value creation strategies - wirc-icai.org · value creation strategies: real estate developers-anup...

Value Creation Strategies:Real Estate Developers

- Anup P. Shah16th July, 2011

2 Days Conference @ Hotel Sea Princess

Corporatisation of Firms

© PRAVIN P. SHAH & CO. 2

Corporatisation – Alternatives

� Builders’ Firms can be converted into

Company / LLP:

� Slump / Asset Sale by Firm to Co.

� Slump / Asset Sale by Firm to LLP


� Conversion of Firm into Co. under Part IX

� Conversion of Firm into LLP under LLP Act

Corporatisation by Sale

Shareholders / Partners


Firm Co. / LLPSlump / Asset Sale of Bus.

Corporatisation by Sale

� Slump Sales or Asset Sales

� No Court process

� Quick

� Factors to be considered


� Factors to be considered

� Capital Gains

� Stamp Duty

� VAT

Tax Consequences

� Slump Sale to Co. / LLP

� Lump sum consideration – No itemised break-up

� Excess of SC over Networth = LTCG / STCG

� Gains Taxable u/s. 45 r.w. s.50B


� Itemised Sale to Co. / LLP

� Itemised Break-up over A&L

� Gains Taxable:

�

Tax Exemption

� Exemption for Slump / Itemised Sale to Co.:

� S.47(xiii) Conditions

� All A / L of Firm / AOP become that of Co.

� All Partners become SHs in same proportion


� Partners do not receive any other consideration

� SH of all Partners is at least 50% of Voting Power

� 50% SH of Partners continues for 5 years

� Exemption Available even if Sale to LLP

Tax Exemption

� Analysis of s. 47(xiii):

� Can it be a New Co.?

� Firm can trf 2 Businesses to 2 Cos.?

� Only Business A/L to be trd?

Can RPS be issued to partners?


� Can RPS be issued to partners?

� Shares can be issued at a Premium?

� Transfer inter se Partners permissible in 5 years?

� If conditions violated

Stamp Duty

� Slump Sale / Assets Sale

� Conveyance under BSA & ISA

� Bifurcate assets into Immovable & Movable

Bifurcation for SD purposes negates IT


� Bifurcation for SD purposes negates IT

Benefit?

� Under BSA - SD on Movables

� Under BSA - SD on Immovables

Stamp Duty

� Slump Sale

� Sale of Undertaking as a Going Concern

� SD on:

Net Market Value of Undertaking; OR


� Net Market Value of Undertaking; OR

� Gross Value of Assets

Stamp Duty

� Slump Sale / Asset Sale

� Under ISA : No SD if transfer:

� between Transferor Co. owning at least 90% of

Transferee Co. or


Transferee Co. or

� between Parent Co. & min. 90% Subsidiary or

� Two 90% Subsidiaries of one Parent Co.

� Applicable in Mumbai?

Indirect Taxes – Slump Sale

� VAT – Applicable?

� Sale of Bus. Undertaking = Movable Goods?

� Lump sum consideration

� Is it a sale in course of Business?


� Service Tax / CENVAT

� Trf. of CENVAT Credit available to Buyer Co?

� No Service Tax on Sale

Issue of Shares

� Articles of Association

� 0.2% of Share Capital – Max. Rs. 50 lakhs

� At every increase in Authorised Capital

� Issue of Share Certificate:


� Issue of Share Certificate:

� 0.1% of the Value of the Share

�

Corporatisation by Conversion

Shareholders / Partners


Firm Co. / LLPConverted by Statute

Part IX Conversion

� Firm⇒⇒⇒⇒ Co. u/s. 565 of Cos. Act (“Part IX”)

� Transfer of Undertaking from Firm to Co.?

� Sale of Property?

� Statutory provision – ROC must Incorporate Co?


� Conveyance reqd.?

� Statutory vesting of property

� Capital gains?

� Is it a Transfer u/s. 45(4)?

� Stamp Duty?

Part IX Conversion

� Conditions

� Registered Firm

� 7 or more Members of Co.

� On Conversion Co. only has Partners as Members


� On Conversion Co. only has Partners as Members

� Do conditions of s.47(xiii) need to be satisfied?

