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C a s e S t u d y o nC a s e S t u d y o nD e m e r g e rD e m e r g e r ––
A c c o u n t i n g a n dA c c o u n t i n g a n dC o m p a n y L a wC o m p a n y L a w
-- C A . S u j a lC A . S u j a l
S h a hS h a h
a s p e c t sa s p e c t s
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2 o f 3 4
D e m e r g e r
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D e m e r g e r -
I n t r o d u c t i o n
D e m e r g e r c o n t e m p l a t e s h i v i n g o f f
a d i v i s i o n / u n i t / b u s i n e s s o f ac o m p a n y i n t o a n e w / e x i s t i n gc o m p a n y
D e m e r g e r i n v o l v e s a v e r t i c a l s p l i t o f c o m p a n y , w h e r e b y b u s i n e s s i st r a n s f e r r e d o n a g o i n g c o n c e r nb a s i s t o a n e w / e x i s t i n g c o m p a n y
T h i s d i v i s i o n m a y e i t h e r :
F o r m a n e w c o m p a n y a n d o p e r a t es e p a r a t e l y f r o m t h e o r i g i n a l o n e
o r C o n t .
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P R E
P O S T S h a r e h o l d e r sS h a r e h o l d e r sS h a r e h o l d e r sS h a r e h o l d e r s
D e m e r g e r -
I n t r o d u c t i o n ( C o n t … )( C o n t … )
A B A B
L t d L t d U n d e r t a k i n g AU n d e r t a k i n g A U n d e r t a k i n g BU n d e r t a k i n g B B L t d B L t d
A B A B
L t d L t d
U n d e r t aU n d e r t a
k i n g Ak i n g A
U n d e r t a k i n g BU n d e r t a k i n g B
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R e a s o n s f o r
D e m e r g e r U n l o c k i n g s h a r e h o l d e r v a l u e
S t r e a m l i n i n g b u s i n e s s s e g m e n t s
T o m a k e f i n a n c i a l a n d
f o r d e v e l o p i n g o t h e r m o r ep r o f i t a b l e o p p o r t u n i t i e s
S e l l i n g u n w a n t e d a n d s u r p l u sp a r t s i n t h e b u s i n e s s a s ar e s t r u c t u r i n g s t r a t e g y
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A ) E x a m p l e s o f D e m e r g e r i n t o a
n e w c o m p a n y :
D e m e r g e r o f N e w C h e m i c a lE n t i t R e s e a r c h U n i t N C E
D e m e r g e r –
E x a m p l e s
u n i t ) o f N i c h o l a s P i r a m a lI n d i a L t d i n t o N P I L R e s e a r c h& D e v e l o p m e n t L t d
D e m e r g e r o f C e m e n t B u s i n e s so f L a r s e n & T o u b r o L t d i n t oU l t r a T e c h C e m C o L t d
C o n t .
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B ) E x a m p l e s o f D e m e r g e r i n t o a n
e x i s t i n g c o m p a n y :
D e m e r g e r o f F a r m I n p u t sD i v i s i o n o f E . I . D P a r r I n d i a
D e m e r g e r –
E x a m p l e s ( C o n t … )( C o n t … )
L i m i t e d i n t o C o r o m a n d a lF e r t i l i s e r s L i m i t e d
D e m e r g e r o f C o n s u m e rP r o d u c t s D i v i s i o n o f C a d i l aH e a l t h c a r e L i m i t e d i n t oC a r n a t i o n N u t r a - A n a l o g u e
F o o d s L i m i t e d
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D e m e r g e r – C a p i t a l
S t r u c t u r e 1
D E M E R G E DC O M P A N Y
R E S U L TI N G
C O M PA N Y
P A R T I C U L A R S B e f o r e A f t e r
S h a r e C a p i t a l 1 0 0 1 0 0 5 0
R e s e r v e s & S u r p l u s 6 0 0 3 5 0 2 0 0
L o a n F u n d s 3 0 0 2 0 0 1 0 0
T o t a l L i a b i l i t i e s 1 , 0 0 0 6 5 0 3 5 0
F i x e d A s s e t s 6 0 0 4 0 0 2 0 0
N e t C u r r e n tA s s e t s 4 0 0 2 5 0 1 5 0 C o n t .
