Demerger

Demerger

Strategic Financial Management

Before MERGER happens!

Sania Mirza has called off her engagement of seven months to Sohrab Mirza, a childhood friend of the tennis ace and a wealthy businessman.

A short statement to the press - Sania said that they were “friends for years but found ourselves incompatible as fiances.”

And that sure happens to a lot of us. The best friend becomes a life partner and then things with the life partner don’t work out. In Sania’s case, the two of them had everything going for them, at least on the surface -- looks, money, a friendship going back years -- but the secret ingredient, compatibility, was missing.

And although they found that out a little late in the day, after a formal engagement, they did the right thing -- officially ending a relationship on an honourable note takes a lot of courage and dignity. In fact, the couple's parents even issued statements saying that their friendship remains unchanged, which is more than you can expect of anyone.

And while it must be hard coping with such a situation as a celebrity, with the world watching your every move, a break-up involves a lot of heartbreak for anyone.

Source: http://getahead.rediff.com/report/2010/jan/28/how-do-you-cope-with-a-painful-break-up.htm

Reliance Industries Limited

Reliance Industries Limited (RIL) as India's largest private sector company on all major financial parameters with turnover of Rs 73,164 crore (US$ 16.7 billion), cash profit of Rs 12,087 crore (US$ 2.8 billion), net profit of Rs 7,572 crore (US$ 1.7 billion) and net worth of Rs 40,403 crore (US$ 9.2 billion).

Why RIL as Case Study?

The first and only private sector company from India to feature in the 2004 Fortune Global 500 list of 'World's Largest Corporations' and ranked amongst the world's Top 200 companies in terms of profits.

Among the world's 10 most respected energy/chemicals companies and amongst the top 50 companies that create the most value for their shareholders in a global survey and research conducted by PwC and Financial Times in 2004.

Featuref in the Forbes Global list of world's 400 best big companies and in FT Global 500 list of world's largest companies.

The 'Best Managed Company' in India in a study by Business Today and A.T. Kearney in 2003. In 2004, the company emerged as 'India's biggest wealth creator' in the private sector over a 5-year period in a study by Business Today - Stern Stewart and as India's 'Most Admired Company' in a Business Barons - TNS Mode Opinion Poll.

Reliance CaseYear 2005

Details of the Reliance demerger have emerged in a strange sequence.

That Reliance's financial, telecom and power businesses would be demerged was first announced at the AGM of Reliance Industries Ltd (RIL).

On the same day, Anil Ambani, Chairman of the "new Reliance group" ADA Enterprises, announced the demerger ratios for the individual companies in his group.

The very next day, RIL distanced itself from these details, telling the stock exchanges that its board had not yet considered the ratios.

And, late in the night that same day (and long after trading had closed), the board of RIL announced the demerger ratios, not very different from what Anil Ambani had announced.

Last Date of Consolidated RIL

Reliance Industries, India's largest private sector company, having the widest investor base in the country (over 3.1 million) and group revenues equivalent to about 2.6 per cent of India's GDP, traded for the last day on Jan. 17, 2006 as a consolidated company.

Demerger Begins

As per the demerger approved by the RIL board in August 2, 2005, the Ambani brothers -- Mukesh and Anil – were expected to head different businesses and five listed companies have to emerge as potential investment opportunities by March FY 2006.

The Extraordinary General Meeting (EGM), held on October 21, 2005 under the chairmanship of Justice (rtd) M L Pendse, approved the demerger scheme with more than 99 per cent members voting in its favour.

However, a shareholder - Ahmedabad-based chartered accountant Kalpesh B Mankad had raised his objections in the EGM.

Mankad: A single shareholder as an aggrieved party

As an intervenor in the High Court, he in an affidavit, claimed that RIL had not disclosed assets and liabilities, depriving shareholders of the company of their right to get complete information about these issues.

He had further claimed that the company had also not informed shareholders about its financial position, which amounted to non-disclosure of material facts.

