1

AMALGAMATIONS, DEMERGER
COMPROMISES, ARRANGEMENTS

Merger & Acquisition - Case Studies

With Procedures and Tax implications
Presented by CA.Dilip Jagad
DMKH & Co., Chartered Accountants
9TH SEPTEMBER, 2017 at BCSC, BORIVALI

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 2
INDEX
Sr. No. Contents Nos.
1 TOOLS FOR RESTRUCTURING 3
2 RATIONALE OF RESTRUCTURING 6
3 REGULATORY ASPECTS UNDER VARIOUS STATUES 7
4 COMPANIES ACT - MERGER/DEMERGER & RECONSTRUCTION 8
5 SCHEMES- PROCEDURAL ASPECTS 13
6 TAX ASPECTS-MERGER/DEMERGER/ SLUMP SALE 23
7 VALUATION APPROACHES 34
8 STAMP DUTY ASPECTS 35
9 CASE STUDIES 39
10 MERGER SCENARIO ...UP DATES 65
11 OPPORTUNITY INSOLVENCY RESOLUTION THROUGH M&A 67
12 ISSUES & IMPACTS 69
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 TOOLS FOR RESTRUCTURING 3

Making an Acquisition is like falling in love;

you cant say how and when it will happen.
oN.R. Narayanamurthy- Infosys
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 TOOLS FOR RESTRUCTURING 4

TOOLS FOR RESTRUCTURING

Merger / Financial Acquisition of

Demerger
Amalgamation Reconstruction shares

Consolidation
Acquiring in
Divest non- Restructuring interest in
of
core with in the new
businesses / Company business/
entities business
Entity

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TOOLS FOR RESTRUCTURING 5

TYPES OF MERGER
Vertical Merger - two or more firms, operating at different levels
within an industry's supply chain, merge operations [Cloth
manufacturing Merger with Readymade Garments Manufacturing ]

Horizontal Merger- between firms that are selling similar products in

the same market. [ PSU Banks merger, Cement unit with Cement
unit]

Reverse Merger -Merger of a listed shell company into an unlisted

company having business and its listing without making an IPO.

Conglomerate Merger- Merger of two companies that are involved

in totally unrelated industries, business activities, or geographic
areas.
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 RATIONALE OF RESTRUCTURING 6

RATIONALE OF RESTRUCTURING

Business Clarity to
Operational synergies Stock and Credit Re- rating
Management

Stronger financial Business Clarity to Improving

base Investors Governance Process

Business Clarity to
Sustainability Risk Management
others

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REGULATORY ASPECTS UNDER VARIOUS 7
STATUES

SEBI Take over Stamp

Regulations FDI
duty

Stock Exchange

Cross Boarder M &A

Exchange Control,
Companies Act/ Overseas Regulatory Indirect
NCLT Jurisdictions tax

Accounting Competition Tax regulations

Implications Act GAAR, BEPS
[AS]/[IFRS]

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COMPANIES ACT -MERGER/ 8
DEMERGER AND RECONSTRUCTION

INTRODUCTION OF NCLT

AAIFR

High
Court BIFR

CLB

NCLT DMKH & C0

COMPANIES ACT -MERGER/ 9
DEMERGER AND RECONSTRUCTION

INTRODUCTION OF NCLT

SC (Only on the Question of Law)

Appeal Can be made to NCLAT

Powers Vested to NCLT
PARTICULARS HIGH COURT BIFR
POWERS High Court primarily in relation to BIFR under the Sick Industrial
winding up, amalgamation, Companies (Special
restructuring and appeals from CLB Provisions) Act, 1985

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COMPANIES ACT -MERGER/ 10
DEMERGER AND RECONSTRUCTION

INTRODUCTION OF NCLT

Notice of Merger of Listed

NCLT Meeting to Company with
Minority
regulatory Unlisted
Exit
authorities Company

No
Treasury Register Corporate Fast
Shares ed Debt Track
Valuers Restructuring Merger

Cross Limit for

Border Preservation of
objection to
Merger Dissenting Records of
compromise/
Shareholders Transferor
Arrangement
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 COMPANIES ACT -MERGER/ 11
DEMERGER AND RECONSTRUCTION

SEC PARTICULARS
48 Variation of Shareholders Rights
66 Reduction in Share Capital.
68 Power of company to purchase its own securities.
230 Power to Compromise or Make Arrangements with Creditors and Members. (sub
section 11 and 12 not operational till date. They are related to open offer and
SEBI has jurisdiction). (old sections 390, 391,393, 394A)
231 Power of Tribunal to Enforce Compromise or Arrangement (392).
232 Merger or Amalgamation of Companies (394).
233 Merger or Amalgamation of Certain Companies (dissenting holders, treasury
shares by company).
234 Merger or Amalgamation of Company with Foreign Company (effective from
13/04/2017)

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COMPANIES ACT -MERGER/ 12
DEMERGER AND RECONSTRUCTION

235 Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract

Approved by Majority.
236 Purchase of Minority Shareholding
237 Power of Central Government to provide for amalgamation of companies in
public interest (Old section 396) [ NSEL AND FTIL]
238 Registration of offer of schemes involving transfer of shares
239 Preservation of Books and Papers of Amalgamated Companies
240 Liability of officers in respect of offences committed prior to merger,
amalgamation etc.

