Presented By
CA Swatantra Singh,
B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com
1
Mergers &
Acquisitions
Current Scenario and Way Ahead
Precedents










Takeover of Ashok leyland by Hindujas
Chabbria group took over Falcon tyres
Ceat tyres taken over by Goenkas
Pepsi & Coke taking over Parle and Indian soft drink companies
Take over of Tetley by Tata Tea.
Grasim acquired UltraTech through a Swap
Tata Motors’ acquisition of Daewoo
Jindal Vijaynagar steel merged Euro Iron & steel, Euro energy and
JSW Power
ITC, Somani group through BIFR.
Recently Vijay Malaya took over Shaw Wallace
Why M & A








Horizontal growth for enlarged markets & optimum utilization
Vertical combination to economize cost and reduce tax burden
Diversification of Business
Combination of management, financial and human resources.
Synergies
Improve dividend yield, earnings, book value of entities and cash
flow of the entities.
Attraction to foreign investors
Financial Restructuring and
Tax Planning
Terminologies







Blending of two or more existing undertakings: “Amalgamation”
Sale of business
- As a going concern – “Slump Sale”
- Individual assets - “Itemised sale”
Merger / Amalgamation of existing business – “Merger”
Sell to a subsidiary – “Subsidiarisation”
Demerger
Secondary market / negotiated purchase of shares – “Share
Purchase”
Issue of fresh shares (preferential issue) – “Fresh Issue”.
Current Scenario


Revival in deal activity in the country
More than double the transactions in first five months as
compared to same period last year
No of deals
Value of deals


Jan – May ‘10
Jan – May ‘09
439
179
USD 30 bn
USD 8 bn
Rebound linked to recovery of Indian and global economy
Active sectors – Telecom, Pharma, Cement, FMCG
6
Mergers & Acquisitions…
Deal Summary 2008 2009
Deal Summary
Total
Inbound
Outbound
Total Cross Border
Domestic
Total M&A
Volume
2008
2009
86
74
196
82
282
156
172
174
454
330
Value (USD bn)
2008
2009
12.55
3.88
13.19
1.38
25.74
5.26
5.21
6.70
30.95
11.96
7
…Mergers & Acquisitions…
Top 5 M&A Deals - 2009
Top 5 M&A Deals - 2008
8
…Mergers & Acquisitions…
Deal Summary - Jan-May 2010
Deal Summary
Total
Inbound
Outbound
Total Cross Border
Domestic
Total M&A
Volume
2010
34
85
119
198
317
Value (USD bn)
2010
4.88
17.70
22.58
3.46
26.04
13
14
12
10
8
6
4
2
0
100
89
68
60
56
80
8
60
44
3
1
40
20
1
0
Jan-10
Feb-10
Mar-10
Value
Apr-10
Volume
9
May-10
Number of deals
Value (USD bn)
M&A Deal Value - Volume 5 Month Trend
…Mergers & Acquisitions
Top 5 M&A Sectors - 2010
Sector
Telecom
Pharma &
Metals, Ores &
Banking & Financial
Services
FMCG, Foods &
Beverages
Volume USD mn
6
13,518
21
4,854
6
2,524
%
52
19
10
18
2,192
8
9
541
2
Top 5 M&A Deals - 2010
Acquirer
Bharti Airtel
Abbott Labs
Hinduja Group
GTL Infrastructure
Vedanta Resources
Target
% Stake USD mn
Zain Africa
100% 10,700
Domestic
100%
3,720
Formulations
Business of Piramal
Healthcare
Solutions
KBL European
100%
1,863
Private Bankers
Aircel's 17500
100%
1,787
telecom towers
Zinc business of
100%
1,340
Anglo American Plc
10
Private Equity…
Deal Summary - 2008, 2009
Deal Summary
Total
Private Equity
Volume
Value (USD bn)
2008
2009
2008
2009
312
260
10.59
12.05
11
…Private Equity…
Top 5 PE Deals - 2009
Top 5 PE Deals - 2008
12
…Private Equity…
Deal Summary - Jan - May 2010
Deal Summary
Total
Private Equity
Volume
2010
Value (USD bn)
2010
122
4.02
50
Value (USD bn)
40
40
30
1.25
1.37
29
20
18
20
15
0.58
10
0.57
0.26
0
Jan-10
Feb-10
Mar-10
Value
Apr-10
Volume
13
May-10
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Number of deals
PE Deal Value - Volume 5 Month Trend
…Private Equity
Top 5 PE Sectors
Sector
Real Estate &
Infrastructure
Management
Banking &
Power & Energy
Telecom
Cement
Volume
USD mn
14
20
4
1
2
%
519
720
318
300
222
13
18
8
7
6
Acquirer
Investee
% Stake
Quadrangle Capital Tower Vision India
NA
USD mn
300
Top 5 PE Deals
Unnamed Investors GMR
Infrastructure Ltd
Unnamed Investors Yes Bank
Temasek Holdings GMR Energy Ltd
GNVF, IDBI, IFCI, Gujarat State
etc
Petroleum Co
14
NA
298
NA
NA
5%
225
200
211
Positive Trends…

