corporate restructuring october 2013. role of cfo page 2 recent trends in m&a reorganization...
TRANSCRIPT
Corporate restructuring
October 2013
Role of CFOPage 2
► 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
Content
Role of CFOPage 3
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
Role of CFOPage 4
Recent trends in M&A
Role of CFOPage 5
Recent trends - M&A deals in India
Source: Thomson ONE; Ernst & Young researchNote: data does not includes PE deals
30.7
43.9
53.8
40.7
17.9
62.2
34.6 34.8
1,107
1,298 1,296
1,209 1,134 1,196
840
977
0
200
400
600
800
1,000
1,200
1,400
0
10
20
30
40
50
60
70
80
90
100
2005 2006 2007 2008 2009 2010 2011 2012
Deal
co
un
t
Deal
valu
e (U
S$ b
n)
Deal value Deal count
Role of CFOPage 6
Recent trends - M&A deals in India
18% 21% 23%12%
22% 23% 16% 14%
21%24% 22%
16%
21% 25% 30%23%
61% 55% 55%72%
57% 52% 54%63%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013
By count
Outbound Inbound Domestic
46% 42%33%
7%
52%
27% 34%
7%
17%39%
38%
31%
26%58%
25%61%
37%19%
29%
62%
22% 15%
41%32%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2012
By value
Cross border vs. domestic activity
Source: Thomson ONE; Ernst & Young researchNote: 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.
Role of CFOPage 7
Restructuring Rationale
Commercial
Financial
► Business synergies► Inorganic growth► Gain more competitive position ► Focus on core competencies► Achieve economies of scale► Stake enhancement► Greater control over assets and operations► Exit► Strategic alliances/ partnerships► Unlocking value
► Tax savings► Reducing administrative and management costs► Upstreaming cash ► Encashing value► Cash infusion in operations► Projecting stronger financials► Organic growth► Larger dividends to promoters
Role of CFO integral in identifying opportunities/business requirements
Reorganization prerequisites: a snapshot
Role of CFOPage 8
Fund raising/cash infusion in operations
Role of CFOPage 9
Modes of restructuring for fund raising
Fund raising
Split
Consolidation
Vertical, horizontal and hybrid split – suitable for value split, when funds are required in specified business
Consolidation of similar business via merger, demerger and slump sale
Role of CFOPage 10
Classical/vertical split
► Company A to transfer Business Y to NewCo
► 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
► Appropriate in case of unlisted companies wherein funds are required only in a specific business
Co A
Shareholders
NewCo
Business YBusiness X
Transfer
Business Y
Investor
Fu
nd
s
Value split between multiple companies
Role of CFOPage 11
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
Co A
Shareholders
WOS
Business YBusiness X
Transfer
Business Y
Investor
Funds
Value consolidation along with fund raising efficiency
Role of CFOPage 12
Hybrid split
► Company A to transfer Business Y to NewCo
► Transfer to be effected by way of slump sale, demerger or gift of Business Y to NewCo
► Such that, Co A and Shareholders hold share in NewCo
► NewCo to raise funds for Business Y
► Limited value capture at A Co level
Co A
Shareholders
NewCo
Business YBusiness X
Transfer
Business Y
Investor
Funds
Hybrid structure – achieves (limited) consolidation of value and fund raising ability
Role of CFOPage 13
Funding options
Equity share capital
Compulsorily Convertible Debentures
Shareholders loans
Compulsorily Convertible
Preference Shares
Redeemable debentures
Optionally convertible preference shares
Redeemable preference shares
Optionally convertible debentures
Funding options
Role of CFOPage 14
Funding options – Key considerations
Ease of repatriation
Commercial considerations
Extent of control and voting rights
Tax efficiencyIndian exchange
control regulations
Indian company law regulations
Key
con
side
ratio
ns
Role of CFOPage 15
Unlocking business value
Role of CFOPage 16
Unlocking business value - Modes
Acquisitions Takeover of a sick entityConsolidation of operationsEnhancing promoter holdingsTax savingsEliminate multiple layers of
holdings
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 readyUnlocking business
value
Merger Demerger
Disinvestment of non-core business
Consideration may be structured (Cash / shares)
Time sensitivity
Transfer of single/ identified assetNo requirement for the Buyer Co
to continue to undertake the business
Slump sale Itemized sale
Role of CFOPage 17
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
► 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
MergerTransferor Co
(Amalgamating Co)Transferee Co
(Amalgamated Co)
Shareholders of Transferor Co
Consideration in the form of shares of Transferee
Co
Shareholders of Transferee Co
Shareholders of Transferor Co
Shareholders of Transferee Co
Transferee Co(Merged Entity)Transferor Co
Transaction
Resultant Structure
Dissolved
Role of CFOPage 18
► 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
Shareholders
Resultant Structure
Transferor Co(Demerged Co)
Transferee Co(Resulting Co)
Shareholders of Transferor Co
Demerger ofBusiness B
Consideration in the form of shares of Transferee Co
Transaction
Business A Business B