Section 237[Only case merger of National Spot Exchange Limited with Financial
Technologies Limited][Old Section 396]. Still pending for disposal.

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 SCHEMES PROCEDURAL ASPECTS 13
MERGER

CONCEIVING IDEA OF MERGER, AMALGAMATION AND RECONSTRUCTION AND

A
EVOLUTION OF STRUCTURE
Finalisation of Scheme of Amalgamation (structure), Valuation and Share Swap Ratio
Approval of the Scheme , Valuation Report by Board of Directors of the Companies
Recommendation on Scheme and Valuation report by the Audit Form No.
committee (If Applicable) and File Form with Resolution passed. MGT -14
IF LISTED
Obtain Fairness Opinion from Merchant Banker Registered with SEBI
Filing of Scheme, Valuation report and Fairness Opinion with the designated Stock
Exchanges for SEBI approval. [ Also posted on the website of the Company]
[Refer Section 11, 30 , 37 and 94 of SEBI (Listing Obligations and Disclosure requirements)
Regulations 2015. and SEBI Circular CFD/DIL3/CIR/2017/21 dated March 10, 2017.

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 SCHEMES PROCEDURAL ASPECTS 14
MERGER

B FILING OF SCHEME WITH NCLT FORM No

Application with Notice of Admission, and Affidavit [Separate NCLT -1, NCLT-2
affidavit if reduction of capital is part of the scheme] & NCLT -6
Notice of Meeting to Class of creditors and Members with Valuation CAA-2
Report, the effect of scheme on KMPs, Creditors, Promoters, Non
promoters members and also disclose interest of Directors
Notice to be sent to Statutory authorities, Income tax, Central CAA-3 & GLN-1
Government, ROC, Official Liquidator, Regional Director, and if
applicable to SEBI, RBI and Competition Commission
Report on the Result of meetings by Chair Person [File in 3 days] CAA-4
Petition for confirming Compromise or Arrangement or Merger[to CAA-5
be filed in 7 days from the date of filing of Report]
Order on Petition by NCLT . [File copy with ROC with in 30 days] CAA-6 & INC-28
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 SCHEMES PROCEDURAL ASPECTS 15
MERGER

C FINER POINTS
The scheme to be approved by in value in the meeting of creditors and/ or members
If creditors having at least 90% value agree and confirm by way of affidavit to the
scheme, then NCLT may dispense creditors meeting.
Members holding 10% of shareholding and Creditors holding 5% of total outstanding
debts can raise objection to the scheme of arrangement
Yearly Report on working of the scheme of compromise or arrangement.
Cross Boarder Merger with Prior approval of RBI with jurisdictions who are member
of IOSCA, or MOU with SEBI or Central Bank is member of Bank for International
Settlement, and FATF compliant.
Report of the auditor that the scheme in conformity with the accounting standard
prescribed under section 133 to be filed with NCLT
NCLT may provide in the order for Exit option to dissenting shareholders.
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SCHEMES PROCEDURAL ASPECTS 16
FAST TRACK MERGER

FAST TRACK MERGER

Small Holding
Company Company

Fast Track Merger

Wholly Owned
Small Company Subsidiary

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 SCHEMES PROCEDURAL ASPECTS 17
FAST TRACK MERGER

FAST TRACK MERGER [SECTION 233]

Section 233 of Companies Act, 2013 provides for the fast paced merger mechanism
for the class of companies namely between two or more small companies, and
holding company and its wholly-owned subsidiary company (not applicable for listed
companies).
Requirement to go to NCLT for sanctioning of scheme of arrangement has been done
away with
Objections only from Registrar and Official Liquidator (and from no other authority/
regulator)are invited as envisaged in the provisions,
if opined to be against public interest, NCLT may order merger in normal course, that
is, through NCLT route
Equally applicable to Demergers and other schemes of arrangement

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 SCHEMES PROCEDURAL ASPECTS 18
DEMERGER

DEMERGER
Demerger involves a vertical split of company hiving off a division/unit whereby
business is transferred on a going concern basis into a new/existing company
This division may either: Form a new company and operate separately from the
original one, or May get merged into another existing company

PRE POST
Shareholders Shareholders

B
Undertaking AB Undertaking Undertaking AB Undertaking
Ltd
A Ltd B A
Ltd
B

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 SCHEMES PROCEDURAL ASPECTS 19
DEMERGER

BENEFITS OF DEMERGER
Unlocking shareholder value and Streamlining business segments
To make financial and managerial resources available for developing
other more profitable opportunities
Selling unwanted and surplus parts in the business as a restructuring
strategy to get rid of sick part of the company

Demerger of following businesses of Bajaj holding and Investment Limited

Auto Insurance & Consumer Finance

Bajaj Auto Limited Bajaj Finserv Limited

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 SCHEMES PROCEDURAL ASPECTS 20
DIFFERENCE- MERGER / ACQUISITION

ACQUISITIONS / TAKEOVERS:
An acquisition, also known as a takeover, is the buying of a business or a company
(the target) by another
MODES
Business Purchase: This type of Share purchase: The buyer buys the
transaction leaves the target company shares, and therefore control of the
as an empty shell. It is further divided target company:
into: Example: Mahindra and Mahindra
Slump Sale acquires stake in Rewa Electric Car
Itemized Sale Company Ltd.