Market in favour of consolidation

Higher degree of homogeneity across markets due to globalization –
Marginal costs of set up in new markets

Brand identity recognizable across markets

Market dynamics favour fewer players – economies of size and scale

Recent examples – Bharti – Zain, GTL Tower deal
15
…Positive Trends…

Flexibility and pragmatism demonstrated by Indian Promoters

Promoters recognise strengths and weaknesses and willing to adapt

No stigma attached to alienation of stake in companies

Ability to gauge time to encash vs carry on

Recent examples – Ranbaxy, Piramal, Wockhardt, Tata Docomo
16
…Positive Trends…


Availability of credible information

Reliable standards of accounting – transition to IFRS

Higher levels of transparency and corporate governance
Breadth and depth in the financial sector

Increase in number of players in the financial intermediary market

Emergence of investor classes with different risk appetites

Angel investors, VC, PE, FIIs, Domestic cos, Foreign cos, Retail investors
17
…Positive Trends

Certainty in regulatory framework

Clarity in tax provisions relating to slump sale

Incorporation of M&A provisions in direct and indirect taxes
18
Roadblocks…


Positive trends yet to achieve full potential

Greater flexibility to be shown by Indian promoters

Need for consolidation not fully recognized
Grey areas in regulatory framework

Lack of clarity on stamp duty liability

80IA provisions not conducive to mergers and acquisitions
19
…Roadblocks…


Restrictive foreign exchange controls and listing norms

Direct listing of Indian shares on foreign exchanges not allowed

Indian companies not allowed to merge with foreign companies

Foreigners individually not permitted to invest in Indian shares

Restricts usage of Indian shares as currency for deals
Increasing protectionism

Governments keen on retaining national identity of iconic companies

Increasing use of capital controls to regulate flow of foreign capital
20
…Roadblocks

Accounting for M&A under IFRS

Appointed date of merger vs actual date of merger

Purchase method of accounting – valuation of intangibles and off
balance sheet items and residuary goodwill

Marked departure from Indian GAAP – no comparability pre and post IFRS

Capital Reserve vs Credit to P&L A/c – MAT impact

Demergers to be treated as non-cash dividend – change in
accounting for transferor

IFRS to apply to top 50 companies – different norms applicable to
different companies at same time
21
Wishlist…