Mankad apprehened unfair "asset swapping" if the scheme was approved.

RIL counsel Iqbal Chagla: After the demerger the transferred assets are to be held by new entities to be carved out of RIL.

"As every RIL shareholder would be holding equal shares in newly-formed companies, there is no scope for any unfair swapping of assets and members would not lose on their investment," he contended.

Judiciary & Demerger in India

On Dec. 9, 2005, the Bombay High Court Justice Mhatre declined to grant six weeks stay on the High Court order sought by Mankad, a shareholder and approved the demerger of Reliance Industries group companies aimed at settling dispute between the Ambani brothers, Mukesh and Anil.

Over-ruling objections of a minority shareholder, Justice Nishita Mahatre passed the order granting approval to the RIL demerger scheme.

The Mukesh Ambani-headed RIL had moved the High Court on September 12, 2005 to get its approval for the demerger scheme aimed at the settlement with his younger brother Anil.

Approvals and compliances other than HC

After getting a certified copy of the Bombay High Court order dated December 9, 2005 sanctioning the scheme of arrangement between RIL and the `resulting companies' - Reliance Energy Ventures Ltd, Global Fuel Management Services Ltd, Reliance Capital Ventures Ltd and Reliance Communication Ventures Ltd - and their respective shareholders and creditors, approval sought from Registrar of Companies (RoC) and then RELIANCE Industries Ltd informed stock exchanges on Dec. 21, 2005 that its demerger scheme has become effective on that day.

Demerger and Revaluation by stock market

Three entities, Reliance Industries, Reliance Capital and Reliance Energy were already listed at the exchanges and they were expected to be re-valued by analysts in a new demerged business scenario.

Two other companies were to be listed by March 2006.

New Structure

Mukesh Ambani got complete and independent control over the oil exploration, refining, petrochemicals and textiles businesses through a 'core' / standalone Reliance Industries and the refinery Indian Petrochemicals Corporation (IPCL. He got the biotech firm Reliance Life Sciences and Trevira, a European company manufacturing polyester fibres.

Anil Ambani got control over power, communications and financial services undertakings through four companies which come under the umbrella of the Anil Dhirubhai Ambani Enterprise (ADAE) group, as part of the Reliance group.

New Structure

As per plan, these four companies were Reliance Capital Ventures Ltd (to be amalgamated with listed Reliance Capital), Reliance Energy Ventures (to be amalgamated with Reliance Energy), Reliance Communication Ventures (mainly including Reliance Infocomm and Reliance Telecom) and Global Fuel Management Services (for gas-based energy undertakings).

What the market said?

As a unified conglomerate, Reliance had the advantages of scale — the economies, the cash flows, the investment leverage.

It had the culture, the ambition and the resources to think big like no other entrepreneur had thought.

Its strength was creating huge assets, massive capacities, on an unheard of scale.

The duo worked well — Mukesh set up projects, Anil engineered finances.

Now they will have to gain experience in one another’s strength.

Particularly, because both businesses need both these skills.

Confusion among fund managers, FIIs and traders

THE demerger of RIL has created confusion among fund managers, FIIs and traders who followed the Sensex and the Nifty index.

The confusion among fund managers was: how to balance their portfolio following the demerger and what to do with the shares of new companies, which would not be traded for some time?

For traders in the derivatives market, the confusion was how to value index futures after RIL stocks start trading without the shares of the new companies. After the demerger, the value of RIL share would fall.

RIL has the second highest weightage of 9.04 per cent on the Nifty and the highest on the Sensex at 11.46 per cent.

Confusion among fund managers, FIIs and traders

In the past too, companies on the index have been demerged.

For instance, Dabur Pharma was de-merged from Dabur, which was part of S&P CNX Nifty Junior.

NIIT, then a part of the Nifty, was demerged into NIIT Technologies.

Similarly, Ultratech Cement was formed after the demerger of Larsen & Toubro's cement division.