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 SCHEMES PROCEDURAL ASPECTS 21
DIFFERENCE- MERGER / ACQUISITION

Merger Acquisition
Consideration discharged by issue of Consideration may be by cash or
shares of Transferee co. shares
Shareholders of Transferor co. become Acquirer co. gains controlling
shareholders of Transferee co. interest in the Target co.
Usually by negotiations May be friendly or hostile
Friendly Takeovers: Acquirer's contacts target's management & proposes a
deal. Target agrees and cooperates. [Say Takeover of Ranbaxy
Laboratories Ltd by Dai Ichi Sanknyo Ltd, Reliance ADAG Group acquires
Pipavav Defence and Offshore Engineering Ltd.]

Unfriendly Takeovers: Acquiring firm makes a tender offer to target's

shareholders. Meanwhile, target's management tries defensive measures
[Bharti Shipyard and ABG Shipyard for Great Offshore Ltd] [Deepak Fertilizers
for Mangalore Chemicals & Fertilizers Ltd ]

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 SCHEMES PROCEDURAL ASPECTS 22
DIFFERENCE- MERGER / ACQUISITION

SLUMP SALE
The term slump sale connotes the sale of an entire business
undertaking, comprising of various assets net of liabilities relating to the
undertaking for a lump sum or slump consideration. (Section 2(42C) of
IT Act)
The consideration may be discharged by issuing shares and/or cash to
the Transferor co.
A sale in order to constitute a slump sale must satisfy the following tests:
Business has been sold off as a whole and as a going concern
Sale for a lump sum consideration
Materials available on record do not indicate item-wise value of the
assets transferred

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 TAX ASPECTS MERGER/ 23
DEMERGER/ SLUMP SALE

Special treatment for Restructuring

under Income Tax Act.
Salient Features are:-
Definitions/Qualifying Conditions
Capital Gains
Carry Forward & Set-off of Losses

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 TAX ASPECTS -MERGER 24

DEFINITION OF AMALGAMATION/ MERGER UNDER INCOME TAX ACT, 1961

Section 2(1B)- Amalgamation

Amalgamating Amalgamated
All Assets & Assets &
Liabilities Liabilities

Shareholders 75% value of

shareholders

Section 2(42A)(c) Period of Holding of shares (Transferors holding period

to be included for Transferees holding period)
Section 49 (1) Cost of Acquisition of shares in case of Amalgamation
(= cost of acquisition of Amalgamating Co.)
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 TAX ASPECTS -MERGER 25

Section (47(vi) & (vii) Transactions is not regarded as Transfer for Capital Gains Tax.
Section32, Depreciation at WDV of Transferor Co. on date of amalgamation for
remaining period. Depreciation to Transferor Co and transferee company in the year
of merger shall be apportioned in the ratio of the number of days for which the
assets were used.
Section 72A Carry forward and set off of accumulated losses.
Qualifying Companies - Companies Owning Industrial Undertaking or Ship or
Hotel, Manufacturing Companies and Banking Companies
Business Losses8 Years(Fresh Life)
Unabsorbed depreciation No time limit

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 TAX ASPECTS -MERGER 26

CONDITION TO BE FULFILLED FOR CARRY FORWARD AND SET OFF OF LOSSES

Transferor co. should be engaged in business at least 3 years to which loss or
unabsorbed depreciation relates and holds at least 75% of book value of Fixed Assets
held by it 2 years prior to the date of merger.
Transferee co. holds 75% of book value of Fixed Asset of transferor co. for at least for
5 years and continues business of Transferor co. for at least 5 years
Rule 9C : Achieve 50% level of installed production capacity of undertaking
of Transferor co. before 4 years, and continue till 5th year.
Section 79 (Closely held Co.) :- Carry forward Business loss (Not Depreciation) would
lapse if shareholding pattern changes by more than 49 %.

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 TAX ASPECTS -DEMERGER 27

DEFINITION OF DEMERGER UNDER INCOME TAX ACT, 1961

Section 2(19AA)- Demerger
All the properties and liabilities of the demerged undertaking to be transferred on
going concern basis at book value.

Demerged Resulting
All Assets &
Liabilities Assets &
Liabilities
Shareholders 75% value of
shareholders

Section 2(22)(v)- Deemed Dividend (not treated as deemed dividend = no tax)

Section 2(42A)(g) Period of Holding of shares (include period of holding of shares of
demerged co.)
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 TAX ASPECTS -DEMERGER 28

Capital Gain Tax Sec 47(vid)- Not a transfer - no liability for capital gains tax in
the hands of shareholders of Transferee Co
Cost of Acquisition Section 49 (2C) and (2D) :
Cost of acquisition of shares in the Resulting co. will be the amount which
bears to the cost of acquisition of shares in the Demerged co. the same
proportion as the net book value of assets transferred bears to the net worth
of the Demerged co. immediately before the demerger
Cost of acquisition of shares of the Demerged co. will be the original cost of
shares of Demerged co. after reducing the cost of shares of the Resulting co.
as computed above.

