Corporate restructuring
October 2013
Content
►
Recent trends in M&A
►
Reorganization prerequisites
►
Fund raising/cash infusion in operations
►
Unlocking business value
►
Tax planning
►
Restructuring options in light of recent tax & regulatory
developments
Page 2
Role of CFO
Glossary
CG
Central Government
DDT
Dividend Distribution Tax
IPR
Intellectual property right
ITA
Income-tax Act, 1961
LLP
Limited Liability Partnership
MAT
Minimum Alternate Tax
M&A
Mergers and Acquisitions
NCLT
National Company Law Tribunal
OL
Official Liquidator
ROC
Registrar of Companies
SCRA
Securities Contract (Regulation) Act, 1956
SEBI
Securities and Exchange Board of India
WOS
Wholly owned subsidiary
CBDT
Central Board of Direct Taxes
Page 3
Role of CFO
Recent trends in M&A
Page 4
Role of CFO
Recent trends - M&A deals in India
100
1,298
1,400
1,296
1,209
90
1,107
1,134
1,196
1,200
977
70
62.2
60
1,000
840
53.8
50
800
43.9
40.7
40
34.6
30.7
34.8
30
600
400
17.9
20
200
10
0
0
2005
2006
2007
2008
2009
Deal value
Source: Thomson ONE; Ernst & Young research
Note: data does not includes PE deals
Page 5
Role of CFO
2010
Deal count
2011
2012
Deal count
Deal value (US$ bn)
80
Recent trends - M&A deals in India
Cross border vs. domestic activity
By value
By count
100%
100%
19%
80%
61%
55%
55%
72%
60%
40%
21%
24%
22%
16%
20%
18%
21%
0%
23%
57%
52%
54%
80%
21%
22%
23%
12%
Inbound
41%
39%
17%
15%
30%
16%
23%
20%
32%
26%
58%
38%
25%
40%
61%
46%
42%
14%
33%
31%
52%
27%
7%
0%
2006 2007 2008 2009 2010 2011 2012 2013
Outbound
22%
29%
62%
63%
60%
25%
37%
34%
7%
2006 2007 2008 2009 2010 2011 2012 2012
Domestic
Source: Thomson ONE; Ernst & Young research
Note: data does not includes PE deals
►
Cross-border deals represented nearly 60% of the aggregate deal value in 2012.
►
Outbound deal activity fell in 2011 as capital raising was affected due to high borrowing costs and
devaluation of the rupee.
Page 6
Role of CFO
Reorganization prerequisites: a snapshot
► Business synergies
► Inorganic growth
► Gain more competitive position
► Focus on core competencies
Commercial
► Achieve economies of scale
► Stake enhancement
► Greater control over assets and operations
► Exit
► Strategic alliances/ partnerships
► Unlocking value
Restructuring
Rationale
► Tax savings
► Reducing administrative and management costs
► Upstreaming cash
Financial
► Encashing value
► Cash infusion in operations
► Projecting stronger financials
► Organic growth
► Larger dividends to promoters
Role of CFO integral in identifying opportunities/business requirements
Page 7
Role of CFO
Fund raising/cash infusion in operations
Page 8
Role of CFO
Modes of restructuring for fund raising
Vertical, horizontal and hybrid split
– suitable for value split, when
funds are required in specified
business
Split
Fund raising
Consolidation
Page 9
Role of CFO
Consolidation of similar business
via merger, demerger and slump
sale
Classical/vertical split
►
Company A to transfer Business Y to
NewCo
Shareholders
►
Existing shareholders to be the
shareholders of NewCo
Transfer could be effected by way of
slump sale, demerger or gift of
Business Y to NewCo
►
NewCo to raise funds for Business Y
►
Results in value split between multiple
companies
►
Funds
►
Co A
Business X
Value split between multiple companies
Role of CFO
NewCo
Business Y
Appropriate in case of unlisted
companies wherein funds are required
only in a specific business
Page 10
Investor
Business Y
Transfer
Downward/horizontal split
►
Company A to transfer Business Y to its
WOS
►
Transfer to be effected by way of slump
sale, demerger or gift of Business Y to
WOS
►
WOS to raise funds for Business Y
►
Value captured at Co A level
►
Appropriate in case of listed companies
wherein funds are required in only in a
specific business
Shareholders
Co A
Business X
Investor
Transfer
WOS
Funds
Value consolidation along with fund raising efficiency
Page 11
Business Y
Role of CFO
Business Y
Hybrid split
►
►
Company A to transfer Business Y to
NewCo
Shareholders
Transfer to be effected by way of
slump sale, demerger or gift of
Business Y to NewCo
Co A
Business X
Business Y
Investor
►
Such that, Co A and Shareholders hold
share in NewCo
►
NewCo to raise funds for Business Y
►
Limited value capture at A Co level
Transfer
NewCo
Funds
Business Y