In most cases, trading in the companies' shares was suspended for some time. But, trading in RIL shares would continue. "Each is different and has to be looked into separately," said an NSE official on that day.

Confusion among fund managers, FIIs and traders

A fund manager managing the Nifty index said, "I do not know what to do with the shares of new companies (formed after the demerger) as an index fund does not allow investment in stocks outside the index."

According to him, calculating NAV would be a problem, as it is difficult to put a value on unlisted securities.

This was also a nagging issue for several FIIs that invest in Nifty and Sensex stocks alone.

Confusion among fund managers, FIIs and traders

Mutual funds have to adjust their index portfolio with the same weightage as in the index.

They would have to sell shares of RIL and buy shares of other companies in the index. This happened due to the weightage of RIL in the Sensex and the Nifty falling, while the weightage of other stock increases.

For traders, the problem was that if they held Nifty futures till January 18, 2006, they could lose money as the price of RIL shares would fall and this in turn would affect the index value.

August 5, 2005 (In Mumbai)

The Board of Directors of Reliance Industries Ltd. (RIL) unanimously approved the scheme of Demerger of the businesses of the company.

The Board at its meeting held on June 18, 2005 had resolved in principle to consider reorganization of the businesses of the Company and authorized the Corporate Governance and Stakeholders' Interface Committee of Directors ('CG Committee') to examine in depth all the relevant issues including statutory and legal requirements for a suitable reorganization of Company's businesses and suggest a proposal to the Board including any Scheme of Demerger.

On August 2, 2005 the Board approved in-principle the proposal for demerger.

August 5, 2005

CRISIL, JM Morgan Stanley, Deloitte Haskins and Sells and M/s Amarchand Mangaldas and Suresh A. Shroff & Co were appointed to advise the CG Committee and the Board.

The CG Committee along with the Advisors presented a Scheme for the approval of the Board of Directors.

In accordance with the principles of fairness, protection of minority shareholders' interest, full disclosure and the objective of unlocking value for all shareholders, the Board of Directors, after extensive deliberations and discussions, have approved the Scheme of Demerger.

The Scheme of Demerger as approved by the Board is subject to such approvals as may be required including that of the Stock Exchanges, Mumbai High Court and Shareholders' approvals.

The Appointed Date: September 1, 2005

The Scheme proposes to demerge assets and liabilities of the following undertakings of RIL

Telecommunications Undertaking Coal based energy Undertaking Financial Services Undertaking Gas based energy Undertaking

Reliance Communication

1. Reliance Communication Ventures Ltd. 1.1. Reliance Communication Ventures Limited for telecommunications

Undertaking including RIL's investments in Reliance Communications Infrastructure Limited (RCIL), Reliance Infocomm Limited (RIC) and Reliance Telecom Limited (RTL).

1.2. Reliance Communications Infrastructure Limited has set up the backbone infrastructure required by Reliance Infocomm Limited for its telecom operations.

1.3. Reliance Infocomm Limited was set up to provide wireless and wireline telecommunication services based on CDMA technology in various parts of India.

1.4. Reliance Telecom Limited was promoted for providing cellular mobile telephony services using the GSM technology in East and North-East India and basic telephone services in Gujarat.

RIL held………in Reliance Communications

90 crore equity shares of face value of Re.1 each in Reliance Communications Infrastructure Limited,

319.26 crore equity shares of face value of Re.1 each in Reliance Infocomm Limited and

0.71 crore equity shares of face value of Rs.10 each in Reliance Telecom Limited.

The value of the investments of RIL in the Undertaking to be demerged into Reliance Communication Ventures Limited is approximately Rs. 15,400 crore.

Reliance Energy

2. Reliance Energy Ventures Limited 2.1. Reliance Energy Ventures Limited for coal

based energy undertaking including RIL's investments in Reliance Energy Limited

2.2. Reliance Energy Limited engaged in the generation, transmission and distribution of power.

2.3. RIL owned 9.09 crore equity shares of face value of Rs.10 each in Reliance Energy Limited.

2.4. The value of the investments of RIL in the Undertaking to be demerged into Reliance Energy Ventures Limited is approximately Rs.3,000 crore.