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 TAX ASPECTS -DEMERGER 29

Carry forward accumulated business losses (for unexpired period) Section 72A(4)
& Section (72A)(5)
Where it is directly relatable to undertaking transferred, it should be such
relatable amount
Where it is not directly relatable to the undertaking transferred, it should be
apportioned in the ratio of assets retained by the demerged company and
transferred to resulting company
Business Losses
Brought forward loss of Demerged undertaking to be carried forward and set
off in hands of Resulting co.
Allowed to be carried forward for set off in the hands of the Resulting co. for
the unexpired period.
Unabsorbed depreciation- Unlimited period
Unlike merger, no conditions prescribed for availing the benefit of set off of loss

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 TAX ASPECTS -SLUMP SALE 30

Slump Sale: Section 2(42C) of the Income Tax Act, 1961 defines Slump Sale as
the transfer of one or more undertakings as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and
liabilities
a) sale of an undertaking; (b) lump sum consideration; and (c) no separate
values being assigned to individual assets and liabilities
Example: Primal Healthcare sold its domestic formulation business to US
based multinational drug major Abbott in a deal worth Rs. 17,000
Crores.
Itemized Sale: Sale of assets & liabilities with values assigned separately
for each item of assets & liabilities
Slump Sale vs. Itemized Sale: In case of itemized sale, unlike slump sale,
it is possible to pick and choose assets and liabilities. Also, the
consideration is identifiable against each item
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 TAX ASPECTS- SLUMP SALE U/S 50B 31

PROFIT ARISING ON SLUMP SALE OF ONE OR MORE UNDERTAKINGS SHALL BE

CHARGEABLE TO INCOME TAX AS:
Long Term Capital Gain where held for more than or equal to 36 months
Short Term Capital Gains where held for less than 36 months
The net worth of the undertakings would be regarded as cost of Acquisition
No Indexation benefit would be allowed
Net worth= Aggregate value of* Aggregate value of total liabilities
total assets
*Tax WDV in case of depreciable assets and book value in case of other non-
depreciable assets and liabilities

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 TAX ASPECTS SLUMP SALE 32

Only transfer as a result of sale within the ambit of slump sale and has
expressly not covered transfers by any other means

It became implicit that any sort of cherry picking would be inconsistent

with the concept of slump sale as defined under Income Tax Act,
1961 and hence not permissible. However, Delhi High Court in the case
of Triune Projects Pvt. Ltd vs. DCIT, upheld the position that a
transaction does not cease to be a slump sale merely due the seller
retaining certain defunct or unwanted assets of the undertaking

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TAX ASPECTS -SLUMP SALE -GST 33

Under the erstwhile tax regime, transfer of a business as a going

concern including transfer of whole unit or a business division was not
subject to Sales Tax or Value Added Tax (VAT). The rationale behind
this was that the sale of whole business cannot be equated to sale of
moveable goods which was subject to sales tax.
Tax regime for Slump Sale post enforcement of GST: The Central Goods and Services
Tax Act, 2017 (CGST Act) does not clearly stipulate the law vis--vis transfer of
business as a going concern or slump sale. Thus, there is no settled position or
clarity whether the transactions involving slump sales would be taxable under the
new CGST Act or not.
Dual GST Model adopted by India- In the event of inter-state transaction involving
slump sale, the input tax credit of the entity which as a result of such slump sale,
cease to have any operations, shall remain untouched as such entity would not be
able to adjust the input tax credit against the output tax credit.
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 34
VALUATION - APPROACHES

Asset Based Income Based Market Based

Approach Approach Approach
Comparable companies
Book Value Method market multiples method
Capitalization of
Existing Method

Replacement Value Market Value Method (for

Method quoted securities

Discounted Free CF Comparable Transaction

Liquidation Value
Method Multiple Method

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 35
STAMP DUTY ASPECTS

STAMP LAWS IN INDIA SCHEME OF AMALGAMATIONS

Under the Constitution of India, the power to levy stamp duty is divided
between Union and State
Indian Stamp Act, 1899 (the Act) is a Central enactment and States have powers
to adopt said Act with amendments as deem fit
Various states have added separate schedules to the act (for e.g. Delhi, Andhra
Pradesh, Madhya Pradesh, Punjab )
Various states have made changes in the Schedule I of the Act (for e.g. Tamil
Nadu, Assam and North Eastern States)
Various states have their separate Stamp Acts (for e.g. Maharashtra, Gujarat,
Karnataka, Kerala, Rajasthan and Jammu & Kashmir)

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 STAMP DUTY ASPECTS 36

SCHEDULE I OF THE MAHARASHTRA STAMP ACT, 1958

Entry 25(da) Stamp Duty on Conveyance- On the true market value
of the property which is the subject matter of conveyance- If relating
to the order of High Court in respect of the amalgamation or
reconstruction of companies under Section 230 to 234 of the
Companies Act, 2013.
10% of the aggregate of the market value of the shares issued or allotted
in exchange or otherwise and the amount paid for such amalgamation.
Provided that the amount of duty chargeable under this clause shall not
exceed
(i) Amount equal to 5% of the true market value of the immovable
property situated in Maharashtra of the transferor company; or
(ii) Amount equal to 0.7% of the aggregate market value of the shares
issued or allotted and the amount of consideration paid
whichever is higher.
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 STAMP DUTY ASPECTS 37