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D e m e r g e r – C a p i t a l
S t r u c t u r e 2 ( C o n t … )( C o n t … )
D E M E R G E DC O M P A N Y
R E S U L TI N G
C O M PA N Y
P A R T I C U L A R S B e f o r e A f t e r
S h a r e C a p i t a l 1 0 0 5 0 5 0
R e s e r v e s & S u r p l u s 6 0 0 4 0 0 2 0 0
L o a n F u n d s 3 0 0 2 0 0 1 0 0
T o t a l L i a b i l i t i e s 1 , 0 0 0 6 5 0 3 5 0
F i x e d A s s e t s 6 0 0 4 0 0 2 0 0
N e t C u r r e n tA s s e t s 4 0 0 2 5 0 1 5 0 C o n t .
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D e m e r g e r – C a p i t a l
S t r u c t u r e 3 ( C o n t … )( C o n t … )
D E M E R G E DC O M P A N Y
R E S U L TI N G
C O M PA N Y
P A R T I C U L A R S B e f o r e A f t e r
S h a r e C a p i t a l 1 0 0 1 0 0 1 0 0
R e s e r v e s & S u r p l u s 6 0 0 3 5 0 1 5 0
L o a n F u n d s 3 0 0 2 0 0 1 0 0
T o t a l L i a b i l i t i e s 1 , 0 0 0 6 5 0 3 5 0
F i x e d A s s e t s 6 0 0 4 0 0 2 0 0
N e t C u r r e n tA s s e t s 4 0 0 2 5 0 1 5 0
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Does breaking up
deliver value ?
1 1 o f 3 4
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R I L D e m e r g e rReliance Demerger
Date : January 18, 2006
(in Mn)
Name of Company
Market price No. of shares Market Cap Market price No. of shares Market Cap
RIL 912.90 1,39,35,08,041 12,72,133 708.46 1,39,35,08,041 9,87,245
Pre- Demerger Post- Demerger
. , , , , , ,
Reliance Energy Ventures Ltd 43.84 1,39,35,08,041 61,091
Reliance Capital Ventures Ltd 22.61 1,39,35,08,041 31,507
Reliance Natural Resources Limited 19.72 1,39,35,08,041 27,480
Total 12,72,133 15,10,047
% Increase/(decrease) 18.70%
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r o c e s s o
D e m e r g e r A g r e e m e n t o n
A p p o i n t e d D a t e S c h e m e o f
A r r a n g e m e n t C o n v e n i n g a B o a r d
m e e t i n g
Va l u a t i o n a n d f a i r n e s so p i n i o n A p p r o v a l b y t h e
B o a r d o f D i r e c t o r s S t o c k E x c h a n g e
a p p r o v a l f o r l i s t e dC o m p a n i e s
P e t i t i o n t o t h e C o u r t M e e t i n g o f
S h a r e h o l d e r s /C r e d i t o r s
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Definition of Demerger – Section 2(19AA)
A l l t h e p r o p e r t y o f t h e ‘ u n d e r t a k i n g ’o f t h e d e m e r g e d c o m p a n y b e c o m e sp r o p e r t y o f t h e r e s u l t i n g c o m p a n y
A l l t h e l i a b i l i t i e s r e l a t a b l e t o t h e
D e m e r g e r –C o n d i t i o n s
‘ u n d e r t a k i n g ’ b e c o m e l i a b i l i t y o f t h er e s u l t i n g c o m p a n y
T h e p r o p e r t y a n d t h e l i a b i l i t i e s a r et r a n s f e r r e d a t B o o k Va l u e s
T h e r e s u l t i n g c o m p a n y i s s u e s s h a r e st o t h e s h a r e h o l d e r s o f d e m e r g e dc o m p a n y o n a p r o p o r t i o n a t e b a s i s
S h a r e h o l d e r s h o l d i n g m i n i m u m 75% o f t h e v a l u e o f s h a r e s b e c o m eC o n t .