Reliance Capital

3. Reliance Capital Ventures Limited 3.1. Reliance Capital Ventures Limited for

Financial Services Undertaking including insurance.

3.2. Reliance Capital is in the business of financial services including asset management.

3.3. Reliance General Insurance in the business of general insurance activities.

3.4. Reliance Life Insurance is yet to commence business.

RIL held………in Reliance Capital

RIL currently owned 6.01 crore equity shares of face value of Rs.10 each in

Reliance Capital Limited, 2.55 crore equity shares of the face value of Rs.10 each in

Reliance General Insurance Co. Limited and 0.05 crore equity shares of the face value of Rs.10 each in

Reliance Life Insurance Company Limited.

The value of the investments of RIL to be demerged in Reliance Capital Ventures Limited is approximately Rs.600 crore.

Gas based energy Undertaking

Global Fuel Management Services Limited for gas based energy undertaking.

The book value of RIL investment in this company was not significant.

Shareholding in Demerged Entities

All shareholders of RIL, except the Specified Shareholders', would be issued shares of de-merged undertakings in 1:1 ratio i.e., for each share held in RIL, shareholders would get:

One share of Reliance Communications Ventures Ltd. of face value Rs. 5 each fully paid-up

One share of Reliance Energy Ventures Limited of face value Rs. 10 each fully paid-up

One share of Reliance Capital Ventures Limited of face value Rs. 10 each fully paid-up

One share of Global Fuel Management Services Limited of face value Rs. 5 each fully paid-up

Shareholding in Demerged Entities

The Specified Shareholders i.e. Trustees of Petroleum Trust (holding 7.5% of RIL) and four companies - Reliance Aromatics and Petrochemicals Pvt. Ltd., Reliance Energy and Project Development Pvt. Ltd., Reliance Chemicals Pvt. Ltd. and Reliance Polyolefins Pvt Ltd (collectively holding 4.7% of RIL) hold RIL shares for the economic benefit of RIL shareholders.

The Specified Shareholders will not take shares of the resulting companies. The RIL shareholders will get proportionate benefit of this also.

As a result thereof, the total number of shares to be issued by each of the resulting companies would be 122 crore as against 139 crore equity shares of RIL.

Benefits - Shareholders

The shareholders of RIL continued to participate in the growth and progress of RIL (A global oil, gas, refining and petrochemicals company). They would continue to hold the same number of shares as they currently hold in RIL.

Received separate shares in the four demerged entities, which allowed them to participate individually as well as collectively in the growth areas of telecom, financial services and coal and gas based energy businesses.

The shares of the resulting companies (to be) listed on the Stock Exchanges in India, where RIL shares are currently listed, thus providing liquidity to all shareholders.

Unlocked value for all shareholders as they can participate directly in all the businesses that RIL has nurtured and brought to stature.

Benefits - Shareholders

All RIL shareholders were issued shares of the demerged companies in a 1:1 ratio. So if a shareholder held 100 Reliance Industries shares he got:

100 shares of Reliance Communications Ventures Ltd, 100 shares of Reliance Energy Ventures Ltd (REVL), 100 shares of Reliance Capital Ventures Ltd (RECL) and 100 shares of Global Fuel Management Services Ltd.

REVL amalgamation with Reliance Energy and RECL with Reliance Capital -- following a board decision -- RIL shareholders received shares of REL and Reliance Capital based on an earlier approved independent swap ratio.

Benefits - Shareholders

The ratio approved was 7.5 shares of Reliance Energy for 100 shares of REVL held and 5 shares of Reliance Capital for 100 shares of RECL held.

Analysts: Risks would be lower as some 'unrelated' business undertakings will be demerged.

And further there will be unlocking of value and if an RIL shareholder holds these shares, he will continue to receive benefits in terms of growth from unrelated Reliance Capital, Energy and Infocomm businesses anyway.