EXAMPLE OF STAMP DUTY UNDER BOMBAY STAMP ACT WOULD BE AS UNDER:

Particulars Amount
No of Equity shares to issued /Allotted by Transferee 6,00,000
Value of each share as per valuation report 10
Total Consideration Rs. 60,00,000
10% of the Total Consideration [A] Rs. 6,00,000
5% of the Market value of Immovable Properties [B ] NIL
0.7% of the Total Consideration [C] Rs. 42,000
Stamp Duty Liability [Higher of B or C, restricted to A] Rs. 42,000

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 38
STAMP DUTY ASPECTS

Notification No. 1 of 16 January 1937 exempted payment of stamp duty on

instruments evidencing transfer of property between companies limited by shares
where:
At least 90% of the issued share capital of the transferee company is in the beneficial
ownership of the transferor company
Transfer takes place between a parent company and a subsidiary.
Transfer takes place between two subsidiary companies of each of which not less
than 90% of the share capital is in the beneficial ownership of a common parent
company
exemption notification will apply only in those states where the State Government
follows the notification, otherwise stamp duty would be applicable irrespective of
inter se relations of companies.
In Delhi, State Government has withdrawn this stamp duty exemption vide
Notification dated 1 June 2011.
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Case Study 1 ...ULTRATECH CEMENT 39

A B

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 Case Study A... 40
Birth of Ultratech Cement

ULTRATECH has grown inorganically by acquisitions and consolidation.

Presently 4th largest cement capacity [93 mln tons]
We will study three significant structuring in Ultratech 2004, 2008 and 2016
2004
1. Demerger of Cement business into C Ltd.
2. Issue of shares by C Ltd. 80% (68% + 12%) to A shareholders; 20% with A
3. B acquires another 8.5% stake in C Ltd. from A for Rs. 362 crs
4. B makes an open offer to acquire 30% in C Ltd. total outflow for B - Rs.
1,278 crs
5. B sells its 15% stake in A to the Trust for Rs 446 crs Trust funded by A

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 41
Case Study A...Birth of Ultratech Cement

(5) Sale of 15% of A

(4)
Other 68% (2)
B 15% Shareholders A Employees
85% Trust

12% 8.5% of C
(3) sold to B
A

20%
12+8.5+30
Bs ultimate
(1)
shareholding
Engineering Cement C Ltd.
51%

(2)

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 42
Case Study A...Birth of Ultratech Cement

Demerger scheme compliant with tax provisions

B with 51% shareholding acquires control of C Ltd.
A management gets control of 15% (held through the Trust) stake
previously held by B
Transaction between A / Trust and B almost cash neutral
Initially B acquired 10% stake from Reliance in 2002 and balance 5 %
from market. In 2003 , it made take over offer, but did not get response.
Total outgo of Rs. 2,200 Crores

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Case Study B...Consolidation without 43
diluting shareholders economic interest

MECHANICS
G Ltd and U Ltd are listed companies
Cement Division of G Ltd was demerged into S Ltd.
Consideration for Demerger is discharged by way of issue of shares
to the shareholders of G Ltd
Post demerger the shareholders of G Ltd. would hold 35% in S Ltd.
and the holdings of G Ltd. would be diluted to 65%
No change in economic interest of G Ltds shareholders
S Ltd. gets automatic listing without IPO (vide SCRR Circular dated
September 3, 2009)

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Case Study 2...Consolidation without 44
diluting shareholders economic interest

75% 75%

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Case Study B...Consolidation without 45
diluting shareholders economic interest

Enhancement of financial flexibility in both businesses of G Ltd.

(Cement and VSF)
Continuation of G Ltd.'s parentage
No change in economic interest of shareholder
G Ltd. will continue to consolidate the cement business results
Possibility to raise funds in future for Cement business

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Case Study C...Slump Sale with 46
Amalgamation Ultratech / JP Associates

Instrument Quantity Face Value Amount

(Rs.in Crs)
NCD 13,200 10,00,000 1,320
CRPS- A 1,00,000 1,00,000 1,000
CRPS- B 50,000 1,00,000 500
NCD 18,049 1,00,000 180
CRPS 10 1,00,000 0
TOTAL PAYMENT 3,001
Balance Taking over of Loans 13,188
CONSIDERATION 16,189

The acquisition of Jayprakash Associates by Ultratech in, a large domestic M&A

transaction, saw a structure combining asset sale and Merger. Hybrid structures
involving a merger and slump sale are being used to provide the necessary
balance between the regulatory constraints and commercial objectives.
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Case Study ... 2 47
RELIANCE ADAG GROUP

In last two years Reliance [ADAG] Group is involved in more than 10 schemes to re
organise its business and reduce debt.
1. Reliance 1. Western Region Transmission (Gujarat) Private
Infrastructure Limited
Limited 2. Western Region Transmission (Maharashtra)
Private Ltd.
3. Reliance Concrete Private Limited
4. Reliance Electric Generation and Supply
Private Limited
2. Zee Entertainment 1. Reliance Big Broadcasting Private Limited
Limited. (RBBPL)
[Adag group exited 2. Big Magic Limited (BML)
from media business 3. Azalia Broadcast Private Limited (ABPL)
for Rs. 1860 Crores]
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Case Study ...2 48
RELIANCE ADAG GROUP

3. Reliance Capital Limited 1. Reliance Gilts Limited

2. Reliance Home Finance Ltd [For demerger of Real
Estate Lending Business]
4. Reliance Communications 1. Siestema Shyam Teleservices Limited
Limited. 2. Aircel Limited
3. Reliance Telecom Ltd [demerger of Tower Business]
4. Dishnet Wireless Limited
5. Deccan Digital Network pvt. Ltd
6. South Asia Communications Pvt. Ltd
ADAG Group Shifting focus on four pillars of Telecom, Power , financial services and
Defence and exiting from other businesses.

