1. ICSI - MSOP - 15.03.2012 Business Strategy, Corporate Restructuring and Take Overs An Overview By R. Ramesh Chandra Partner L V V Iyer & Associates Corporate Lawyers Begumpet Hyderabad

2. ICSI - MSOP - 15.03.2012 Business Strategy increase efficiency consolidate increase market share turn around increase market capitalization entry barrier

3. ICSI - MSOP - 15.03.2012 Business Strategy Corporate Restructuring -Part-IX conversion - Mergers - Acquisitions - Conversion to LLP

4. ICSI - MSOP - 15.03.2012 Business Strategy Conversion of firm to Company Under Part-IX of the Companies Act No Stamp Duty Tax Neutral (subject to conditions) Registration - a vesting order

5. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions Arrangements pursuant to Sec.391/394 Merger De-merger Reverse Merger Hiving off Re-organization of Capital Compromise with Creditors Reduction of capital as part of Composite Scheme

6. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions What is a reverse merger ? A profit making company merges into a loss making company to take advantage of the accumulated losses of the surviving company which shall be set off against the profits of the combined entities

7. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions De-merger Recognized as a concept under Income – Tax Act, 1961 In place of merging the company as a whole, an undertaking (business division) is spun off to a separate company at book value. Differs from a hiving off arrangement in that shares of the resulting company is issued to the shareholders of the de-merged company as opposed to shares being issued to the de- merged company itself in a hiving off arrangement.

8. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions Hiving off Resorted to enable holding the hived off undertaking in a subsidiary Not recognized for exemption as transfer under Income Tax Act, 1961 Normal practice is to carry out the hiving at book value to make it tax neutral

9. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions Reorganization of capital Consolidation of shares of different classes Division of shares into shares of different classes Combination of both the above A typical case is to convert preference shares into equity or debentures when redemption under Sec.80 is not possible

10. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions Reduction of Capital Can be attempted as part of a composite scheme without a need to follow the procedure under Sec.100 to 104 Repaying preference capital when redemption under Sec.80 is not possible Converting equity capital to preference capital under an arrangement would not amount to reduction of capital.

11. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions Stamp Duty Applicable only to Amalgamations under AP Stamp Act. Applicable only to Amalgamations under AP Stamp Act. De-merger and other arrangements not covered. De-merger and other arrangements not covered.

12. ICSI - MSOP - 15.03.2012 Mergers & Acquisitions Tax implications Amalgamations under Sec. 2(1 B) of Income Tax, Act, 1961 –not a transfer u/s 47 De-merger under Sec.2 (19 AA) of Income Tax Act, 1961 – not a transfer u/s 47

13. ICSI - MSOP - 15.03.2012 Competition Law Acquisition by enterprises No Group Criteria Assets – In India – Rs.1500 cr. Worldwide- USD 750 mn (Rs.750 cr. in India) Turnover – In India – Rs.4500 cr. Worldwide- USD 2250 mn (Rs.2250 cr. in India) Exceptions – Merger between Holding and subsidiary Companies and between wholly-owned subsidiaries belonging to the same Group

14. ICSI - MSOP - 15.03.2012 Competition Law Acquisition by Group Group Criteria Assets – In India – Rs.6000 cr. Worldwide- USD 3 bn (Rs.750 cr. in India) Turnover – In India – Rs.18000 cr. Worldwide- USD 9 bn (Rs.2250 cr. in India)

15. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies `B’ Co.Ltd. to merge with `A’ Co.Ltd. Average Share Price : A Co.Ltd. B Co.Ltd Rs 250 Rs 50 Swap Ratio:14 EPS of B Co.Ltd. Rs 5 Net Result: A Co. Ltd adds to itself a business with an EPS of Rs 20

16. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies B Co.Ltd. to merge with A Co.Ltd. Average Share Price :A Co.Ltd.B Co.Ltd. Rs 200Rs 8 B Co.Ltd. has an operating profit but on account of huge debt burden it has a net loss. The merger scheme includes an arrangement by which all the long term debts are extinguished by issuance of shares of A Co.Ltd. at Rs 180 per share. Net Result : After merger B Co.Ltd. becomes a viable division of A Co.Ltd. Issue: Whether under Section 78 of the Companies Act, 1956, Securities Premium A/c can be credited without receipt of money.

17. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies A Co.Ltd. is a holding company of B Co.Ltd. Both A Co.Ltd. and B Co.Ltd. are listed companies. After the merger in the next two to three years the share price of A Co.Ltd. is supposed to rule quite high. Instead of canceling the shares held by A Co.Ltd. in B Co.Ltd. in the process of merger, shares of A Co.Ltd. in the swap ratio to be issued to a Trust. The Trust to hold the shares for three years for disposal, the proceeds thereof to go to A Co.Ltd. Issue: When the proceeds of the sale of shares by the Trust are received in the hands of the Company, what is the nature of such a receipt – is it a capital receipt not subject to Income Tax ?

18. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies A Co.Ltd. is a closely held family company. B Co.Ltd. is a listed company where the family has controlling interest. By merging A Co.Ltd. into B Co.Ltd. the shareholding of the family in B Co.Ltd. is increased substantially without having to go through the Takeover Code.

19. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies A Company Limited is a listed BIFR Company which has been sanctioned a Corporate Debt Restructuring package. In terms of this package, 50% of the equity share capital is converted into preference capital, Part of the loans are converted into preference capital and promoters bring fresh money as equity contribution. A Company Limited goes in for a Scheme of Reconstruction & Arrangement under Section 391 of the Companies Act, 1956. Implications Can such a thing be done under the provisions of Section 391 of the Companies Act, 1956, when the Company is a BIFR Company? Does it involve reduction of capital? Are the promoters equity contribution exempt under Takeover code ?

20. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies A Company Limited, B Company Limited and C Company Limited have a common business i.e chemical business. All these companies also have other businesses. A new company is formed called D Company Limited. A Company Limited is a listed company with a share capital of Rs.30 crores. B Company and C Company are non listed companies with share capital of Rs.5 crores and Rs.2 crores respectively. D Company Limited is formed with an authorised capital of Rs.10 crores. On the basis of evaluation by experts, the equity capital of D Company Limited is kept at Rs.10 crores. All the chemical businesses of A Company Ltd., B Co., Ltd., and C Co., Ltd., are de-merged into D Company Limited. The net assets remaining in A Co., Ltd., is Rs.12 crores. The capital of A Co., Ltd., is reduced from Rs.30 crores to Rs.12 crores. D Company Limited becomes a listed company with a healthy EPS of Rs.7/- as against a combined EPS of Rs.3/- of A Company Limited, B Company Limited and C Company Limited

21. ICSI - MSOP - 15.03.2012 Corporate Restructuring-Case Studies A Company Limited has issued Cumulative Preference Shares amounting to Rs.50 crores redeemable at the end of 10 years. Since A Company Limited has been able to securitize its future receivables, it wants to redeem the preference shares now, i.e. after three years of issue, despite the fact that it does not have enough profits to redeem the shares nor does it come out with a new issue of shares for this purpose, under Section 80 of the Companies Act, 1956. In view of this, A Company Limited goes in for a reduction of capital under Section 80 of the Companies Act, 1956. Can this be made possible in law?

22. ICSI - MSOP - 15.03.2012 Take Over Regulation – 3 - Trigger for open offer No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise 25% or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations.

23. ICSI - MSOP - 15.03.2012 Take Over The term ‘acquirer’ covers (i) Persons – both individual and juristic person (ii) who either directly or indirectly, acquires or agrees to acquire –a. Shares –b. voting rights –c. control of the target company (iii) by himself or with any person acting in concert.

24. ICSI - MSOP - 15.03.2012 Take Over Acquirer includes a person acquiring shares under blank transfers which are yet to be registered – as decided by Bombay High Court in Sreenivasulu Reddy’s case

25. ICSI - MSOP - 15.03.2012 Take Over The SEBI Tribunal in Kiron Margadarsi’s case held that in the case of a pledge of shares with blank transfer forms there is no case of acquisition by the pledgee since the intention of the pledger is only to pledge the shares and not to sell them and also since in the case of pledge only the special property in the pledged goods including shares would pass to the pledgee while the legal ownership of the same still remain with the pledger.

26. ICSI - MSOP - 15.03.2012 Take Over The SEBI Tribunal in Ashwin Doshi’s case held that in order to arrive at the percentage of voting rights, the shares which are frozen or attached by a special court cannot be excluded from the total voting power in relation to the company

27. ICSI - MSOP - 15.03.2012 Take Over Creeping Acquisition upto 5% of voting rights in any financial year ending 31 st March – limited to Acquirer along with persons acting in concert (PAC) holding shares or voting rights of 25% or more but less than maximum permissible non-public shareholding.

28. ICSI - MSOP - 15.03.2012 Take Over Regulation – 4 – Trigger for Open Offer Acquisition of control directly or indirectly with or without acquisition of shares or voting rights shall trigger an open offer unless the Acquirer makes a public announcement of an open offer. For the purpose of Regulation – 3 and Regulation – 4, acquisition of shares or voting rights in, or control over, any company that would enable exercise or direct the exercise of such percentage of voting rights in, or control over target company otherwise attracting the regulations would be considered indirect acquisition of shares or control.

29. ICSI - MSOP - 15.03.2012 Take Over SEBI Tribunal in the Gujarat Ambuja Case held the term ‘control’ would mean effective de facto control and not dejure control alone

30. ICSI - MSOP - 15.03.2012 Take Over The term ‘Control’ includes The right to appoint majority of the directors; or (ii)To control the management or policy decisions exercisable by a person or persons, acting individually or in concert, directly or indirectly, by (a) virtue of their shareholding (b) management rights (c) shareholding agreements, or (d) voting agreements, or (e) in any other manner In order to come within the definition of ‘control’ it is not necessary that one should have actually appointed majority of directors, it would be enough if such a right of appointment is vested in him.

31. ICSI - MSOP - 15.03.2012 Take Over Exempted Categories Rights Issue to the extent of one’s entitlement and beyond entitlement subject to not having renounced any of the entitlements and the price at which the rights issues made is not higher than the ex-rights price of the shares calculated as per the Regulations.

32. ICSI - MSOP - 15.03.2012 Take Over Pursuant to a scheme- framed under Section 18 of SICA of arrangement or reconstruction including amalgamation or merger or de- merger Pursuant to the provisions of SRFAESI Pursuant to the scheme of CDR not involving change of control

33. ICSI - MSOP - 15.03.2012 Take Over SEBI Tribunal held in Mega Resources’ case otherwise known as Bombay Dyeing case that for the purpose of disclosure the holdings of the acquirer along with his associates and persons acting in concert have to be taken into account.

34. ICSI - MSOP - 15.03.2012 (1)“Shares” means shares in the equity share capital of a company carrying voting rights and includes any security which would entitle the holder to exercise voting rights (including all depository receipts carrying an entitlement to exercise voting rights)

35. ICSI - MSOP - 15.03.2012 The SEBI Tribunal in Modipon case held that there is no legal presumption that every promoter is an acquirer or a person acting in concert with another promoter unless the facts are otherwise.

36. ICSI - MSOP - 15.03.2012 Thank you