LLP Act Conversion

� Firm⇒⇒⇒⇒ LLP u/s. 55 of LLP Act

� No Transfer of Undertaking from Firm to LLP

� Statutory provision – ROC must Incorporate LLP

� Conveyance reqd.?


� Statutory vesting of property

� Capital gains?

� Is it a Transfer u/s. 45(4)?

� Stamp Duty?

Mergers


Mergers – Key Issues

� Appointed Date – Retrospective?

� Rationale? Tax Planning only?

� Share Exchange Ratio

� Fairness Ratio in case of Listed Cos.


� Accounting Treatment

� Auditor’s Certificate for Listed Cos.

� Reduction of Capital of Transferee Co.

� St. Ex. Permission

� 3/4th SH Majority + Court

Mergers – Key Issues

� Tax Losses & MAT Credit

� Stamp Duty

� ICDR Regs for Listed Cos.

� Listing Requirements


Reverse Merger

Finvest Ltd.UNLISTED

Ace DevelopersLISTEDMERGER


• Unlisted Co.

• Loss Making

• Low activity

• Listed Developers

• Profitable

• In Business

Q. Listing of Finvest Ltd. possible?

Reverse Merger

� Listing possible?

� SEBI’s approval required

�

� Justification


� Justification

� Under a Court Scheme of Merger / Demerger

� Procedural matters

Forward v. Reverse Merger - Comparison

Available?Available?C/f Unabs. Dep

Available?Available?C/f Bus. Loss

Reverse MergerForward Merger


Advisable?Required?Capital Reduction

Unlisted can be

listed?

Continues?Listing

Remains with itAvailable?MAT Credit of

Loss making Co.

Merger

� SD on Merger is an evergreen issue

� BSA Conveyance defn. – s.2(g) Includes

� Every Instrument,


� Every Decree / Order of Civil Court

� Every HC Order u/s. 394 of Cos Act or RBI

Order under Banking Act for the

amalgamation or reconstruction of Cos.

Specific Entry for SD

� Entries for Merger under Sch. I

� Maharashtra

� Gujarat

� Karnataka


� Rajasthan

� MP

� AP

� West Bengal

Merger – BSA Rates

� Art. 25 Conveyance

� 10% of Market Value of shs issued + consideration

� But not exceeding higher of:

� 5% of Market Value of Immovable Property of Transferor


located in Maharashtra; or

� 0.7% of Market Value of shares issued

� Upper limit if 5% of MV of IP > 10% of MV of shs

� For Market Value of Imm. Property –

� Refer to Ready Reckoner Value


Details Scenarios

1 2 3

FMV of Shares 1000 1500 1700

FMV of Imm. Prop. In Mah. 3000 500 120


FMV of Imm. Prop. In Mah. 3000 500 120

10% of FMV of Shares 100 150 170

5% of Imm. Prop. 150 25 6

0.7% of FMV of Shares 7 10.5 11.9

Stamp Duty 100 25 11.9


� Art. 25 Conveyance

� For Market Value of Shares :

� If Transferee listed & quoted for Trading on a St. Exch. :


FMV as on Appointed Date in Scheme or

Date of Court Order

� Transferee Not listed &/or listed Not quoted for Trading:

FMV of Transferor’s Shares or

FMV as determined by Collector

Merger – ISA

� Gemini Silk (Cal)

� ISA – West Bengal

� Merger u/s. 394 is a sale

� Sale by a Court Order

� Consideration is shares

� Order is an instrument – SD as

� Madhu Intra Ltd. (Cal)

� Under ISA – WB – 2 Member

� Overrules Gemini Silk

� HLL (SC) not cited or considered

� No SD on Order unless express

provision like under BSA


� Order is an instrument – SD as

on Conveyance

� Hindustan Lever (SC)

� Under BSA – did not deal with

ISA expressly

� SD payable even if no amdt to

BSA

provision like under BSA

� Delhi Towers (Del)� Decision under ISA ~ Delhi

� Considered all decisions

� Order u/s.394 is a conveyance

� Liable to stamp duty

� Hero Motors (All)� Order u/s.394 a conveyance

� Liable to stamp duty

Demerger


Demerger – Key issues

� Vertical Split

� Tax Neutral

� Transfer at Book Values

� Trf. of Bus. Undertaking on Going Concern Basis


Trf. of Bus. Undertaking on Going Concern Basis

� At least 3/4th SH should become SH

� A/c : Whether Capital & reserves to be split?