Certain shortcomings in IFRS to be addressed

Few norms contribute to volatility and subjectivity in fin statements

Accounting for FCCBs

Lease Equalization vs Inflation

Fair degree of subjectivity in fair valuation norms
22
…Wishlist…

Regulations to encourage cross border M&A

Indian companies to be allowed to merge with foreign companies

Capital controls to be lifted on the Indian rupee

Listing on foreign exchanges to be allowed and vice versa

Permit accounting and reporting in functional currency
23
…Wishlist…

Rationalization of tax provisions

Tax liability only on encashment - not on exchange or conversion

Tax benefits to continue in case of mergers

Clarity on treatment of depreciation post transaction

Introduction of group relief

Introduction of anti-abuse provisions like CFC and thin
capitalization rules

As opposed to current anti-abuse norms prescribed in DTC
24
…Wishlist

Better protection of minority rights in corporate law

Strengthen norms on independent directors and corp governance

Suitable amendments in listing agreement

Provisions to eliminate conflicts of interest in cases where
management also holds majority shares
25
Corporate Restructuring -- Necessity
 Companies worldwide are refocusing, downsizing and merging
to become globally competitive.
 Developing core competence for global / domestic competition,
technological development through collaboration and joint
venture
 Divesting non profitable business
Crystal Clear
Items
Reconstruc Amalgamati
tion
on
Merger
Acquisition
& takeover
Meaning Winding
/ Nature up an
existing
co. & its
transfer to
a new co.
in its place
Full/partial
transfer of
one/more
cos to
another
including
merger
Dissolving
one/ more
entities to
form or get
absorbed
into
another co
Transferor
sell outright
on a going
concern
basis with
all its worth
Share
holding
pattern
Same
shareholders
but different
rights
Same
shareholde
rs different
rights
Form and
nature can
change
substantially
New Co’s
remain
substantial
ly same
Restructuring
Restructuring
Mergers/
Amalgamation
Demerger /
Spin off
Subsidiary
Sale as a
going concern- Itemized
Slump
sale
sale
Stock
sale
Amalgamation
Shareholder X
Shareholder Y
Shareholders X & Y
Company X Ltd..
Company Y Ltd..
Company XY Ltd.
Cement Unit
Cement Unit
Cement Unit
• Merger of one or more company into another or merger of companies to form
another company provided
– 75% in value of the shareholders of amalgamating company must become
shareholders of the amalgamated company (Sec 2(1B))
• Amalgamation - Direct tax neutralized
• No income to amalgamating company/shareholders on the transfer of business
undertaking/receipt of income. (Sec 47(vi))
• Depreciation to amalgamated company on the basis of tax w.d.v in the hands of
the amalgamating company (Explanation 7 to Sec 43)
• Accumulated losses and unabsorbed depreciation of amalgamating company can
be carried forward by the amalgamated company if specified conditions are
fulfilled. (Sec 72A)
Tax Consequences On Companies
 Income/
 Capital
Loss transferred w.e.f
Appointed date
Gains:

To Transferor
NIL

To Shareholders
NIL
 Depreciation
basis for:

Transferee
Existing w.d.v

Transferor
Remaining w.d.v

Quantum
Prorated
Tax Consequences…..Contd
 Tax
incentives of undertaking
 Subsequent
 Holding
 B/f
Expenditure
Continue
Allowed
Period benefit

For Asset Transferred
1/4/81 Option
Continue

For resulting shares
Continue
- carried forward

Depreciation
Allowed

Loss
Allowed
 Cessation
of liability
Taxed
 Expenses
on process
Deductible
Amalgamation.. .Issues

¾ shareholding criteria to be applied in respect of shares
held as on Appointed date or Effective date?

43B payment by amalgamated Company

Credit in respect of MAT paid by amalgamating Company

Depreciation on cost or WDV 43(1) vs 43(6)

Whether succession to business

Transaction between holding & subsidiary in the intervening
period

Dividend distribution tax paid
Tax implications……c/f and set off of
losses u/s 72A


Conditions prescribed: For Amalgamating Co.
•
Has been engaged in business in which accumulated losses
occurred/depreciation remained unabsorbed for 3 or more
years
•
Has held continuously as on date of Amalgamation 3/4 of
book value of fixed assets held by it 2 years prior to date of
Amalgamation
For Amalgamated Co:
•
Holds continuously for 5 years 3/4 of book value of fixed
assets of Amalgamating co.
•
Continues business of Amalgamating co. for 5 years
•
Fulfill conditions prescribed under Rule 9C
Tax implications……conditions under
Rule 9C in case of Amalgamation
Conditions prescribed under Rule 9C

Amalgamated Co. to achieve production level of 50% of
installed capacity of undertaking of Amalgamating Co. before
end of 4 yrs & continue to achieve it till the end of 5 yrs