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 Case Study ...2 49
RELIANCE ADAG GROUP
Reliance Communications Ltd
Reliance Communications has Liability of around Rs. 45,000 Crores.
Through schemes and structures, to reduce debts to Rs. 10,000 Crores.
1. Demerger of Tower Business into Reliance Telecom Ltd and further into
Towercom Infrastructure Pvt Limited. Rapid Holdings 2 Pte. Ltd., a
company which is a part of the Brookfield Infrastructure Group will
acquire 100% of Towercom Infrastructure Private Limited. Post closing,
the Company will receive B Class Non-voting shares in Tower co
providing 49% future economic upside from the business based on
certain conditions Deal Value Rs. 11,000 Crores.
2. The combination of Reliance Communications wireless business with
Airce Limited will reduce debt by Rs. 14,000 Crores.
3. Sale of some real estate for Rs. 10,000 crores
After above structuring, the companys debt will be in the range of Rs.
10,000 Crores. [Source news items]
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Case Study ...3 50
Consolidation in Telecom Sector

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Case study... 4 - Kotak Bank 51
acquiring ING Vysya Bank

Acquisition of ING Vysya Bank by Kotak Bank.

As per RBI Directive, Promoter of a Private bank has to reduce its
holding in Bank in a time bound manner AND has to reduce it to a
threshold level. Prescribed by RBI If For Reducing promoter holding, if
shares are allotted to strategic investor or PE fund, Kotak Bank may
have to offer a Board seat. Further, there was no investment avenue
for deployment of funds raised through issue of shares.
By merger of ING Vysya Bank, it has complied with the RBI directive of
reducing promoter holding, increased public holding without making
an FPO and also increased its presence in the geographies, where the
Kotak bank was not present
It has achieved dual purpose.
Reducing promoters holding , statutory compliance.
Expansion of its business in new geographies
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Case Study. 5 Scheme of 52
Arrangement of NIIT Technologies Ltd.

Amalgamation scheme of PIPL Business Advisors and Investment Pvt. Ltd. and GSPL
Advisory Services and Investment Pvt. Ltd with NIIT Technologies Ltd [ NET] and their
respective shareholders and creditors
Most Promoters are controlling listed entity through their Limited Companies.
DISADVANTAGES of Corporate entity as Holdco.
Dividend Income is accumulated in Pvt Ltd Company. And for distribution of
income, Pvt Ltd Co. has to pay Dividend Distribution Tax.
Holding of investment by pvt ltd co. may be classified as investment activity,
Financial Asset and has income from dividend as financing activity, thereby
RBI may classify the company as an NBFC.
Inter se transfer of shares of Hodlco amongst promoters run the risk of non
compliance of SEBI of Take over code and risk of tax liability on notional
income.

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 Case Study. 5 Scheme of 53
Arrangement of NIIT Technologies Ltd.

STEPS INVOLVED IN THE TRANSACTION

File application to SEBI for obtaining exemption under section11(5)
from the applicability of section 3(1), Section 4 and Section 5 of
A
the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011.
Merger of Private Limited Companies with Listed company through
B NCLT approved scheme of arrangement
Effect: Pvt Limited companies are would up without liquidation
Cancellation of shares of listed company held by private limited
C companies
Effect: company can not hold its own shares (No Treasury Shares)
Listed Company to issue same number of shares to Trusts pursuant
D to the scheme of Amalgamation.
Effect: No Cash flow, No transfer and No risk of Income tax .
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 Case Study. 5 Scheme of 54
Arrangement of NIIT Technologies Ltd.

SEBI APPROVED STRUCTURE U/S 11(5) OF SAST

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Case Study. 5 Scheme of 55
Arrangement of NIIT Technologies Ltd.

proposed to merger PIPL Advisors

and GSPL Advisorors with NTL

Thadani Pawar Family ON MERGER OF PIPL AND GSPL INTO

Family Trust Trust 100% NTL THEIR HOLDING IN NTL 3.56%
100% EACH ALSO WILL BE CANCELLED

PILP BUSINESS GSPL PUBLIC -

ADVISORS - ADVISORY - NIIT - 23.69% 69.20%
3.56% NTL 3.56% NTL
CANCELLED CANCELLED

NTL
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Case Study. 5 Scheme of 56
Arrangement of NIIT Technologies Ltd.