Hybrid structure – achieves (limited) consolidation of value and fund raising ability
Page 12
Role of CFO
Funding options
Equity share capital
Compulsorily
Convertible
Preference Shares
Redeemable
preference shares
Optionally convertible
preference shares
Funding options
Redeemable
debentures
Shareholders loans
Compulsorily
Convertible
Debentures
Page 13
Optionally convertible
debentures
Role of CFO
Key considerations
Funding options – Key considerations
Commercial
considerations
Extent of control
and voting rights
Indian exchange
control regulations
Page 14
Ease of repatriation
Tax efficiency
Role of CFO
Indian company
law regulations
Unlocking business value
Page 15
Role of CFO
Unlocking business value - Modes
Focus in management, achieve
higher market value, etc
Segregation of core and non-core
businesses
Sale of business in a tax efficient
manner
Making an entity exit ready
Acquisitions
Takeover of a sick entity
Consolidation of operations
Enhancing promoter holdings
Tax savings
Eliminate multiple layers of
holdings
Unlocking
business
value
Disinvestment of non-core
business
Consideration may be structured
(Cash / shares)
Time sensitivity
Page 16
Transfer of single/ identified asset
No requirement for the Buyer Co
to continue to undertake the
business
Role of CFO
Merger
►
Appropriate in cases where similar
businesses are carried out in multiple
entities
►
Consolidation of 2 or more entities by
transfer of all assets / liabilities
►
Consideration – typically Transferee
issues shares to shareholders of
Transferor
►
Transaction
Shareholders of
Transferor Co
Consideration in the form
of shares of Transferee
Co
Transferor Co
(Amalgamating Co)
Consolidates value in a single entity
and enables fund raising on basis of
strength of consolidated business
►
High Court driven process – Typically
takes 5-6 months
►
Tax neutral under India tax laws,
subject to satisfaction of certain
conditions
Merger
Transferee Co
(Amalgamated Co)
Resultant Structure
Shareholders of
Transferor Co
Transferor Co
Dissolved
Page 17
Shareholders of
Transferee Co
Role of CFO
Shareholders of
Transferee Co
Transferee Co
(Merged Entity)
Demerger
►
Transaction
Appropriate when requirement is to
focus on core business/sell non-core
business
►
Involves transfer of identified business
from one company to another
►
Consolidation of two or more entities
by transfer of all assets / liabilities
►
Consideration – typically Transferee
(Resulting Co) issues shares to the
shareholders of Transferor (Demerged
Co)
►
High Court driven process – Typically
takes 5-6 months
►
Tax neutral under the India tax laws,
subject to satisfaction of certain
conditions
Page 18
Shareholders of
Transferor Co
Transferor Co
(Demerged Co)
Business A
Consideration in the form
of shares of Transferee Co
Demerger of
Business B
Transferee Co
(Resulting Co)
Business B
Resultant Structure
Role of CFO
Shareholders
Transferor Co
(Demerged Co)
Transferee Co
(Resulting Co)
Business A
Business B
Slump sale
►
Involves transfer of identified business
for lump sum consideration from one
company to another
►
In consideration, the buyer company
can issue shares / pay cash to the
seller company
►
No Court interference
►
Freedom of structuring consideration
as cash / shares unlike in a demerger
►
Different between sale consideration
and net worth of the business taxable
as capital gains
Page 19
Transaction
Consideration
as shares/ cash
Selling
Company
Business
A
Business
B
Buyer
company
Slump sale of
Business B
Post slump sale scenario
Role of CFO
Shareholders
Shareholders
Selling company
(Company A)
Selling company
(Company A)
Itemized sale
►
Involves transfer of business where
consideration is identified against each
asset
►
In consideration, the buyer company to
pay cash to the seller company
►
No Court approval required - can be
achieved through shareholder resolution
and a business transfer agreement (1 –2
months)
►
Taxable capital gains – to be computed
for each capital asset sold
Page 20
Transaction
Role of CFO
Consideration
Selling
Company
Itemized sale
of Assets
Buyer
company
Tax planning
Page 21
Role of CFO
Merger of profit and loss making companies
►
Company A (Co A) and Company B (Co B) part
of same group
Shareholders
►
Co A is a profitable company, paying normal
corporate tax
►
Co B is a loss making company and possess