� Stamp Duty

Demerger for Value Creation

INDIABULLS FINANCIAL SERVICES

NBFC

SHAREHOLDERS


NBFC

INDIABULLS SECURITIESStock Broking Company

INDIABULLS REAL ESTATE Real Estate Developer

Demerger for Value Creation

INDIABULLS FINANCIAL

SERVICES

INDIABULLS REAL

ESTATE

INDIABULLS

SECURITIES

SHAREHOLDERS


SERVICES

NBFC

ESTATE

Real Estate Developer

SECURITIES

Stock Broker

Demerged

Company Takeover


Company Takeover

� Key Considerations:

� Takeover Regulations for Listed Cos.

� FEMA Provisions if one party is a PROI

� Capital Gains on Seller


� Capital Gains on Seller

� Exempt if LTCG through St. Ex.

� MAT if Corporate Seller even if gain exempt

� Indexation or 10% in case of Listed LTCG

� Tax Clearance Certificate / TDS if Foreign Seller

Acquisition in Listed Cos.

Acquirer’s SH Acquisition possible

0-14.99% Any % any time till 14.99% ~ Excess PA

15-55% 5% in any FY ~ Excess PA


55-75% Up to 5% in tranches / via buyback

55-75% Over 1st 5% - by making a PA

Over 75% Follow Delisting Regulations, 2009

Stamp Duty

� Transfer of Shares

� SD covered by ISA and not BSA

� SD under ISA @ 0.25% of consideration

No SD if shares in Demat form


� No SD if shares in Demat form

� Is Demat possible for Unlisted / Private Cos.?

Takeover of Real Estate Co.

� Pvt. Co.’s only Asset is Real Estate

� Sale of 100% Shares

� SD on Conveyance @ 5% or Shares @ 0.25%?

� Society Transfer Charges payable?


� Society Transfer Charges payable?

� What if Co. owns land in MIDC

�

Other Modes


Partnership

� Admission

� If share in firm is bought in cash > Rs.50,000 =

1% subject to maximum of Rs. 5,000

� If share in firm is bought in property =


Same as Conveyance on MV of property

� Retirement / Dissolution

� If retiring partner taking property is not same as

introducing partner = Conveyance (min. Rs. 100)

� Else = Rs. 200

LLP

� LLPs becoming very popular

� LLP: Owner contributes land &

Builder contributes finance + labour

� SD under Art.5 or 25 or 47


� SD under Art.5 or 25 or 47

� 5% or 0.2% or Rs. 100

� Is it a Partnership?

� Is it a Conveyance?

� Is it an Agreement?

HUF Partition

� Instrument of Partition :

� 2% on the Market value of the Separated Share of

the Property

� On which Value is Stamp duty leviable?


� What is the meaning of Separated Share?

Hindu Minority

� Natural Guardian needs Court’s permission to

deal in IP belonging to a Hindu Minor:

� Sale, Gift, Mortgage

� Lease over 5 years


� Lease over 5 years

� If not obtained then transaction voidable at

instance of Minor or person claiming under him

SEBI VCF Regs.

� “Real Estate” removed from the ‘Negative

List’ Sectors

� Can a VCF be set-up in the form of an LLP?

� Can SEBI registered VCF invest in an LLP?


� Can SEBI registered VCF invest in an LLP?

�

FDI & Instruments


Relevant Regulations

Consolidated FDI Policy – DIPP, Ministry of Commerce


FEMA Regulations –Mode of Investments

+ Reporting

AP Dir Circulars –RBI’s changes

from time to time

Relevant Regulators

FIPB –Cases

requiring Govt.

Approval

DIPP –Formulates FDI Policy

Part of FinanceMinistry

Part of Commerce Ministry


Approval

RBI –Nodal

Regulatory Authority

Key Types of Foreign Invst.

Foreign Investment

Primary - FDI Secondary

Invst by PROI in Capital of an Indian

Co.

Purchase by PROI of Shs. Of Indian Co.