Post merger of PIPL Advisors and

GSPL Advisorors with NTL

Thadani Pawar Family PUBLIC -

Family Trust Trust 3.56% NIIT - 23.69% 69.20%
3.56%
RE ISSUED RE ISSUED

NTL
PIPL Business Advisors and GSPL Advisory would up without liquidation

Family Trusts became direct share holders in the listed entity NTL

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CASE STUDY ...6 MERGER OF GRASIM 57
AB NUVO AND DEMERGER OF FINANCE
BUSINESS

COMPANIES
ACT 1956

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CASE STUDY ...6 MERGER OF GRASIM 58
AB NUVO AND DEMERGER OF FINANCE
BUSINESS
2 Aditya Birla
Financial Services
listed on 1-9-2017

COMPANIES
ACT 1956

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 CASE STUDY ...7 HOSPITALS - 59
FORTIS AND DIAGNOSTIC - SRL

PRESENT STRUCTURE

FORTIS HEALTH CARE MALAR HEALTH CARE

36.9% 63.1%
100%
PUBLIC PROMOTER FHsL PUBLIC
62.4% 37.6%COMPANIES

ACT 1956
SRL FORTIS [A] MALAR
Diagnostic Hospital Hospital
Diagnostic Diagnostic
[B]
56.4%
PROMOTER

[C]
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 CASE STUDY ...7 HOSPITALS - 60
FORTIS AND DIAGNOSTIC - SRL

POST ARRANGEMENT STRUCTURE

FORTIS HEALTH CARE SRL
HOSPITAL Diagnostic

36.9% 63.1% 41.9% 58.1%

PUBLIC PROMOTER PROMOTERS PUBLIC

[A] Transfer of the Hospital Business of Fortis Malar to Fortis Healthcare by way of slump
sale. Fortis Malar to retain its existing diagnostic business

[B] Demerger of business undertaking comprising the diagnostic business in Fortis

Healthcare (including investments held by Fortis Healthcare in SRL 56.4% stake) to
Fortis Malar

[C] Merger of SRL into Fortis Malar. Name of Fortis Malar shall be changed to SRL Ltd.
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 CASE STUDY 8 SLUMP SALE 61

PARTICLUARS Before Slump sale After Acquiring Co

Share Capital 50 50 500
Reserves & Surplus 150 150
Profit on Sale 340
Secured Loan 300 100 200 100
Total Liabilities 500 100 740 600
Non Current Assets 100 10 90 100
Net Current Assets 400 150 250 150
Intengible (Goodwill, Patent) 350
Cash and Bank 400
Total Assets 500 160 740 600
Book Value Slump sale is 60 and is sold for 500
Income Tax Liability 100 Cr. for selling co DMKH & C0
CASE STUDY 8 SLUMP SALE 62
INCOME TAX ASPECTS

Profit arising on Slump Sale of undertakings shall be chargeable to income

The undertaking transferred is held for more than 36 months therefore it will
be long term capital gains.
In case of Slump sale Indexation benefit is not available, therefore the
Cost of Acquisition will be 60 crores
The Long term capital gain tax will be computed as under :
(Rs. In Crores)
Sales Consideration 500
Less : Cost of Acquisition (without Indexation) (60)
Long term capital Gain 440
Tax on long term capital gain @ 23.072% 101.52

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 Case Study 9 63
MERGER FOR CAPITAL REDUCTION

Company A , sold its business and having surplus cash say Rs. 100 Cr.and wants to
distribute money to promoters
Avenues Available
Dividend 17.647% Dividend Distribution tax [Section 115O]
Buy Back Tax 20% on distributed Income [Section 115QA to 115 QC] [section 68]
IN THE ABOVE CASE MERGER CAN BE USED WITH CAPITAL REDUCTION. [section 66]
Acquire company B with similar object clause and business that of Company A
Acquire Shares of Company A as investment for furtherance of business. Say of Rs. 10
Crores from the promoter Mr. X. Who is a creditor.
Entry in the books of Company B- Investment Dr and Mr. X Cr. Rs. 10 Cr.
[ Mr. X will have to pay Long term Capital Gains Tax]
Merge Company B into Company A. Investment [ shares of Company A ] will be
cancelled as Capital reduction and cash in the books of A will be paid to Creditors of B.
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Case Study 10 Nation Spot 64
Exchange Limited [NSEL]with FTIL
[Now 63 moon Ltd]
The only case in history in which provisions of Section 396 were applied for the first
time where [ Now section 237]
Central Government ordered for merger of National Spot Exchange Ltd. (NSEL)
with its holding company Financial Technologies India Limited[ FITL] in public
Interest.
In the above case
a systematic fraud perpetrated in the commodity market
NSEL failed to pay its investors in commodity paired contracts
FMC was of the view that the manpower and financial strength of NSEL
had been depleted and so it was financially and physically incapable of
effecting any substantial recovery from the defaulting members.

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 MERGER SCENARIO 65

MERGER SCENARIO- 2016

Of the Total 10 biggest deal of the year 2016, 2 deals were related to
following Indian companies.
1 Essar Oil Rosneft deal: sale of 98.26% stake (49.13% to Rosneft,
49.13% to consortium of Russian PE funds Trafigura and United
Capital Partners), for Rs. 70,000 Crores ( US$13.9 Bln)for Vadinar
COMPANIES
Refinery (Cap. 20 mln Tons), Vadinar Port, 3,500 petrol pumps
ACT 1956
and Vadinar Power Plant (1010 MW).
To retire debt of US$ 5bln at group level and US$ 5.4 Bln of Co.
2 Reliance Communication and Aircel, both the companies will
hold 50% in new company with potential to dilute for raising of
fund from investor.