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Definition of Demerger – Section 2(19AA) –Explanations
‘ U n d e r t a k i n g ’ s h a l l i n c l u d e a n y p a r t o f t h e u n d e r t a k i n g o r a u n i to r a d i v i s i o n o f a n u n d e r t a k i n g o r
D e m e r g e r –C o n d i t i o n s ( C o n t … )( C o n t … )
a u s i n e s s a c t i v i t y t a e n a s a w h o l e
T h e l i a b i l i t i e s o f t h e u n d e r t a k i n g w i l l m e a n s p e c i f i c l i a b i l i t i e s o r
b o r r o w i n g s o f t h e u n d e r t a k i n g
T h e g e n e r a l p u r p o s e b o r r o w i n g o f t h e c o m p a n y w i l l b e t r a n s f e r r e d i n
p r o p o r t i o n o f t h e v a l u e o f a s s e t st r a n s f e r r e d a n d t h e t o t a l a s s e t s o f
C o n t .
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Definition of Demerger – Section 2(19AA) – SomeIssues
I s i t p o s s i b l e t o t r a n s f e r s u r p l u sa s s e t s ?
I n t e r - d i v i s i o n b a l a n c e s -
D e m e r g e r –C o n d i t i o n s ( C o n t … )( C o n t … )
t r e a t m e n t ? B o r r o w i n g s a t h e a d o f f i c e l e v e l –
H o w t o s p l i t ?
I s i t p o s s i b l e t o t r a n s f e r e x t r al i a b i l i t i e s ?
W h e t h e r r e s u l t i n g c o m p a n y c a ni s s u e p r e f e r e n c e s h a r e s t o t h es h a r e h o l d e r s o f t h e d e m e r g e d
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Capital Gain Tax – Sec 47(vid)
N o t a t r a n s f e r - n o
l i a b i l i t y f o r c a p i t a l g a i n st a x i n t h e h a n d s o f s h a r e h o l d e r s o f T r a n s f e r e e C o .
D e m e r g e r – Ta xa s p e c t s
TAXBENEFITS
eeme v en ec 2 22 v
N o t t r e a t e d a s D e e m e dd i v i d e n d . H e n c e n o t a xl i a b i l i t y f o r s h a r e h o l d e r s
Amortisation of expense – Sec 35DD
W h e r e a n a s s e s s e e , b e i n ga n I n d i a n c o m p a n y ,i n c u r s a n y e x p e n d i t u r e ,o n o r a f t e r t h e 1 s t d a y o f
A p r i l , 1999, f o r t h eu r o s e s o f
C on t .
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Cost of Acquisition– Sec 49(2C) & 49(2D)
C o s t o f a cq u i s i t i o n o f s h a r e s o f t h e t r a n s f e r e e / r e s u l t i n gc o m p a n y w i l l b e t h e a m o u n t w h i c h b e a r s t o t h e c o s t o f
D e m e r g e r – Ta xa s p e c t s (cont..)(cont..)
a cq u i s i t i o n o s a r e s o t et r a n s f e r o r / d e m e r g e d c o m p a n y ,t h e s a m e p r o p o r t i o n a s t h e n e tb o o k v a l u e o f a s s e t s t r a n s f e r r e d
b e a r s t o t h e n e t w o r t h o f t h ed e m e r g e d c o m p a n y i m m e d i a t e l y b e f o r e d e m e r g e r
C o s t o f a cq u i s i t i o n o f s h a r e s o f
t h e D e m e r g e d C o w i l l b e t h eo r i i n a l c o s t o f s h a r e s o f
C o n t .
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Depreciation on the Assets beingtransferred
W DV i n t h e h a n d s o f t h e d e m e r g e dc o m p a n y s h a l l b e t h e Ta x
A s p e
D e m e r g e r – Ta xa s p e c t s (cont..)(cont..)
a s s e t s b e f o r e d e m e r g e rl e s s WD V o f t h e a s s e t st r a n s f e r r e d t o t h e
t r a n s f e r e e c o m p a n y . D e p r e c i a t i o n t o
t r a n s f e r o r c o m p a n y a n d t r a n s f e r e e
c o m p a n y i n t h e y e a r o f
c t s
C o n t .