Direct Downstream Portfolio Off-Market

FIIs

NRIs / PIOs

Repatriable

Non-repatriable

Types of FDI

Foreign Direct Investment


Automatic Approval

No PermissionMoF/FIPB – Inflows up to Rs.1200 cr.

CCEA – Inflows above Rs. 1200 cr.

Instruments

Foreign Direct Investment

Equity


EquityHybrid

Voting Non-Voting CCDs CCPS

Warrants

Equity Shares

� Consideration must be for Cash

� All other cases – FIPB approval

� Issue Price of FDI Shares


� Issue Price of FDI Shares

� Listed Cos.

� Unlisted Cos.

� Must be issued within 180 days of funds

Equity Shares

� DCF Valuation

� No Guidelines specified

� Discretion to Valuer in selection of:

� No. of Years’ Forecast

Discount Rate / WACC


� Discount Rate / WACC

� Growth Rate

� Method of Calculation of Terminal Value / Perpetuity

� Q. Cos. where DCF is difficult?

CCDs

� Quasi-equity Instruments

� Subject to ECB restrictions?

� Cap on Rate of Interest?

� All-in-cost ceilings like ECBs?


� All-in-cost ceilings like ECBs?

� Tax Deduction benefits to Investee Co.

� Can be redeemed / bought back by Co.?

� Time limit for conversion into Equity?

�

CCDs

� Circular 1/2011

� Issue Price or Conversion Formula to be specified

upfront at time of issue

� Price @ Conversion Date > FMV @ Issue Date

FMV = DCF OR Preferential issue Pricing under ICDR


� FMV = DCF OR Preferential issue Pricing under ICDR

� Earlier Issue Price was required

� Flexibility in Earn-out Formula Deals

� Beneficial for PE / VCF Deals

� Co. gets higher Value if performance good

Preference Shares

� Part of Sectoral Caps Only if CCPS

� If RPS / OCPS – treated as ECBs

� Must be converted within a reasonable

timeframe


� Plain redemption / buyback possible?

�

� Max. Dividend Rate

�

NVR Shares

� Issue of NVR Shares possible?

� When Useful?

�

� If Public Company?


� If Public Company?

� Examples

Others

� Issue of

� Warrants?

� Partly Paid-up Shares

� Flip-flop in Policy


� Flip-flop in Policy

� Recent Reports - Proposal

� Paid-up portion - a part of Capital

� 25% paid-up upfront

� Balance within 12 months

FDI in Real Estate


FDI in Real Estate

� General Prohibitions

� Real Estate Business

� Construction of Farm House

� Trading in Transferable Development Rights (TDRs)

© PRAVIN P. SHAH & CO. 59© PRAVIN P. SHAH & CO. 59

� ‘Real Estate Business’:

� Buying and selling of immovable properties

� Assignment of Development Agreements?

FDI in Real Estate – Guidelines

� 100% FDI allowed under Automatic Route subject to

conditions in Construction & Development Projects

� Projects Permitted

� Housing

� Commercial Premises


� Commercial Premises

� Resorts

� Educational Institutions

� Recreational Facilities

� City & Regional Level Infrastructure

� Townships

Conditions

� Minimum Area

� Serviced Housing Plots – 10 hectares/25 acres

� Built-up area: 50,000 sq. mtrs. or 5,38,200 s.ft.

� Combination Project – Any one of above 2


Combination Project – Any one of above 2conditions

� What is ‘built-up area’?

� What is included and what is excluded in it?

�

Conditions

� Investment – Minimum Capitalisation

� In case of WOS – US $10M

� In case of JV – US $ 5M

� FDI in a JV in 99:1 between Foreign & Indian


� FDI in a JV in 99:1 between Foreign & Indian

Partner – What should be the min. capital?

� Securities Premium included in Min. Cap?

�

� Whether Preference Shares included?

�

Conditions

� Funds to be brought within 6 months of

commencement of business

� What is Commencement of Business?

� Would it be date when Co. buys land as its SIT


� Would it be date of approval by Local Authority?

�

Conditions

� Original Investment locked-in for 3 years

� Entire Invst. or only what is brought in initially?

� If Invst. in Tranches?