Transferor Co(Demerged Co)
Transferee Co(Resulting Co)
Business A Business B
Demerger
Role of CFOPage 19
► 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
Transaction
Post slump sale scenario
Selling company (Company A)
Shareholders
Consideration as shares/ cash
Shareholders
Selling company (Company A)
SellingCompany Buyer
companySlump sale of Business B
BusinessA
BusinessB
Slump sale
Role of CFOPage 20
► 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
TransactionConsideration
SellingCompany
Buyer companyItemized sale
of Assets
Itemized sale
Role of CFOPage 21
Tax planning
Role of CFOPage 22
Merger of profit and loss making companies
► Company A (Co A) and Company B (Co B) part
of same group
► Co A is a profitable company, paying normal
corporate tax
► Co B is a loss making company and possess
tax losses
► 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
Co A
Shareholders
Co BMerger
Losses
Accelerated utilization of tax losses within the group vs stamp duty costs
Role of CFOPage 23
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
► Co B to merge with Co A
► 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
Co A
Shareholders
Co BMerger
10A unit
Reduction in group tax cost. Full realization of tax holiday benefit
Role of CFOPage 24
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
LLP - A hybrid entity structure
Features of LimitedLiability
Partnership (LLP)
Features common with Company
Features common with Partnership firm
► Body Corporate► Distinct Legal Entity► Limited Liability ► Perpetual Succession► Common Seal
► Minimum 2 partners► Mutual Agreement► Partners personally
liable for their own wrongful act or omission
Role of CFOPage 25
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
Key benefits
► No DDT
► Profits exempt in hands of partners of LLP
Challenges
► Tax implications upon conversion of existing
company into LLP
Profit distribution
Conversion to LLP
Shareholder
Partner
Transferor Co
Ind Co
India LLP
Role of CFOPage 26
Deemed dividend
Mechanism
► Parent with multiple Indian operating entities
► Indian operating entities set up as LLPs
► Excess cash in one operating entity and need for
cash in another
► Inter-LLP loan
Key benefits
► Inter-LLP not considered as deemed dividend
► Tax efficient movement of cash within operating
entities
Loan
India LLP 2India LLP 1 India LLP 3
India Co 3India Co 1 India Co 2
Parent
Role of CFOPage 27
Restructuring options in light of recent tax and regulatory developments
Role of CFOPage 28
Recent tax and regulatory developments
Developments
Companies Act 2013
Others
► Companies Bill introduced in 2008
► Passed by the Lok Sabha in Dec 2012
► Passed by the Rajya Sabha and Presidential assent in August 2013
► SEBI
Tax
► Key recent developments in the Indian tax landscape
Role of CFOPage 29
The Companies Act, 2013
Role of CFOPage 30
Investment layers
► 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
H Co (Op Co)
Inv Co 1
Inv Co 2
Inv Co 3
Target Co
H CO (Op Co)
Inv Co 1
Inv Co 2
Inv Co 3
Target Co
Companies Act, 2013Companies Act, 1956
Not Notified
Impact
► 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 CFOPage 31
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
► 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
Not Notified
Role of CFOPage 32
Treasury Shares – Case Study…
Cos Act, 1956 Cos Act, 2013
A Co
Trust X
C Co
100%
Issue of shares on merger
merger
Settlement of
shares into
Trust
Flexibilities relating to liquidity and increase in promoter control is available
A Co*
C Co
100%
100%
merger
Flexibilities relating to liquidity and increase in promoter control may no
more be available
* No issue of shares on merger
Role of CFOPage 33
Treasury Shares – Case Study – Likely Impact
Cos Act, 1956 Cos Act, 2013
Books of A Co
Particulars Rs
Net Assets of C Co
200
Interest in Trust
300
Books of A Co
Particulars Rs
Assets of C Co 200
Goodwill 300
► 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;
As per AS-14, goodwill on merger to be amortised over 5 years unless longer period can be justified
Role of CFOPage 34
Cross border mergers Not Notified
► 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
► Scope of inbound mergers may get restricted to notified jurisdictions
► Tax and FEMA regulations to be aligned
Role of CFOPage 35
Fast Track merger Not Notified
Two Small companies
Holding company and WOS
Other prescribed class of companies
1
2
3
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
Applicability
Impact
► 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 CFOPage 36
Merger of Listed Co. in to Unlisted Co. Not Notified
Impact
► 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?
► 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
Role of CFOPage 37
Recent updates
Role of CFOPage 38
Recent updates - SEBI Circulars & notifications
Pre-emption and options in SHA
► 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 CFOPage 39
Recent updates - Others
Listing overseas► 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.
Role of CFOPage 40
Questions?
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