Amalgamated Co. to furnish a CA report to AO in Form No. 62
along with ROI for AY in which above condition is satisfied
and for subsequent AY falling within 5 yr period
Demerger...
Promoter - 40%
Public - 60%
Company(DC)
Cement Unit
Steel Unit
Promoter - 40%
Public - 60%
Company (DC)
Company(RC)
Cement Unit
Steel Unit
• Transfer of business undertaking as a going concern by one company (DC) to
another company (RC) pursuant to a court Scheme subject to fulfillment of following
conditions (Section 2(19AA))
–
All properties and liabilities of the business undertaking are transferred at
book values;
–
Shares of the RC are issued to the shareholders of the DC on a proportionate
basis;
–
Shareholders holding not less than 75% in value of the shares of the DC
become shareholders of the RC;
Demerger ...
Demerger - Direct tax neutral for company/shareholder.
•
No income to DC on transfer of undertaking (Section 47(vib))
•
No income to shareholder on receipt of shares in RC (Section 47(vid))
•
Proportionate depreciation in the year of demerger. Depreciation to RC
on the basis of tax W.D.V. in the hands of DC.[explanation to Section
43(1)]
•
Accumulated business losses and unabsorbed depreciation (Section
72A):-
•
–
directly relatable to the demerged undertaking - allowed to be carried
forward by RC
–
not directly relatable to the demerged undertaking - to be apportioned in
the ratio of assets transferred to RC and assets retained by DC
Demerged business undertaking eligible for most tax exemption benefits available even as part of RC (deduction u/s 80IA, 80IB
available for unexpired period to resulting Co.)
Demerger.. .Issues

¾ shareholding criteria to be applied in respect of shares
held as on Appointed date or Effective date?

Transactions between holding & subsidiary Company during
‘Appointed date’ & ‘Effective date’?

Dividend declared - DDT

43B payment by resulting Company

Whether succession to business

What happens if conditions for demerger are not satisfied
Demerger.. .Tax consequences if conditions
of demerger not satisfied

Capital gain to transferor / shareholder

Deemed dividend to shareholder – dividend distribution tax

Section 72A not applicable

Depreciation to transferee on consideration paid

Cost of shares issued to shareholders of demerging
company
Subsidiary
Promoter - 40%
Public - 60%
•
•
•
•
•
Public - 60%
Company X Ltd.
Cement Unit
Company X Ltd..
Cement Unit
Promoter - 40%
Steel Unit
New Company Y Ltd..
Steel Unit
Transfer of undertaking to WOS for a consideration
Direct Tax - Transaction is tax neutral subject to a lock-in period.
(Section 47A )
No capital gains to the holding company (Section 47(iv))
Depreciation to subsidiary on the basis of the written down value
for the holding company (Explanation 6 to section 43)
Two layers of Dividend distribution tax
Slump Sale
Promoter - 40%
Public - 60%
Company X Ltd..
Cement Unit
Promoter - 40%
Public - 60%
Y Ltd..
Company X Ltd..
Steel Unit
Cement Unit
Steel Unit
Transfer of business undertaking as a going concern for lump sum consideration without
values being assigned to individual assets and liabilities.(Section 2(42C)
Transferor Company
•
Transferor Company liable to short/long term capital gains (holding period 36
months)(Section 50B)
– Capital gains computed by deducting ‘net worth’ from the sale consideration
•
Step up of Depreciation - possible as transferee entitled to depreciation on the cost
of assets.(Section 32 & 72) – Valuation of assets required
Slump sale.. .Issues

Contingent consideration – tax implications to
purchaser/seller

Negative net worth – capital gain?

Depreciation to purchaser on cost – impact of 5th proviso
to section 32

Tax liabilities of predecessor – Sec 170

Approval u/s 281 – practical difficulty
Stock Sale
•
Liable to long term capital gains depending on the period of
holding (holding period 12 months)
•
In case of shares listed on a recognised stock exchange in
India
– Subject to securities transaction tax instead of Capital gains tax
– Deduction under section 88E of STT available if income under
‘PGBP' includes any income from taxable securities transactions
Stock Sale.. .Issues
s

Interest deduction of acquisition cost

Tax liabilities of predecessor – Sec 170

Approval u/s 281 – practical difficulty
Itemized Sale
•
Sale on the basis of value being assigned to a separate item.
•
Transferor liable to short/long term capital gains depending on
the nature of asset & period of holding
•
Depreciable asset-Short term capital gain
•
Non depreciable assets
– For stock-Long term if held for a period > 12 months
– For others-Long term if held > 36 months
•
Depreciation to transferee on cost – opportunity to claim step up
depreciation
Itemized sale.. .Issues

47A – No step up when holding Co. pays tax

Tax liabilities of predecessor – Sec 170

Approval u/s 281 – practical difficulty
Considerations

Legal Aspects:
•
•
•
•
•

Finance Aspect:
•
•



Companies Act, 1956
MRTP Act
Industrial Development & regulation Act
Sick Industrial (special provisions) Act
SEBI Regulations
Synergy
Valuation of firm – DCF / APV
Taxation Aspect: I.T.Act, 1961
Accounting Aspect: AS 14
Procedural Aspects – Scheme of Amalgamation
Legal Aspects I