� Is Invst. In excess of Min. Cap. also locked-in?


�

� 50% project must be developed in 5 years

from date of obtaining all statutory clearances

Conditions

� Lock-in of Initial Investment

� Can Foreign Investor sell to another NR within 3

years?

� No outflow /remittance from Co.

Is lock-in on Investor or on Investment?


� Is lock-in on Investor or on Investment?

�

Conditions

� Investor cannot sell ‘Undeveloped Plots’

� ‘Undeveloped Plots’ means road, water supply, street

lighting, drainage, sewerage, etc. not made available

� Developer to provide infrastructure and obtain CC

before disposing serviced housing plots


before disposing serviced housing plots

� All Conditions should be mandatorily fulfilled

� Earlier Exit ?

FDI in Real Estate – Issues

� Whether Agricultural Land can be acquired for

developing serviced housing plots?

�

� If FDI & non-FDI compliant projects, can Co. get


FDI?

�

� FIPB planning to monitor end-use of funds on a

Qtly basis

FDI in Real Estate – Issues

� Whether Service Provider to Developer needs to

comply with conditions of P.Note?

� Whether FDI in LLP engaged in Real Estate

activities possible?


Investment by NRIs and PIOs

� Prohibited Investments

� Investment in Agricultural Property,

Plantations & Farm Houses

� Trading in Real Estate and TDRs


� Trading in Real Estate and TDRs

� Conditions of Press Note No. 2/2005?

� Can invest in smaller size projects also

�

Investment by NRIs and PIOs

� Specified Categories of Invst.:

� Devlp. of serviced plots & built-up res. Premises

� Const. of Res.& Comm’l Premises / Offices

� Townships


� Urban Infrastructure facilities ~roads, bridges

� Mfg. of Building Materials

� Invst. in Participatory ventures in above

� Invst in Hsg Finance Inst.

FDI in Infrastructure &Other Real Estate-based Projects


FDI in Hotels & Hospitals

� 100% FDI under the Automatic Route in Hotels &

Tourism Industry

� Hotels includes:

� Restaurants

� Beach Resorts


� Beach Resorts

� Other Tourist Complexes

� Convention centres, seminar units

� 100% FDI under Auto. Route also allowed in Hospitals

� Conditions of Press Note No. 2/2005

� Mixed Use Projects

FDI in Industrial Parks

� 100% FDI allowed under the Automatic Route

� FDI in Setting up of IPs and also in Established IPs

� STPs, IT Parks, Bio-tech parks, etc

� Conditions of Press Note No. 2/2005?

Conditions for FDI


� Conditions for FDI

� Minimum 10 Units and No Single Unit occupying more than 50%

of the allocable area

� Minimum 66% of the total allocable area for Industrial Activity

FDI in Industrial Parks

� Must have Infrastructure Facilities:

� Must have Common Facilities:

�

� Must be for Industrial Activities:


�

� Tax Benefits under Industrial Park Scheme, 2008

� Difference between IPS 2008 and Circular 1/2011

� Which is more liberal

FDI in SEZs

� 100% FDI allowed under the Automatic Route in

Development of :

� SEZs

� Free Trade Warehousing Zones


� Free Trade Warehousing Zones

� Conditions of P/N 2/2005 Applicable?

� Conditions of SEZ Act should be fulfilled

� What about Transfer of Shares of an SEZ Developer?

� Recent Stand of BoA

Structuring of FDI

Mauritius Co. Cypriot Co.


SPV

Downstream FDI

Downstream Investment

NR

ICO FDI Compliant Land

FDI


ICO

ICO2Non-FDI CompliantLand

Invst.

Permissible?

Downstream Investment

� Yes, if:

� Company Owned & Controlled by resident Indian

citizens

� Owned – More than 50% equity ownership with Indian


� Owned – More than 50% equity ownership with Indian

citizens; AND

� Controlled – Power to appoint majority of Directors

with Indian citizens

� Both conditions must be satisfied

Exit Options for FDI Investors

� Some popular Exit Options for PEs:

� IPO

� Buyback by Co.


� Buyback by Co.

