partner (Greaves) resign Consideration is paid by the Buyer (Piaggio) to Seller through a mandate to the Bank S T D is handed over by the Seller to the Buyer
6. BOD - II of JVC:
Resignation of the Nominees of the Selling partner (Greaves) accepted The Share Transfer endorsed in favour of the Acquiring partner (Piaggio) Reconstitution of Board by the Piaggio India Pvt. Ltd.
6.Drafting of the Stock Purchase Agreement

6.
Drafting of the Stock Purchase Agreement
1. Price of the share 2. Duties and obligations of the Buyer (Piaggio) 3. Duties and obligations of the Seller (Greaves) 4. Closing date 5. Closing covenants 6. Other incidental clauses
7. Issues relating to:

1. 2. 3. 4. 5. Sales Tax Income Tax Stamp Duty FEMA-RBI and Accounting treatment
August 17, 2007
1. Sales Tax
The entire undertaking is sold as a going concern on as is where is basis. It is a slump sale. Slump Sale was exempt from Sales Tax. Sales Tax now has been replaced by VAT.
2. Income Tax
Was it a Slump Sale or Demerger under Section 391-394 of the Companies Act?
August 17, 2007
35
Computation of Income Tax liability in case of a Business

Illustration on computation of provision for Income Tax

From the information given below of XYZ Ltd., compute its tax liability. All amounts are Rs. In Lakhs. Particulars Amount Profit Before Tax Depreciation under the Companies Act Depreciation under the Income Tax Act Brought forward business loss Corporate Tax rate
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net
400 40 75 65 34%
37
Income Tax provisions in case of Slump Sale

Definition of Slump Sale

Provisions relating to Slump Sale were introduced by the Finance Act, 1999. It means 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 in such sale. If value of an asset or liability is determined for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees, that should not be regarded as assignment of values to individual assets and liabilities.
Question
In case an undertaking is transferred against the allotment of shares in the acquiring company and not against cash payment, would such a transaction qualify as a Slump Sale under the Act?.
August 17, 2007
43
What is the cashflow impact on the Transferor company in case of Slump Sale and Demerger?
August 17, 2007
46
Chargeability of Slump Sale under Income Tax Any profit arising from the Slump Sale shall be chargeable as capital gains. It shall be deemed to be the income of the PY in which the transaction takes place.
PY , AY , Actg Y , FY
Benefit of Indexation is not allowed. If the undertaking is owned and held by the assessee for not more than 36 months, it shall be treated as short-term capital asset.
Undertaking defined for Slump Sale [(Section 2(42C)] Undertaking is defined to include any part of an undertaking or a unit or division of an undertaking or a business activity as a whole, but does not include individual assets or liabilities or any combination thereof not constituting business activity. Implication?
August 17, 2007
50
Net Worth for Slump Sale

Net worth shall be the aggregate value of total assets of the undertaking or division as appearing in its books of account. In case of depreciable assets , WDV shall be taken and in case of other assets, book value shall be taken. What are the assets that will be taken at Book Value?
Obligations of the Transferor assessee

Who is transferor in the given case? Shall furnish in the prescribed form along with the Return of Income a report from a Chartered Accountant indicating the computation of net worth and certifying that the same has been computed in accordance with the provisions of the Act.
August 17, 2007
53
Auditors Certificate in Form No.3CEA (Rule 6H)

The Auditors of the Assessee shall provide a Certificate in Form No.3CEA relating to the
computation of capital gain in case of slump sale. This certificate needs to be filed along with the Return of Income in accordance with the provisions of Section 139 of the Act.
August 17, 2007
55
Income Tax provisions in case of a Slump Sale The Transferor company (Greaves) to account for capital gains from the sale of the unit and pay tax thereon. What should be the effect on the Transferee company (JVC)?. Unabsorbed depreciation and brought forward losses relating to the undertaking not transferred under Slump Sale.
What is unabsorbed Depreciation and Unabsorbed Loss and how to compute it?
3. Stamp Duty
The transfer is liable for stamp duty under the Bombay Stamps Act. Get the Sale Deed adjudicated and pay the Stamp Duty so assessed.
What is adjudication?
Purchase Deed signed between JVC and Greaves was submitted to the Stamps Collectors Office for adjudication and Stamp Duty was paid accordingly @ applicable rate i.e. 5%.
4. SIA - FEMA - RBI

Specific Approval from SIA required in case the transfer of shares is to a non resident from a Resident. In this case, Greaves , a Resident transferred shares to Piaggio, a non-Resident, hence approval of SIA was obtained. Approval from RBI required. Reason? Definition of a Resident under FEMA is different from that given under the Income Tax Act.
August 17, 2007
61
5. Accounting Treatment
What are the Accounting Standards? Is there any Accounting Standard applicable to Demerger ? AS 14 applicable in respect of Amalgamations.
August 17, 2007
62
Accounting Treatment by Greaves and JVC

Transferor (Greaves) to remove the assets and liabilities from its Books and account for the consideration received by passing a Journal Entry.
What should be the Journal Entry?
Transferee (JVC) to take the assets and liabilities on record in its books and reduce the bank balance by the amount of consideration paid to Greaves by passing a Journal Entry.
What should be the Journal Entry?
Value of the net assets received was Rs. 28.0 crore and the price paid was Rs. 32.0 crore. How would you account for the difference?
When Goodwill is recorded in the Books?