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 MERGER SCENARIO 66

FALIED MERGER INDIA SCENARIO

1 Merger of Air India with Indian Airlines [ not successful]
2 Merger of Air Deccan with Kingfisher Airlines
MERGER CALLED OFF
1 Flipkart Snapdeal merger called off to avoid millions of Dollars
COMPANIES
in Tax liability (July 31, 2017) [Snapdeal acquired Free charge in
2015 for US$400 mln, and sold to Axis Bank in 2017ACTfor
1956
Rs. 385 Cr]
2 HDFC Life Insurance Max merger called off due to regulatory
hurdles as two are not able to agree on alternative structure
and HDFC investors wanted to go for an IPO.(August 1, 2017 ET)
3 McNally Bharat Engineering company Limited , EMC Ltd and
Mc Nally Sayaji Limited with Kilburn Engineering Ltd called off
due to revival in Infrastructure sector.
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 OPPORTUNITY INSOLVENCY 67
RESOLUTION THROUGH M & A

ECONOMIC TIMES [29 AUGUST 2017] India's bad loan recovery plan reaches a critical turn as big
new roadblock looms.
The bad-loans recovery exercise now has a puzzle to solve: Who pays the 20% Minimum Alternate
Tax (MAT) on book profits when assets are written down?
Where loans are written off or restructured, there would be book profits. Some of that may get
negated with the write-off of assets, but the net impact may create a book profit, attracting MAT,
In cases where a company is taken over under the insolvency code,COMPANIES and where a significant
portion of the loan liability is extinguished as part of the resolution, the question that would arise
ACT 1956
is regarding the tax impact arising out of writing back liability as income under section 41 of the
Income Tax Act.
In a normal situation, if a company has a debt of Rs 40,000 Cr. and the new buyer buys it for Rs
10,000 Cr. on going concern basis that is liability is agreed to be settled at Rs. 10,000 Cr. [ Rs
30,000 Cr. Hair cut taken by lenders will have to be recorded as write back in the companys P&L,
eventually increasing the companys book profit]. And MAT of 20% will be applicable on that
Rs.6,000 Cr. in this case. ]

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 OPPORTUNITY INSOLVENCY 68
RESOLUTION THROUGH M & A

ECONOMIC TIMES [29 AUGUST 2017] India's bad loan recovery plan reaches a critical turn as big
new roadblock looms
As the rules stand today, any write downs or hair-cut taken by lenders will be treated as gains in
the company's profit and loss (P&L) statement and hence will attract 20% MAT. This may not have
been a problem under earlier accounting standards, but under Ind-AS fair value of debt is taken
into consideration,
Top 12 companies that are currently under insolvency resolution have a total debt of Rs 2.5 lakh
Cr. Within the next few months, potential buyers will bid for these COMPANIES
companies and push for
takeovers. In most cases, the lenders will have to take haircuts. ACT 1956
SOLUTION
The solution is in the scheme of arrangement/ demerger under section 230 to 234. However no
acquire would like to take the baggage / hidden liability of the target company.
The way Ultratech Jaypee Cement structure evolved which includes slump sale plus merger can be
used for acquiring the target assets.
THIS GIVES NEW OPPORTUNITY FOR STRUCTURING AND MERGERS
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 69
ISSUES

Issues
Due to Involving of so many authorities the speed of Compromise,
Arrangement may effect
In case of fast track merger approval required form Members holding
90% Shares and Creditors holding 90% in value, this may be difficult,
Other statutory regulations need alignment;
Income Tax
RBI,
FEMA
SEBI,
TAKE OVER CODE
ACCOUNTING STANDARDS
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 70
IMPACT

Impact
Internal Restructuring will increase due to separate provision for Small
Companies (Only Private Companies) and Holding and Wholly Owned
Subsidiary Company under Fast Track Merger,
Only relevant issue on Compromise and arrangement will be raised due
to prescribed limit for objecting the Scheme,
Dissenting shareholder will easily exit the Compromise and
Arrangement,
There will be more Cross Border Transaction in form of Merger and
Amalgamation
Role of other authority like Income Tax, RBI etc becomes important,
Now companies will have to upload the scheme documents on their
website and can use e- voting.
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 71
THANK YOU

DMKH & C0 Branches : Akola, Pune, Surat,

CHARTERED ACCOUNTANTS Ankleshwar and Bhilwara
CA. Durgesh Kabra :9869015418
Mumbai durgeshkabra@dmkhca.in
803-4, Ashok Heights, CA. Dilip Jagad : 9821142587
Opp. Saraswati Apartments, dilipjagad@dmkhca.in
Near Bhuta School, CA. Hiren Jogi : 9850955965
Old Nagardas X Road hirenjogi@dmkhca.in
CA.Dinesh Mundada : 9833866332
Gundavali , Andheri East mundada2007@gmail.com
Mumbai -400069 CA. Mithun Rathi :9227717000
Tel : 022 26824800 Mithun.rathi@gmail.com

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