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C a r r y F o r w a r d & S e t - o f f L o s s e s – S e c72A ( 4) & 72A ( 5)
B u s i n e s s L o s s e s a n d U n a b s o r b e dD e p r e c i a t i o n :
L o s s o r U n a b s o r b e d d e p r e c i a t i o n
D e m e r g e r – Ta xa s p e c t s (cont..)(cont..)
w i l l b e t r a n s f e r r e d t o r e s u l t i n gc o m p a n y
L o s s o r u n a b s o r b e d d e p r e c i a t i o n n o td i r e c t l y r e l a t a b l e t o t h e u n d e r t a k i n g
w i l l b e a p p o r t i o n e d b e t w e e n t h ed e m e r g e d c o m p a n y a n d t h er e s u l t i n g c o m p a n y i n t h e p r o p o r t i o no f t h e v a l u e o f a s s e t s t r a n s f e r r e d a n d
t h e v a l u e o f a s s e t s r e m a i n i n g w i t h
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Case Study – Cadila Demerger
Zyd u s Ho s p i t a l s &
Me d i c a l R e s e a r c hPvt Lt d (ZHMR PL)
71 . 6
C a d i l a He a l t hc a r e
Lt d (C a d i l a )
Pha r m a Bu s i n e s s
C a r n a t i o n Nu t r a -
An a l o g u e Fo o d s
Lt d (C a r n a t i o n )
o n s u m e r Pr o d u c t
Bu s i n e s s
C o n s u m e r Pr o d u c t
Bu s i n e s s
6 1 . 56 %
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ZHMRPL
Step 1: D e m e r g e r o f C o n s u m e rP r o d u c t D i v i s i o n o f C a d i l a
i n t o C a r n a t i o n
Cadila Carnation
Pha r m a Bu s i n e s sC o n s u m e r Pr o d u c t
D i vi s i o n
C o n s u m e r Pr o d u c t
Bu s i n e s s
D e m e rg e r
4 e qu i t y s h a r e s o f C a r n a t i o n i s s u e d t o
t h e s h a r e h o l d e r s h o l d i n g 1 5 e qu i t ys h a r e s o f C a d i l a (i n c l u d i n g ZHMR PL )
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Carnation
ZHMRPL
P o s t D e m e r g e r :
Cadila
Pha r m a
Bu s i n e s s
C o n s u m e r
Pr o d u c t
Bu s i n e s s
Po s t d e m e r g e r C a r n a t i o n c e a s e t o be as u bs i d i a r y o f C a d i l a a n d be c o m e s
s u bs i d i a r y o f ZHMR PL
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Cadila ZHMRPLA ma l ga mat i o n
Step 2: A m a l g a m a t i o n o f ZH M R P Li n t o C a d i l a
Carnation
9 C r o r e s h a r e s o f C a d i l a h e l d by ZHMR PLc a n c e l l e d a n d n e w 1 0 . 0 9 C r o r e s h a r e s o f
C a d i l a i s s u e d t o s h a r e h o l d e r s o f ZHMR PL(p r o m o t e r s )
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Step 3: R e - o r g a n i s a t i o n o f r e s e r v e s
o f C a d i l a
R s . 200 C r o r e s d e b i t e d t o S h a r eP r e m i u m A c c o u n t a n d c r e d i t e d t o
I n t e r n a t i o n a l B u s i n e s sD e v e l o p m e n t R e s e r v e A c c o u n t( I B D R )
I B D R t o b e u t i l i s e d f o r :
P r o f e s s i o n a l , l e g a l , f i n a n c i a l f e e s f o ra n y a c qu i s i t i o n b y C a d i l a
D e b t i s s u e , I n t e r e s t , i n t e g r a t i o ne x p e n s e s o r f o r e i g n e x c h a n g e
f l u c t u a t i o n r e l a t i n g t o s u c h d e b t R & D e x p e n s e s f o r p r o d u c t
r e g i s t r a t i o n a b r o a d
G o o d w i l l a r i s i n g o n a c c o u n t o f a cq u i s i t i o n w h i c h r e q u i r e si m p a i r m e n t
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Shareholding Pattern of Cadila
Pre Post
% %
Promoter shareholding 72.02 74.25
Others 27.98 25.75
Shareholdin Pattern of Carnation
Particulars
Pre Post
% %
Promoter shareholding 61.56 70.53
Others 38.44 29.48
Particulars
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