Sunil Bharti identifies one unit of a company for purchase. Value of the net assets of the Unit is Rs. 800 cr., but the transferor company has asked for a consideration of Rs. 1000 cr. Considering the synergy these assets have with the current operations of Sunil Bhartis Company, he agrees to pay Rs. 1000 cr for the assets whose fair market value is Rs. 800 cr. Assuming Sunil Bharti has funded the acquisition in the Debt Equity Ratio of 1:1, how will the Balance sheet of Sunil Bharti will look like after the acquisition?
August 17, 2007
64
What if the same assets would have been bought at Rs. 700 crores, how the Balance Sheet of Sunil Bharti would look like .
August 17, 2007
66
Demerger
Spinning off of one or more of the undertakings into another company. (Section 391-394).
August 17, 2007
68
Section 391-394 Route

1. Besides shareholders, approval from the High Court / NCLT also necessary 2. Creation of a new entity for focus and control 3. Division of family business 4. Shareholding pattern remains the same in the new entity.
August 17, 2007
69
Demerged / Resulting company

Demerged company L & T Ltd. Reliance Industries Resulting company Ultratech Cement Ltd. Reliance Communications Reliance Infrastructure Reliance Natural Gas
August 17, 2007
70
Demerger under Section 391-394 Pre-demerger situation

Reliance
Refinery Div.
August 17, 2007
Telecom Div.
Capital Div.
Infrastructure Div.
72
Post -demerger situation

RIL
Reliance Natural Gas
Reliance Communication
Reliance Infrastructure
August 17, 2007
73
Demerger Process u/s 391-384

In principle approval to the Proposal by the Board of Directors of the Company. Enabling provision in the Memorandum /Articles Incorporation of the Resulting company Board Meeting of both companies Notice to SEBI and Stock Exchanges Presentation and approval to the scheme of demerger by the Boards Application to the High Courts for directions

Actions as per the High Court directions
Convene Shareholders Meeting Convene Creditors meeting Release Notice in Paper
File affidavits with the high courts confirming fulfillment of the HC directives HC to direct for filing of the demerger petition File demerger petition

HC to direct :
Fix the date of hearing Notice to be given in the newspapers
Release Notice in the papers Hearing Takes place, HC passes the order Stamping of the Order if applicable / Adjudication File the Order with the ROC The Demerger becomes effective with filing of the High Court Order with ROC. Initiate consequent steps
Income Tax provisions of Demerger under the Income Tax Act, 1961
Definition of Demerger Section 2(19AA) of IT Act, 1961

Demerger is defined as the transfer of one or more of its undertaking by the demerged company pursuant to a scheme of arrangement u/s 391 to 394 of the Companies Act, 1956 to any resulting company in such manner that: a) All the properties and liabilities of the undertaking which is being transferred become the properties and liabilities of the resulting company. b) properties and liabilities of the undertaking being transferred by the demerged company are transferred at their book values immediately before the demerger.
August 17, 2007
Definition of Demerger Section 2(19AA)

c) In consideration of the demerger, the resulting company issues shares to the shareholders of the demerged company on a proportionate basis. d) The transfer of the undertaking is on a going concern basis.
August 17, 2007
80
Undertaking would mean..

An undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
August 17, 2007
81
Liability shall mean the following

a) Those which arise out of the activities or operations of the undertaking b) The specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertakings.
A loan from IDBI for exclusively financing the assets of the resulting undertaking.
c) So much of the general purpose or multipurpose borrowings of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of the demerged company immediately before the merger.
Liability Examples
a) A Term Loan of Rs. 500 cr. was taken from FIs for financing the assets of the undertaking transferred to the Resulting company. FIs have a pari passu first charge on these assets of the undertaking. Carrying amount of these assets on the effective date is Rs. 300 cr where the amount of loan outstanding on that is Rs. 250 cr.. b) Comment on the transferability of the assets and liabilities in this case?.
Liability Examples
a) The demerged company had availed working capital facility of Rs. 400 cr. from a consortium of bankers for financing the working capital of the entire demerged company including the resulting company. Total working capital of the demerged company was Rs. 800 cr. Out of which the resulting company accounted for Rs. 200 cr. On the date of the demerger the entire WC facility was utilised by the demerged company. The resulting companys share in such utilisation was in the proportion of its WC to the WC of the demerged company as a whole. How much of the Working Capital loan and the Current Assets would be transferred in this case to the Resulting Company?.
b) c)
d)
August 17, 2007
84
Accounting Treatment in case of Demerger