Companies Act, 1956: Sections 391 to 396

An application to be made to the court along with
scheme of amalgamation, company’s final accounts.
 Court has powers to supervise and modify the
structuring of the scheme. Court can order a meeting of
shareholders, members as it deems fit.
 If a ¾ majority of such a meeting consents and the
scheme is sanctioned by court, file it with registrar.
 Court can order for merger of 2 cos. In public interest
 In case of court merger, the transferor co. will be
dissolved without winding up whereas in acquisition, the
transferor co. continues to exist.

MRTP Now Competition Act:

Power retained with the government to order discontinue or restructuring of such
combination agreement as would obtain dominant position.
legal Aspects II

Industrial (Development And Regulation Act):
•
•

Sick Industrial (Special Provisions) Act:
•
•

High court can order to appoint anyone to takeover the management of the
entity for running or restarting.
License of the amalgamating co. shall automatically be transferred to
amalgamated co.
Not applicable to non-industrial co.and small scale or ancillary undertaking.
Section 18 empowers BIFR to sanction the merger of a sick co. with
another co. & vice versa considering the employee’s views.
SEBI:
•
Regulation 3 of SEBI regulations provides for the non applicability of
takeover provisions to Amalgamations effected u/s 391 to 394 of
companies act and Sick Industrial units u/s 18
Finance Aspect…

Returns>cost
Synergy is the economic value of benefits arising out of Amalgamation.
Synergy = VAB –(VA + VB) Hence, it signify the difference between combined
value and individual values of entities.

Synergy can be a vital but a sole determinant of Amalgamation. Post merger
integration, managerial talent can result in abnormal returns.

Valuation of the transferor entity can be done by DCF Methodology i.e.
discounting the estimated future cash flows of entity (less) value of debt and
other obligations as estimated.

An alternative approach to value target co. can be APV:
• Value the company as if it were financed entirely with equity.
• Estimate the value of financing side effects like tax shields etc
• Add the two to arrive at APV.
Taxation Matters

Transferor Company can claim Capital gains exemption u/s 47(vi)

WDV of depreciable assets of transferor co. as on the appointed day to be added to the
respective block of transferor co. Other Assets can be taken at actual cost – Expl (2) to
Section 43(6)( C).

Depreciation claim to be split up between both cos. as per number of days

Only accumulated business loss & unabsorbed depreciation can be transferred. Capital
loss to lapse. Transferee co. should be an Industrial undertaking, Shipping Company,
Hotel or a Bank to claim benefits.

Tax benefits u/s 10A,10B,80IA,80IB shall be available continuously.

Amalgamation expenses can be claimed as deduction equally over 5 years period.

No transfer for shareholders of transferor Co. hence no tax liability. Period for which
shares are held in transferor co. to be considered for indexation .
Tax issues Mapped
For Transferor
•
•
•
•
•
•
•
•
•
•
•
Carry forward of loss / depreciation
Capital gains tax.
Transfer pricing.
Tax avoidance device
Business closure
Diversion of income at source.
Depreciation.
Tax impact of alternate funding.
Staggered consideration.
Capital receipt.
Chapter XXC - Allocation of common assets / liabilities.
Tax issues Mapped
For Transferee
• Carry forward of loss
• Production / asset holding criteria.
• Depreciation on tangible / intangibles.
• Tax credit under MAT.
• Deduction for 43B liabilities.
• Deduction for liabilities of predecessor / remission of liabilities.
• Cost of acquisition / fair market value.
• Continuity of tax exemptions / deductions.
• Restatement of value.
• Succession of business.
Tax issues Mapped
For Shareholders
• Deemed dividend
• Capital gain / loss
• Consideration in kind / staggered consideration.
• Short term / long term capital assets
• Cost of acquisition
• Transfer pricing
• Treaty protection
• Foreign tax credit
• Underlying tax credit
• Tax sparing on exempt income
• Tax avoidance
Long term tax Objectives
• Reduce Dividend distribution tax
• Opportunities to utilize losses.
• Step up of tax depreciation base.
• Reduced administrative cost.
• Transfer pricing asymmetry.
• Flexibility of allocating common expenses.
• Impact on quantification of tax incentives.
• Possibility of depreciation on intangibles
• Mitigation of minimum alternate tax.
• Impact on tax incentive of change in holding / migration of business.
• Tax optimization by alternate funding methods.
AS 14 : Accounting Interpretations

Applicable for Amalgamation as defined in Companies Act, 1956. Not applicable for
other ways of reconstruction, takeover.