tax losses
Co A
Co B
Merger
►
Co B to merge with Co A
►
Potentially result in reduction overall group tax
cost
►
Taxes in Co A to be set off against losses of Co B
►
Utilization of accumulated losses of Co B could
be accelerated
Losses
Accelerated utilization of tax losses within the group vs stamp duty costs
Page 22
Role of CFO
MAT planning
►
Company A (Co A) and Company B (Co B)
part of same group
►
Co A enjoy tax holiday and pays tax
under MAT provisions
►
Co B paying normal corporate taxes
Shareholders
Co A
►
Co B
Merger
Co B to merge with Co A
10A unit
►
Overall group tax cost could be reduced
►
Companies required to pay higher of MAT tax
or normal corporate tax
►
Merged entity to take credit of taxes payable
on account of MAT for Co A
Reduction in group tax cost. Full realization of tax holiday benefit
Page 23
Role of CFO
LLP - A hybrid entity structure
Features common with
Company
►
Body Corporate
►
Distinct Legal Entity
►
Limited Liability
►
Perpetual Succession
►
Common Seal
Features common with
Partnership firm
Features
of Limited
Liability
Partnership
(LLP)
►
Minimum 2 partners
►
Mutual Agreement
►
Partners personally
liable for their own
wrongful act or
omission
Other features
►
LLP to have minimum 2 individuals (one of them to be Indian resident) as designated
partners
►
No cap on number of partners
►
Flexibility in adjusting profit share vis-à-vis capital contribution
►
Rights of a partner to share profits or losses transferable
►
Foreign investment has been allowed in LLP via Government approval
Page 24
Role of CFO
DDT planning
Mechanism
►
Ind Co. belongs to Foreign/Indian owned group
►
Ind Co. converted to LLP
►
Parent Company is partner in LLP
►
LLP distributes profits to partners
Transferor Co
Shareholder
Profit distribution
Key benefits
►
►
Ind Co
No DDT
Partner
Profits exempt in hands of partners of LLP
Challenges
►
India LLP
Tax implications upon conversion of existing
company into LLP
Page 25
Conversion to
LLP
Role of CFO
Deemed dividend
Mechanism
►
Parent with multiple Indian operating entities
Parent
►
Indian operating entities set up as LLPs
►
Excess cash in one operating entity and need for
cash in another
►
India Co 1
India Co 2
India Co 3
India LLP 1
India LLP 2
India LLP 3
Inter-LLP loan
Key benefits
►
Inter-LLP not considered as deemed dividend
►
Tax efficient movement of cash within operating
entities
Page 26
Role of CFO
Loan
Restructuring options in light of recent tax
and regulatory developments
Page 27
Role of CFO
Recent tax and regulatory developments
►
Companies Bill introduced in 2008
►
Passed by the Lok Sabha in Dec
2012
►
Passed by the Rajya Sabha and
Presidential assent in August 2013
Companies
Act 2013
Developments
Key recent developments in
the Indian tax landscape
►
SEBI
Tax
Others
Page 28
►
Role of CFO
The Companies Act, 2013
Page 29
Role of CFO
Investment layers
Companies Act, 1956
Companies Act, 2013
H Co (Op Co)
H CO (Op Co)
Inv Co 1
Inv Co 1
Inv Co 2
Inv Co 2
Inv Co 3
Inv Co 3
Target Co
Target Co
►
Restriction shall not apply to:
►
Acquiring a company incorporated outside India if
such subsidiary has investment subsidiaries beyond
two layers as per laws of that country; or
►
Subsidiary having investment subsidiaries for
meeting statutory requirements
Impact
Page 30
►
The new restriction may need to be considered while evaluating any group
restructuring
►
To evaluate whether existing multi layered structures will be impacted
Role of CFO
Treasury shares
►
Presently on merger of wholly or partially owned subsidiary with its parent, new shares in lieu of
shares held by parent itself may be allotted to a trust which will hold such shares for parent’s
benefit
►
Companies Act, 2013 prohibit companies from holding shares in the name of trusts either on its
behalf or on behalf of any subsidiaries or associate companies
►
Provision likely to be effective prospectively
Impact
►
Page 31
Negates the dual advantage available earlier to the company to
►
Indirectly hold such shares to provide access to liquidity; and
►
Allowing promoters to retain a controlling stake
Role of CFO
Treasury Shares – Case Study…
Cos Act, 1956
Cos Act, 2013
A Co
A Co*
100%
Trust X
100%
100%
C Co
C Co
* No issue of
shares on merger
Flexibilities relating to liquidity and