Price discovery for new entities on Jan.18, 2006 (Wednesday)

The BSE and the NSE HELD a special one-hour trading session on Jan. 18, 2006 from 8.00-9.00 a.m. to facilitate price discovery of the post-demerger price for Reliance Industries Ltd.

Only Reliance Industries was traded in this session, without circuit filters, while the unlisted companies were to be listed in coming months.

While the special trading session was on, it had no affect on the overall market or Sensex / Nifty.

The closing price for Reliance Industries after the special trading session was used to determine the opening level of indices (and a new RIL weightage in the indices) at 10.00 a.m. on January 18, 2006.

The volume weighted average price of RIL during this above session was used for adjustment to the base m-cap of the respective indices.

Price discovery for new entities on Jan.18, 2006

People watched the session with anxiety and drama unfolded about a company with revenues of Rs 73,164 crore add up to 2.6 per cent of India’s GDP, whose market capitalisation of Rs 129,339 crore is 5 per cent of BSE’s total market capitalisation, whose weight in the Sensex was 12.1 per cent, whose price is up 50 per cent since June 2005.

Unlocking of shareholder value for 23 lakh stakeholders, the shares of Reliance Industries Ltd (RIL) on THE APPOINTED DAY opened at Rs. 702.90 on the Bombay Stock Exchange (BSE) in an unprecedented special trading session to discover the price of the scrip after its demerger.

Price discovery for new entities on Jan.18, 2006

It was quoted at Rs. 699 on the National Stock Exchange (NSE). The stock touched an intraday high of Rs. 724.70 and an intraday low of Rs. 686 on the BSE.

In all, 1.2 crore shares were traded on the BSE and 2.3 crore shares on the NSE.

The previous closing price of RIL was Rs. 928.15. The BSE and the NSE combined turnover had crossed

Rs. 2,800 crore. Turnover was about half the total turnover on the NSE

the previous day and a third of the turnover on the NSE and the BSE combined.

NSE Release

The NSE in a release stated that the special session for Reliance Industries was held from 8 a.m. to 9 a.m. so as to discover the price after the demerger.

"Trading activity was normal and the number of orders was 4.04 lakh, number of trades was 3.25 lakh, number of shares traded was 3.98 crore and the total traded value was Rs. 2,844 crore. After the close of the special session the volume weighted average price for Reliance Industries was Rs. 714.35. The adjustments to the base index value were suitably carried out to compute the index value so as to give effect to the demerger of Reliance Industries Ltd,".

VALUE UNLOCKED

The demerger of Reliance Industries Limited (RIL) has unlocked unprecedented value for more than 23 lakh Reliance shareholders.

By January 19, 2006, RIL's market capitalisation has increased over 50% from June 2005, outperforming the Sensex by nearly 20%, and adding a record Rs. 55,000 crores to shareholder wealth, in a short span of only seven months.

Website References

http://www.rediff.com/money/2006/jan/17spec.htm http://www.reliancecommunications.co.in/

webapp/Communications/jsp/media/press_release_detail.jsp?id=179

http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2006/reliance_delisting.comments

http://www.prdomain.com/companies/R/RelianceIndustries/newsreleases/20058622477.htm

Newspapers

“REL, Reliance Cap clarify on demerger”, the Hindu Business Line, August 10, 2005.

“Reliance Demerger comes into effect”, the Hindu Business Line, December 22, 2005.

“Reliance demerger catches fund managers, traders on wrong foot”, the Hindu Business Line, Dec. 28, 2005.

“HC to hear Reliance demerger scheme on Friday, The Times of India, November 24, 2005.

“Mukesh, Anil, you & me: Will Reliance demerger unlock value? Will other companies take the same route”, The Indian Express, Jan. 19, 2006.

“Reliance unlocks shareholder value”, the Hindu Business Line, Jan. 19, 2006.

“Special trading session for Reliance Industries”, the Hindu, Dec. 31, 2005.