AS 14 to be followed only for accounting in books of transferee co. For transferor
Co. has to be as per common principles.

Consideration includes shares, securities, cash and other assets by means of
which obligation is discharged.

Amalgamation in nature of merger: Pooling of Interest
•
•
•
•
•

All Assets and liabilities of transferor taken over by transferee Co.
Consideration paid in equity shares except for fractional shares
Business of transferor co. to be carried on by transferee Co.
Shareholders of at least 90% or more in the transferor Co. to become shareholders in transferee
co.
The Assets and Liabilities to be taken over at book values without making any adjustments by way
of revaluation or otherwise.
Amalgamation in nature of purchase: Purchase method

If any of the conditions regarding amalgamation in nature of merger is not satisfied.
Accounting Methods
Purchase Method
Pooling of interest





In the Financial statements post
Amalgamation, line by line addition of
all assets and liabilities of all entities 
except share capital.
Any Excess realised / loss suffered to
be adjusted by reserves.

For statutory reserves open

Amalgamation adjustment a/c.
Amortize goodwill arising out of such
events over 5 years.
Assets and liabilities to be recorded in
the books at the value at which they
are taken over by the transferee co.
Any surplus over net assets to be
debited to goodwill and loss suffered to
be credited to capital reserve.
Reserves and surplus shall not be
transferred to the purchasing co.
Treatment of statutory reserves and
goodwill shall remain same as in
pooling of interest method.
Scheme of Amalgamation or Merger






No prescribed format for a scheme and is designed to suit terms
and conditions relevant to proposal
Provision for vesting the assets and liabilities of transferor co.
should be clearly defined. If transferee co. does not want to
takeover any item, should mention it specifically.
Define the effective date from which the scheme is intended to
come into operation.
Valuation of the shares to decide the exchange ratio. The method
has to be appropriate and acceptable to majority.
Position of employees has to be clearly set out with a specific
mention of transfer of employees at same terms and conditions.
The application for merger can be made by the company,
members, creditors or liquidator.
Acquisitions and Takeovers







It is the purchase of one of the business as a going concern / acquisition of
controlling interest in it in a friendly or a hostile way.
Takeover by reverse bid wherein a smaller co. gains control of a larger co.
Buy out is the acquisition by incumbent management of the business where
they are employed. Full buy out is still a concept popular in OECD countries.
Direct negotiations / acquisitions of shares are the most common ways of
takeover in India
No one shall acquire shares/voting rights of entitlements of over 15% without
Public Announcement as prescribed by SEBI.
Guidelines for takeovers are embodied in clause 40B of the Listing Agreement
of SEBI
Tax shield for unabsorbed losses and depreciation u/s 72A can be
exploited through Acquisitions



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Accounting Implications
Valuations
Share Exchange Ratio
3/13/2016
Accounting Implications

Accounting Standard 14- Pooling of interest method
- Purchase method
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Accounting implications

61
Amalgamation – Accounting
-
conflict of accounting policies
-
uniform set of accounting policies
-
Change in accounting policies reported in accordance with
AS-5
Accounting implications

Treatment of Reserves
- merger accounting - purchase accounting -
identity of Reserves
net assets value – consideration
= reserve
(Statutory reserve to be
preserved)
- Treatment of goodwill
- implication of AS-26 Intangible asset
- Balance in Profit & Loss A/c
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Accounting Implications

Disclosure
(a) particulars of amalgamating companies
(b) effective date of amalgamation for accounting purpose
(c) method of accounting (pooling vs purchase)
(d) particulars of the Scheme
(e) description and number of shares issued
(f) exchange
(g) treatment of difference
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Valuation and determination of Share
Exchange ratio

Valuations
- CA Valuations
- Merchants Bankers Review
- No two valuations are likely to be identical
- fairness
- a matter of opinion
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Valuations

Book value method – net assets method

Market value method

Profit earning capacity method OR yield method
future maintainable profits
DCF method

