module-2 cr
TRANSCRIPT
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Corporate Restructuring
Module 2
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Module 2
Accounting for Mergers & Demergers
Company Law and Competition Act, 2002
SEBIs rules & regulation for M & A Share Buyback guidelines
Tax Implications
Calculation of Exchange ratio
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Accounting for M & A
Amalgamation or Business Combination
Transferor Company
Transferee Company Mergers
Acquisitions
Uniting of Interest Reserve
Purchase Consideration
Fair Value
212
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Amalgamation Types
Amalgamation in the nature of Merger
Amalgamation in the nature of Purchases
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Accounting Classification of
Amalgamation
A. The pooling of interests method
B. The purchase method
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Pooling of Interest Method (In
case of Merger)
i. Assets and liability recorded at existing carryingamount
ii. Reserves carried at existing figures
iii. P & L either aggregated or transferred to GR
iv. Difference of consideration adjusted in reserve
v. If conflict in accounting policies, it must dealthwith AS5.
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Purchase Method
i. Assets and liability recorded at existing carryingamount or values at the date of amalgamation
ii. Reserves not carried out except StatutoryReserve
iii. Difference of consideration adjusted asgoodwill and it must be amortised
iv. If consideration is lower than the value of netassets, difference treated as capital Reserve
v. If conflict in accounting policies, it must dealthwith AS5.
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If Amalgamation is in the Nature
of Merger
Share capital issued by absorbing company ----
- Total share capital taken over ----
Transferred to General Reserve ----
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If Amalgamation is in the Nature
of Purchase Purchase Consideration
Shares issued to equity shareholder of absorbed company ----
Pref.shares of absorbed company ---- Net Assets
Assets taken over ----
Less: Liabilities
Creditors
Debentures
Other Current Liabilities -----
Capital Reserve = Net AssetsPurchase consideration
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A Ltd. and B Ltd. decides to amalgamate. A ltd. takes over B Ltd.
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Equ.share of 10 10,00,000 6,00,000 Land and Building 5,00,000 3,10,000
12% Pref share@10 4,40,000 3,40,000 Plant and machinery 6,50,000 3,40,000
General Reserve 1,00,000 50,000 Furniture 1,15,000 70,000
Export Profit Reserve 60,000 40,000 Investments 1,40,000 1,00,000
Invt. Allowance Reser - 20,000 Stock 2,50,000 1,90,000
Profit and Loss A/c 1,50,000 1,00,000 Debtors 1,80,000 2,06,000
14% Debenture@100 1,00,000 70,000 Cash and Bank 1,45,000 1,04,000
Creditors 90,000 70,000
Other curr.liability 40,000 30,000
19,80,000 13,20,000 19,80,000 13,20,000
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Adjustment1. 70,000 equity shares of Rs. 10 each fully paid to equity
shareholders of B Ltd.2. 14% preference shares of Rs. 100 each to make
payments to preference shareholders of B Ltd. at apremium of 10%
3. Debentures of B Ltd. were converted into equalnumber of debentures of A Ltd.
4. The statutory reserves of B Ltd. are still to be retained
for 2 more years.(a) Prepare b/s if amalgamation is in the nature of Merger
(b) Prepare b/s if amalgamation is in the nature of
Purchase.
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Computation of Purchase
Consideration
Fair Value Measurement
Tangible & Intangible Assets, Stock, QuotedInvestment, Monetary Assets and liabilities
Treatment of Goodwill
To amortise over a period not exceeding 5 yrs
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Computation of Purchase
Consideration
M & A Expenses
It should be charged to P & L A/c of theCombined Entity
Treatment of Reserves
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Accounting of Demerger
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Legal Aspects of Demerger
Assets and Liabilities transferred by theDemerged Company becomes the property ofthe resulting company
Transferred at values appearing in its books
In consideration, the shares issued onproportionate basis
Transfer of undertaking is on Going ConcernBasis
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Taxation Aspects of Demerger
Taxation of Shareholders in DemergedCompanyNo dividend and capital Gain
Tax benefit
Expenses are allowed 20% year from year
Depreciation shall be apportioned
The accumulated losses and unabsorbeddepreciation shall be allowed to be Carriedforward
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The Competition Act, 2002
To establish commission to prevent practiceshaving adverse effect on competition
To promote and sustain competition in markets
To protect the interest of consumers
To ensure freedom of trade carried on by any
other participants in India.
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SEBI (Substantial Acquisition of shares and
takeovers) Regulations, 1997
It was reinforced to regulate the takeover bids.
Appoint a merchant banker
The public announcement shall be made not latethan 4 working days of an agreement foracquisition of shares
Within 14 days from the date of announcement,a draft of letter of offer at minimum price has tobe filed with SEBI
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Company Laws for M & A
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Laws Governing Mergers
A. The Indian Companies Act, 1956
B. Industries Development and Regulation Act ,1951
C. Income Tax Act, 1961
D. Monopolies and Restrictive Trade practices
Act, 1969E. FEMA
F. Sick Industrial Companies Act, SICA, 1985
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Share Buyback Guidelines
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Methods of Buyback
1. Tender Offer Method
2. Open Market Offer Method
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New Policy for Buy Back
The legal Aspects of Share Buyback in India
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The Legal Aspects
A. Maximum Permissible Buyback
25% of total paid up capital and reserves
B. Available resources permitted for buy-backFree reserves, Securities premium a/c
C. Extinguishment or Cancellation of shares
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The Legal Aspects
D. Procedural Requirements
Authorized by Articles Special resolution in GM
No default in repayment
No default in complying with the provisions Must be fully paid up
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The Legal Aspects
E. Declaration of Solvency
F. Sources from where shares can be purchased
1. Existing shareholders on pro-rata
2. Tender Offer
3. Open Market
4. Odd lots
5. Stock option or Sweat Equity
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Procedure for Buyback
1. Board Resolution and public announcement
2. Specific Date
3. Letter to SEBI4. Not less than 15 Days and not more than 30
5. Open a Escrow account
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Advantages of Buybacks
1. Prevents Undervaluation
2. Use of surplus fund
3. Promoters increases control4. Tool to increase shareholders value
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Disadvantages of Buybacks
1. Shareholders may be deprived of
2. Promoters may manipulate share prices
3.
No fixed commitment
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Motives Behind Buybacks
1. Return of surplus cash to shareholders
2. Enhancement of the EPS
3.
Argument for undervaluation of shares4. Increase of Promoters Voting power
5. Anti-takeover defense
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Tax Treatment of Buyback of
Shares
1. Sec 46 A, inserted in IT Act to treat theconsideration received by shareholders fromany company on purchase of its own shares as
Capital Gain.
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Accounting for Buyback
1. Buyback financeFree reserve or Securitypremium
2. Sum to be transferred to Capital RedemptionReserve
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Accounting for Buyback
1. For the amount payable on buyback
Equity Share Capital A/c Dr.
Reserves (Premium) A/c Dr.To Equity Shareholders A/c
For transfer to capital redemption reserveReserve A/c Dr.
To Capital Redemption Reserve A/c
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Calculation of Exchange Ratio