The case study is divided into sections | Transaction | The Strategy | Accounting and Taxation | Future Plans | Did the Strategy works ? What better example of ‘Karlo Duniya Mutthi Mein’.

1. DEMERGER OF TOWER
BUSINESS OF
RCOM AND RTL INTO RITL

2. HELLO!
The case study is divided into sections
| Transaction
| The Strategy
| Accounting and Taxation
| Future Plans
| Did the Strategy works ? 2
Copyright © 2009 Prasad G. Godbole. All rights reserved.

3. WHAT IS DEMERGER ?
▪ Demerger is the business strategy where in company
transfers one or more of its business undertakings to
another company.
▪ In other words, When the company split-off its existing
business activities into several components, with the
intent to form a new company that operates on its own or
sell or dissolve the unit so separated is called a demerger
3

4. 1. THE TRANSACTION
2007April

5. THE TRANSACTION
▪ Reliance Communications Limited (RCOM) and its 100%
subsidiary Reliance Telecom Limited (RTL) transferred
their passive infrastructure assets(primarily consisting
of 13849 wireless towers) to Reliance Infratel Limited
(RITL).
▪ Reliance Infratel Limited then, was a 100 per cent
subsidiary of Reliance Communications Infrastructure
Limited (RCIL), which in turn was a 100 per cent
subsidiary of RCOM.
5

6. “
6
Reliance
Telecom
Limited
Reliance
Telecom
Infrastructure
Limited(RTIL)

7. THE
STRATEGY
behind this move, as explained by the RCOM
chairman Mr Anil Ambani, was
 to keep RCOM asset-light
 to enhance its competitiveness,
 to unlock further value for the benefit of
its nearly 2 million shareholders. 7

8. The move was expected to benefit RCOM
shareholders on account of
1ST
RCOM would achieve
enhanced financial
flexibility and cost
efficiency due to
reduced set-up and
operating costs.
2ND
All new towers and
related infrastructure
would be set up by
RITL, with independent
financing, thereby
reducing capital
expenditure
requirements and
leveraging on RCOM’s
own balance sheet.
3RD
The move would
promote high value
stand-alone business
by conversion of cost-
centric assets to
revenue-centric ones
by sharing passive
infrastructure of RITL
with other wireless
service providers. 8

9. ACCOUNTING AND TAXATION
▪ The scheme of arrangement under Section 391 to 394 Companies
Act, 1956 was approved by the Honorable High Court of Mumbai,
with the effective date as 10 April,2007.
▪ Upon the scheme becoming effective, RCOM transferred to RITL,
assets having book value of Rs 3200.74 crore in RCOM’s balance
sheet to RITL.
▪ These assets of Rs 3200.74 crore were written off by RCOM in its
books through the P & L account for the year 2007-08.
▪ Even after writing off Rs 3200.74 crore, RCOM was left with Rs
1287.10 crore in the reserve for business restructuring account.
9

10.  A unique feature of this
demerger was that no
consideration was paid by RITL
to either RCOM or RTL or RCIL
or to the shareholders of RCOM
 Williams Cooper( accountant)
almost charged 3.75 Cr for the
demerger accounting.
10
ACCOUNTING AND
TAXATION
R Com
RTL RCIL
RITL
NoConsideration

11. R.COM ACCOUNT & RTL
▪ Earlier, Investment in RCIL
Reserves Rs.4487.84Cr
▪ RCOM transferred to RITL
Asset Rs. 3200.74 Cr.(BV)
▪ RCOM was left with Balance
Rs. 1287.10 Cr as business
restructuring account
▪ RTL transferred to RITL
Asset Rs.866.80Cr.(BV)
 The impact on P&L account was
nullified by drawing equivalent
amount from general reserves.
11
R Com
RTL RCIL
RITL

12. RITL ACCOUNTING
▪ RTL and R.com assets are been
revalued under the Scheme of
arrangement approved by
Honorable High Court, Mumbai
▪ Recorded the asset received at
Fair Value
R com – Rs.3327.46 Cr.
RTL-Rs.1188.36 Cr
▪ Because of No Consideration
the entire values asset transfer
to General Reserves.
12
R Com
RTL RCIL
RITL
3200.74 Cr
3200.74 + 126.72 = Rs 3327.46 Cr
866.80 + 321.56 = Rs 1188.36 Cr
Total balance = Rs. 4515.82Cr
866.80 Cr.

13. ▪ Considering that neither the shares of the resulting
company were issued nor any consideration for the transfer
of assets was charged, there was no need for the RITL
demerger to be tax neutral.
▪ Hence, neither of the companies had to bother about tax
neutrality.
▪ Thus, taking advantage of the lack of accounting standard
for demergers, the above creative accounting was done
▪ One wonders if RCOM would be able to set off the capital
losses of Rs 3200.74 Cr against the other capital gains. If it
would, then the whole demerger exercise would in fact
become tax positive than tax neutral.
13
TAXATION

14.  RITL has become an independent wireless telecommunications
infrastructure company in India, engaged in the business of building,
owning and operating communications towers and related assets
which it would lease to wireless operators under long-term
contracts.
 It is the exclusive provider of passive telecom infrastructure to
RCOM and RTL.
 Additional tenants in the form of external wireless operators on
RITL’s towers would provide incremental growth for RITL and thus
provide significant operating leverage.
FUTURE PLANS
14

15. 15
Did the
Strategy Work?
It Indeed did.

16. It Indeed It
16
 In July 2007, RCOM issued a press release announcing the sale of
5 percent equity stake in RITL to a group of Institutional investors
across the USA, Europe and Asia for US $337.5 million (1400 crore).
This sale resulted in the capital gains of 1200 crore.
 Further it translated into Rs 135 per RCOM share, nearly 25 per cent of
the market price of Rs 565 per share of RCOM in July 2007.
 The demerger indeed created a significant value for the shareholders
of RCOM.

17. ‘Karlo Duniya
Mutthi Mein’.
What better example of
17

18. 18
THANKS!
Any questions?
You can find case at:
▪ Ch.20 Demerger of Tower Business of RCOM
and RTL into RITL
▪ @Prasad G. Godbole (Author’s book)