Appropriate weightage

Average of the three methods
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Valuations
Who can object to Valuation
66

Members

Creditors

ROC

Employees
Share Ratio



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Share Exchange Ratio
- in the case of amalgamation
Share entitlement Ratio
- in the case of demerger/arrangement
Reduction of share face value in transferor Co. and issue of shares
for the reduced value in transferee co.
Share Ratio







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Court not to interfere with share exchange ratio
Public interest
Movement in market price during the intervening period not material
Share exchange in the case of holding and subsidiary co
amalgamation
Extinguishment of intercompany shareholding
Trust holding
Method of valuation and resultant share ratio to be mentioned in
explanatory statement
Share Ratio

No necessity that equity to be exchanged for equity

Equity can be exchanged for preference shares as option to
shareholders

Shares to be live during the intervening period from appointed date
to record date (after effective date)
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Demerger

No specific accounting standard

AS 14 by and large applies

Valuation on the basis of identifiable business

Share entitlement ratio

Shares of demerging Co. not to be extinguished
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Amalgamation Accounting –
an Illustration

Hind lever Chemicals Ltd. (HLC) with Tata Chemicals Ltd (TCL)

HLC – bulk chemicals & fertilizers
TCL - Chemicals & fertilizers





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Scheme operative from 01-April-02
Bombay High Court sanctioned TCL scheme on 14-Oct-03
Punjab & Haryana High Court sanctioned HLC scheme on 19May04
Effect given in 2003-04 accounts of TCL
Illustration - Merger of HLC with TCL

Notes to the Balance Sheet & P&L account of TCL 31.03.04
6) Scheme of Amalgamation
(a) understanding of HLC has been transferred to and
vested into TCL retrospectively from 1st April 2002 (the
appointed date). The Scheme has been given effect to in these
accounts. The effective date of amalgamation is 01-06-04
(b) the operations of HCL include manufacturing and
trading in fertilizers and Bulk Chemicals
(c) pooling of interests –method as prescribed by AS 14
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Illustration - Merger of HLC with TCL
Rs Cr
Fixed Assets
Investments
3.43
Net Current Assets
217.84
Total Assets
387.60
Less Loans
Deferred tax liability
73
Rs Cr
166.33
62.46
21.36
(83.82)
303.78
Illustration - Merger of HLC with TCL
303.78

Issue of shares 34464000 Equity Shares
in the ratio of TCL for every two HLC
34.46
Transfer of Share premium HLC to Share premium 162.73
Transfer of CRR of HLC to CRR
0.10
Transfer of Capital Reserve of HLC to Capital Reserve
Transfer of P&L A/C of HLC to P&L A/C
45.30
209.13
Balance transferred to General Reserve
60.19
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-
Illustration - Merger of HLC with TCL

Shares to be issued to HLC shareholders by TCL eligible for
dividend declared by TCL

P%L Appropriation A/C of TCL to include dividend on shares
pending allotment to HLC shareholders

Income and expenses during the period 01-04-02 to 31-03-03
incorporated in the Accounts 2003-04 as HLC carried on the existing
business in “trust” on behalf of TCL

All vouchers documents for the period are in the name of HLC
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Illustration - Merger of HLC with TCL

P&L A/C 31.03.2004
Rs Cr
31.03.04
220.53
365.03
Profit after tax
Balance brought forward
Amount transferred on amalgamation
of HLC:
Balance in P&L A/C 01.04.02
45.30
Profit after tax for 2002-03
30.03
75.33
Dividend
(18.96)
Tax on dividend
(2.43)
Transfer to General Reserve
(5.00) 48.94
Amount available for appropriation
634.50
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31.03.03
196.58
300.53
497.11
Illustration - Merger of HLC with TCL

Valuation
valuation carried out and recommended by N.M. Raiji & Co. CA s
and Delloitte Haskins & Sells CA s
Board of Directors on the basis of their independent valuation and
judgment accepts the recommendation

Share Exchange Ratio
Shareholders of HLC (transferor Co.) eligible to get 5 (five) fully
paid up equity shares of Rs 10 each of TCL (transferee Co.) in
respect of every 2 (two) equity shares of the face value of 10 each
held in HLC
Share exchange to take place on a suitable record date
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Presented By
CA Swatantra Singh, B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com
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