� Buyout by Promoters

IPO - SEBI DIP G/L

� SEBI ICDR Regs:

� In case of IPO/ Offer for Sale

� All Convertibles – CCDs / CCPS should be

converted or they lapse on DRHP


converted or they lapse on DRHP

� Pre-IPO capital locked in for 1 year

� N.A. to a VCF holding shs. for 1 yr. as on DRHP

� N.A. to pre-IPO shs. held for 1 year as on DRHP

and Offered For Sale

�

Buyback by Co.

� Limits under Cos. Act

� 25% of Eq. + Free Reserves

� 25% of Eq. Capital per FY

� Can use Free Reserves, Sh. Premium


Can use Free Reserves, Sh. Premium

� Auto. Route of RBI (for Foreign PE) if:

� Not in Financial services’ sector

� Pricing G/L – 2 Valuation reports

� Form FC-TRS

�

Buyout of PE by Promoters

� Automatic Route of RBI?

� Pricing Guidelines?

� Capital Gains Tax in hands of PE

� Put Option given to Foreign Investor to sell CCDs


� Put Option given to Foreign Investor to sell CCDs to Promoters

� Fixed Price Put Option

� RBI’s Query �

� What if Put Option subject to Pricing Guidelines?

Buyout of PE by Promoters

� Put Option given to Foreign Investor to sell CCDs to Promoters

� Is Put Option legally valid in a Public Company

� Amdt. to SCRA

� SEBI’s View


� Bombay HC Decisions

ECB for Real Estate

ECB in Real Estate

� Violation by one Co. in Group

� Can others within Group borrow?

�

� FCCBs Funds


� FCCBs Funds

� Should also comply with ECB Regulations?

� ECBs have End Use Restrictions for Real Estate.

� Do FCCB Funds also have same End use restrictions?

ECB in Real Estate : Automatic Route

� Eligibility

� Any Company except hotels sector : $ 500 m p.a.

� Hotels & hospitals : $ 100 m p.a.

� Individuals, Trusts, Non-Profit Organisations : Ineligible


� Amount

� Up to $ 20 m : Average Maturity 3 yrs

� $ 20 m to $ 500 m : Average Maturity 5 yrs


� Permitted End Uses

� Import of Capital Goods

� New Projects / Expansion in Infrastructure Sector:

� Hotels, Hospital, Industrial Parks, Airports, Ports, Road, Power,

Cold Storage, etc.


Cold Storage, etc.

� Restricted End Uses

� On-Lending / Co. Acquisition / Investment in Capital Mkt.

� Real Estate

� Working Capital / General Corporate Purpose / Repay

Existing Rupee Loans


� All-in-Cost Ceiling

� Includes Interest, Fees & Expenses in Forex

� Excludes Commitment Fee / Prepayment Fee / INR Fees

� Avg. Maturity 3-5 yrs : 6 mth LIBOR + 300 b.p.


� Avg. Maturity > 5 yrs : 6 mth LIBOR + 500 b.p.

� Prepayment up to $ 500 m permitted provided

minimum Avg. Maturity period complied

ECB in Real Estate : Approval Route

� Eligibility

� FIs in Infrastructure Finance

� NBFCs, FCCBs by HFCs, Multi-State Co-Op. Soc., SEZs

� Others ineligible under the Automatic Route


� Amount

� $ 750 mn. with Avg. Maturity > 10 yrs

� Prepayment & Call/Put Option : Not Permissible

ECB in Real Estate : Approval Route

� Permitted End Uses

� Same as that under the Automatic Route

� Development of Integrated Township - allowed till 2010

� No renewal thereafter

SEZ Developers allowed for providing Infrastructure


� SEZ Developers allowed for providing Infrastructure

Facilities

� Restricted End Uses : Same as under Auto Route

� All in Cost Ceilings : Same as under Auto Route

� Prepayment above $ 500 mn

ECB for SEZ Developers

� ECB under Approval Route allowed for SEZ Developers for

providing Infrastructural Facilities within SEZ

� Power

� Telecom

� Railways & Roads / Bridges


� Railways & Roads / Bridges

� Sea Port & Airport

� Mining, Exploration

� Urban Infrastructure ~ water, sewerage, sanitation

�

Thank You!!

[email protected]

value creation strategies - wirc-icai.org · value creation strategies: real estate developers-anup...

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