increase in promoter control is available
Page 32
Flexibilities relating to liquidity and
increase in promoter control may no more
be available
Role of CFO
Treasury Shares – Case Study – Likely Impact
► Suppose A Co’s cost of investment in C Co is Rs 500
► Book net worth of C Co is Rs200
► Post merger likely impact in books of merged A Co would be as under;
Cos Act, 1956
Cos Act, 2013
Books of A Co
Books of A Co
Particulars
Rs
Particulars
Rs
Net Assets of C
Co
200
Assets of C Co
200
Interest in
Trust
300
Goodwill
300
As per AS-14, goodwill on merger to be amortised over 5 years unless
longer period can be justified
Page 33
Role of CFO
Cross border mergers
►
Companies Act, 2013 permits outbound mergers i.e. amalgamation of Indian companies with
Foreign companies
►
Requirements relating to inter alia notified foreign jurisdiction and compliance with prescribed rules
applicable to inbound as well as outbound merger
►
Consideration to shareholders of merging entity could be in form of cash or depository receipts
Impact
Page 34
►
Scope of inbound mergers may get restricted to notified jurisdictions
►
Tax and FEMA regulations to be aligned
Role of CFO
Fast Track merger
Applicability
1
Additional requirements:
►
Prior notice required to ROC, OL and persons affected by scheme
of both companies before shareholders’ meetings and their
objections / suggestions to be placed before shareholders
►
Shareholders and creditors approval (Holding > 90% in number of
shares and creditors > 90% in value)
►
Scheme to be filed with CG, ROC and OL who would need to file
objections with CG within 30 days
►
In case of no objections, CG to approve the merger
Two Small companies
2
Holding company and
WOS
3
Other prescribed class
of companies
Impact
►
►
Page 35
Is auditor’s certificate on compliance with accounting standards required even if no Court
process involved?
Does notice need to be given to the tax authorities?
Role of CFO
Merger of Listed Co. in to Unlisted Co.
►
Companies Act, 2013 specifically provides that transferee company shall remain an unlisted
company until it becomes a listed company
►
Provision for an exit route for shareholders of the transferor company
►
Payment of value of shares and other benefits in accordance with pre-determined price formula or as per
prescribed valuation
►
Payment/ valuation should not be less than what has been specified by SEBI
Impact
Page 36
►
Provisions are applicable for both merger as well as demerger
►
Indirect way of minority squeeze-out / delisting?
►
Impact on tax neutrality of amalgamation if more than 25% shareholders opt for exit route?
Role of CFO
Recent updates
Page 37
Role of CFO
Recent updates - SEBI Circulars &
notifications
Pre-emption and
options in SHA
Page 38
►
Till recently, SEBI has restricted universally accepted contractual rights
like pre-emptive rights, put-call options in Public companies
►
SEBI has now issued a notification permitting contracts in shareholders
agreements or articles of companies relating to pre-emption including
right of first refusal, tag-along, drag-along rights and put-call
arrangements
►
The put-call arrangements are permitted subject to the following
conditions:
►
The title and ownership of the underlying securities are held
continuously by the selling party to such a contract for a minimum
period of one year from the date of entering into the contract
►
The price or consideration payable is in compliance with all the
laws for the time being in force
►
The contract has to be settled by way of actual delivery of the
underlying securities
►
Contracts need to be in accordance with FEMA regulations
►
The notification applies only prospectively, and does not affect or
validate any contract which has been entered into prior to the date of
the notification
Role of CFO
Recent updates - Others
►
Unlisted companies that are incorporated in India were not
allowed to directly list in overseas markets without prior or
simultaneous listing in Indian markets.
►
It has now been decided with the approval of the Union
Finance Minister that unlisted companies may be allowed to
raise capital abroad without the requirement of prior or
subsequent listing in India.
Listing overseas
Page 39
Role of CFO
Questions?
Page 40
Role of CFO
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