Accounting in case of Demerger involves the following Removal of assets and liabilities from the Balance Sheet of the Demerged Company. Adjustment to the General Reserves amount of the Demerged company. Accounting of the assets and liabilities by the Resulting company in its Balance Sheet Issuance of fresh share capital by the Resulting company and accounting for the same in its books.
Balance Sheet of XYZ Ltd. Liabilities Resulting Co. Share Capital General Reserves Term Loans Bank Borrowings Creditors 400 300 700 600 500 1100 Amount Demerged Co. Total 1000 3000 3000 1000 800 8800 1800 7000 8800 Current Assets 800 5000 5800 Fixed Assets Assets Resulting Co. 1000 Amount Demerged Co. 2000 Total 3000
From the above table, determine the ratio in which shares will be issued by the Resulting company to the shareholders of the Demerged Company
Determine the amount by which the General Reserves of the Demerged Company will reduce.
Exemptions and benefits

1.
A demerger transaction fulfilling the conditions of Section 2(19AA) is free from capital gains tax both with respect to: The transfer of assets and
No CG Tax on the Demerged Entity
2.
Issue of shares to the shareholders

No CG Tax on the new shares issued by the Resulting Company
Section 2(22) of the Act has been amended to provide that the issue of shares directly to the shareholders pursuant to the demerger of an undertaking will not constitute deemed dividend. Implication?
August 17, 2007
93
Exemptions and benefits: Accumulated losses and depreciation

Accumulated losses and depreciation relatable to the undertaking being transferred in a scheme of demerger is allowed to be carried forward and set off in the hands of the Resulting Company.
DEMCO had accumulated losses and depreciation of Rs. 100 cr. in respect of its one of the undertakings namely RESCO on the date of Demerger. RESCO will be allowed to set of such Accumulated losses and depreciation of Rs. 100 cr. from its future earnings.
August 17, 2007
Exemptions and benefits: Accumulated losses and depreciation

The Act provides for the apportionment of the Accumulated losses and depreciation between the demerged company and the resulting company in the same proportion in which the value of the assets have been transferred. When will it happen?
August 17, 2007
Exemptions and benefits: depreciation
Depreciable assets base for tax purposes in the hands of the resulting company would be tax written down value in the hands of the demerged company.
Tax Written Down Value of the assets being transferred to the RESCO on the date of demerger is Rs. 350 cr. This will become depreciable assets base in the hands of RESCO upon the demerger.
The tax depreciable assets base for the demerged company will be reduced by the tax written value of the assets transferred in the demerger process.
The tax depreciable assets base of the DEMCO prior to demerger was Rs. 1000 cr. Out of this, Rs. 350 cr has been transferred to the RESCO. The tax depreciable assets base of the DEMCO now stands reduced to Rs. 650 cr.
August 17, 2007
97
Cost of acquisition of shares in the resulting company
How will you determine the cost of acquisition of shares in the resulting company since the shareholder does pay a dime?.
August 17, 2007
98
What is the difference in tax treatment in case of Slump Sale and Demerger?
August 17, 2007
103
August 17, 2007
104

Presentation On Corporate Demerger & Divestment-For Circulation

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Presentation On Corporate Demerger & Divestment-For Circulation

Hochgeladen von

Copyright:

Verfügbare Formate

A Case Study on Corporate Demerger & Divestment

August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 1

August 17, 2007

1.Financial and strategic issues relating to Demerger

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

2. Process of Slump Sale under Section 293 (1)(a)

2. Process of Slump Sale under Section 293 (1)(a)

August 17, 2007

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Definition of Slump Sale

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Characteristics of Slump Sale Transactions

Characteristics of Slump Sale Transactions

3. Drafting of Joint Venture Agreement

3. Drafting of Joint Venture Agreement

S-Global Consulting / pramod7jain@vsnl.net

4. Formation of JVC & commencement of operations

1. Actions by Foreign partner

2.Actions by the Indian Partner / JVC

August 17, 2007

5. Conversion of a company into a Wholly Owned Subsidiary (WOS)

What is a Wholly Owned Subsidiary (WOS)?

Conversion of a company into a wholly owned subsidiary (WOS)

1. Actions by the two partners:

2. Closing date fixation 3. Stock Purchase Agreement 4. Escrow Account Agreement

Why Escrow Account?

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

How does Escrow Account work?

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Conversion of a company into a wholly owned subsidiary (WOS)

1. Boards approval 2. Inform SEBI /stock Exchanges 3. Obtain RBIs Approval

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Conversion of a company into a wholly owned subsidiary (WOS)

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Conversion of a company into a wholly owned subsidiary (WOS)

4. BODM-I of JVC: Amendment of Articles

Conversion of a company into a wholly owned subsidiary (WOS)

Conversion of a company into a wholly owned subsidiary (WOS)

6.Drafting of the Stock Purchase Agreement

Drafting of the Stock Purchase Agreement

7. Issues relating to:

August 17, 2007

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Computation of Income Tax liability in case of a Business

Illustration on computation of provision for Income Tax

Income Tax provisions in case of Slump Sale

Definition of Slump Sale

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

August 17, 2007

S-Global Consulting / pramod7jain@vsnl.net

Net Worth for Slump Sale