CORPORATE RESTRUCTURING Pavan Kumar Vijay GOVERNING PROVISION SECTION

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 MERGER DEMERGER REDUCTION OF CAPITAL

RESTRUCTURING Approving Authorities High Court BIFR

MERGER REVERSE MERGER “Combining of two or more commercial organizations into one in order to increase efficiency and sometimes to avoid competition”. “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(19 AA) of Income Tax Act, 1961.

REDUCTION OF CAPITAL “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 SECTION 100 – 100 105 ofof. Companies. Act, 1956 SECTION to – 105

A FEW VARIETY OF MERGER Unlisted with Listed ü Listed with Unlisted ü Merger of Subsidiary with Holding Company ü Merger with Group Company ü Healthy Company with Weak Company üMerger through BIFR ü

STOCK EXCHANGE’S ROLE REQUIREMENTS Listing Agreement Compliances Stock Exchange Internal Norms Compliance of Securities laws Compliance of Companies Act PERSPECTIVE Observations

Listing Agreement Compliances Clause 24(f) “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. ”

Listing Agreement Compliances. . contd 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 40 A “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

Stock Exchange Norms. . contd CONTINUOUS LISTING NORMS (Transferee Co is Listed Co. & Transferor Co is Unlisted Co. ) ü Non- Promoter Holding – 25% of Post -merger Capital * (The entire holding of the shareholders of the transferor company be excluded) ü 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 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 , 1997 Regulation 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; ”

O Valuations Analysis No undue benefit to Promoters / Particular group Investors interest not to be affected Back door Entry for listing Change in Management/Control BSE RVATIONS

I SSUES

ISSUES ü ü 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 ü ü 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 ü ü 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 ü 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?

MERGER THROUGH BIFR AN EFFECTIVE WAY TO REVIVE YOUR SICK COMPANY

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 EXEMPTION FROM CL 40 A OF LISTING AGREEMENT Clause 40 A as amended on 13 th 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 Reliance Capital Ventures Ltd Reliance Natural Resources Ltd

TYPES OF DEMERGER ü ü ü 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

CONDITION FOR LISTING (Rule 19 (2) (b) of SCR Rules) 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

LISTING UNDER CL. 8. 3. 5. 1 OF DIP GUIDELINES 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.

Exemption u/c 8. 3. 5. 1 of DIP Guidelines Cont…. CONDITIONS FOR AVAILING EXEMPTION Shares have been allotted by the unlisted company (transfereecompany) to the holders of securities of a listed company (transferorcompany) 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. ü 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. ü 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. ü

Exemption u/c 8. 3. 5. 1 Cont…. The unlisted company has not issued/reissued any shares, not covered under the scheme. ü 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. ü 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. ü

Exemption u/c 8. 3. 5. 1 Cont…. ü ü ü 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.

ISSUES

ISSUES…… ü ü 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?

Case Studies

Morarjee Goculdas Spg. & Wvg. Co. Ltd. (MGC) -Demerger Schemei. FACTS 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 24 th March 2005 26 th May 2006 Value of the shares held by a shareholder as on record date (5 th 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 16, 620 74550 11, 120 69, 050 Total (B) Net benefit (B-A)

Reliance Industries Limited - A Unique Scheme of Arrangement. PRE –ARRANGEMENT SCENARIO Reliance Industries Limited was engaged in various businesses: FACTS (i) Coal based power business; (ii) Gas based power business; (iii) Financial services business; (iv) Tele-Communication business

RIL… demerger The family arrangement aims at ü Segregation between the two Ambani Brothers ü 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 ü 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) ü 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.

Benefits achieved……. . Particulars Value of the shares held by a shareholder as on record date (25 th Jan, 2006) (A) Amount (Rs. ) 24 th March 2006 26 th May 2006 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 Net benefit 108300 130700 15500 37900

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 To Clean-up the Balance Sheet To rationalize the capital base Revival of Sick Company

RESTRUCTURING STRATEGIES What's Your Move? ?

FEW STRATEGIC MOVES

FEW STRATEGIC MOVES. . contd

Strategy I LISTING Direct listing is costly & complicated But Listing of Company provides for…. . ü Unlock value of business ü Brings liquidity ü Attract investors for further growth

Strategy IA ü ü ü 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 Acquisition of Regional Listed Company(RSE) LISTING THROUGH MERGER Merger of financially sound unlisted co with listed co INDONEXT LISTING Now your Company is ready for Listing DIRECT LISTING

Strategy II RAISING 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 ü An Unlisted company is created by Promoters ü This entity is merged with listed company ü Promoters’ holding is raised up to 75%

ACQUISITION OF LISTED COMPANY Strategy III 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 ü ü ü 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 ü The Management may also change.

CLUBING OF RESOURCES Strategy IV 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 ü Proposed transferee company acquires shares in transferor company ü ü ü Companies are merged Crossholdings get cancelled Resources got clubbed, capital base remain low. Effectively , increases EPS.

To sum up…… Restructuring offers tremendous opportunities for companies to grow & add value to the shareholders ü It unlocks the true potential of the company ü It is a Strategy for Growth & Expansion ü It also helps in Cleaning up & create Synergy of Resources ü

To sum up…… It is the Company Secretary in the organisation who has to take proactive steps ü from suggesting roadmap to the company till its implementation to achieve the underlined objectives of restructuring

Thanks a lot… Pavan Kumar Vijay Past President, ICSI