MERGER MERGER REVERSE MERGER“Combining of two or “As a commercial term, itmore commercial means when a Healthyorganizations into one in Company (in terms of size,order to increase capital or listing status)isefficiency and sometimes merging in a Weak Companyto avoid competition”. (in terms of size, or unlisted)”. SECTION 391-394 of Companies Act, 1956
DEMERGER “Division of a Company with two or moreidentifiable business units into two or more separate companies ” SECTION – 2(19AA) of Income Tax Act, 1961.
REDUCTION OF CAPITAL“Extinguishing or Reducing the paid-upcapital, Securities Premium Account or liability of members with respect to their unpaid calls” -An effective way of internal restructuring SECTION 100 to –105 of Companies Act, 1956 SECTION – 100 105 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 CompanyMerger through BIFR
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 anyCourt or Tribunal under Sections 391, 394 and 101 of the Companies Act, 1956, with the stockexchange, 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 havingnationwide trading terminals where it is listed,before issuing shares or other securities to the shareholders of Transferor Company.”
Listing Agreement Compliances..contd Clause 40A “The Company to comply with ContinuousListing requirements while framing a scheme of merger/demerger.”
Stock Exchange‟s NormsPresently, 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 REQUIREMENTS1. 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.) 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 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 acquiredPursuant 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
ISSUES 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 QIBs in an Unlisted Company prior to merger will be counted in the post merger non -promoter shareholding of a Listed Company?
MERGER THROUGH BIFRAN EFFECTIVE WAY TO REVIVE YOURSICK 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 BIFREXEMPTION 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.
DEMERGERReliance Capital Reliance Natural Ventures Ltd Resources 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
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. 22.214.171.124 OF DIP GUIDELINESEXEMPTION 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 126.96.36.199 of DIP Guidelines Cont…. 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 underthe provision of the Companies Act, 1956, and such scheme has beensanctioned by the High Court/s of Judicature. The listing of the shares of the unlisted transferee-company is in termsof scheme of arrangement sanctioned by the High Court/s of theJudicature. At least 25% of the paid-up share capital, post scheme, of the unlistedtransferee-company seeking listing comprises shares allotted to the publicholders of shares in the listed transferor-Company.
Exemption u/c 188.8.131.52 Cont….The unlisted company has not issued/reissued anyshares, not covered under the scheme.There are no outstanding warrants /instruments/agreements which gives to any person to take theshares in the unlisted transferee company at anyfuture date.That the shares of the transferee-company issued inlieu of the locked-in-shares of the transferor-companyare subjected to the lock-in for the remaining period.
Exemption u/c 184.108.40.206 Cont…. 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…… 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?
Morarjee Goculdas Spg. & Wvg. Co. Ltd. (MGC) -Demerger Scheme- i. MGC was engaged in two separate business: • Real Estate Development FACTS • 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 220.127.116.11 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.) Amount as on 24th March (Rs.) as on 2005 26th May 2006Value of the shares held 100 @55by a shareholder as on sharesrecord date (5th 5500Jan,2004) (A)Shares in MRL 100 @125 @694 shares 12500 69400Shares in MTL 51.5 @80 @100 shares 4,120 5,150 Total (B) 16,620 74550Net benefit (B-A) 11,120 69,050
Reliance Industries Limited - A Unique Scheme of Arrangement- PRE –ARRANGEMENT SCENARIO Reliance Industries Limited was engaged in various businesses: (i) Coal based power business;FACTS (ii) Gas based power business; (iii) Financial services business; (iv) Tele-Communication business
RIL… demergerThe family arrangement aims atSegregation between the two Ambani BrothersProvision 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… demergerAs 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 18.104.22.168 of the SEBI (DIP) Guidelines.
Benefits achieved…….. Particulars Amount Amount (Rs.) (Rs.) 24th March 2006 26th May 2006Value of the shares held 100 shares @928by a shareholder as onrecord date (25th 92800Jan,2006) (A)Shares in RIL 100 (@708) 70800 (@950) 95000Shares in REVL 100 (@38) 3800 (@37) 3700Shares in RCOVL 100 (@290) 29000 (@270) 27000Shares in RCVL 100 (@24) 2400 (@23) 2300Shares in RNRL 100 (@23) 2300 (@27) 2700Total 108300 130700Net benefit 15500 37900
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
FEW STRATEGIC MOVES Strategy I Strategy II LISTING RAISING (Without PROMOTERS‟ offer to HOLDING Public) (Beyond 55%)
FEW STRATEGIC MOVES..contd Strategy III Strategy IVACQUISITION CLUBING OF LISTED OF CO. RESOURCES (Exemption from Takeover Code) (Without raising Capital)
Strategy I LISTING Direct listing is costly & complicated But Listing of Company provides for….. Unlock value of business Brings liquidity Attract investors for further growth
LISTING THROUGH MERGERStrategy IA 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
LISTING THROUGH MERGERStrategy IB Merger of Acquisition of financially sound Regional Listed unlisted co with Company(RSE) listed co INDONEXT LISTING Now your Company is ready for Listing DIRECT LISTING
RAISING PROMOTERS‟ HOLDINGStrategy II 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%
ACQUISITION OF LISTED COMPANYStrategy 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 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.
CLUBING OF RESOURCESStrategy 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 Proposed transferee company acquires shares in transferor company 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 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
Thanks a lot… Pavan Kumar Vijay Past President, ICSI