8/12/2019 Forms of Corporate Restructuring
1/40
FORMS OF CORPORATE RESTRUCTURING
Prof. B.D.Panda
8/12/2019 Forms of Corporate Restructuring
2/40
MERGERIt involves combination of all the assets,
liabilities, loans, and businesses (on a goingconcern basis) of two (or more) companies
such that one of them survives. Merger is primarily a strategy of inorganic
growth.
Merger by absorption and by consolidation.
8/12/2019 Forms of Corporate Restructuring
3/40
MERGERExample:- X limited has a paid up equity capital of
Rs.10 crore consisting of 1 crore shares of face
value of Rs.10 each. Y ltd. has a paid up equity
capital of Rs.50 crore consisting of 5 crore sharesof face value of Rs.10 each. X ltd. is proposed to be
merged with Y ltd., where in based on the relative
valuation of both the companies, shareholders of X
ltd. will be given, two shares of Y ltd for every fiveshares of X ltd held by them. Upon the merger
being carried out,
8/12/2019 Forms of Corporate Restructuring
4/40
MERGER Shares of X ltd. will get cancelled since X ltd. cease to
exhist through a legal process.
All the assets and liabilities of X ltd. will be transferred
to Y ltd.
Balance sheet of Y ltd will have equity capital of Rs.54
crore and will include assets and liabilities of both X
ltd. and Y ltd.
Business of X ltd. will be conducted under the name of
Y ltd along with the erstwhile business of Y ltd.
All rights exercisable by X ltd against the third parties
will now be exercisable by Y ltd.
8/12/2019 Forms of Corporate Restructuring
5/40
CASE STUDY : ICICI BANK
Mergers by ICICI Bank Ltd. in India
S. No. Mergers by ICICI Bank Ltd. in India Year of
Merger
1. SCICI 1996
2. ITC Classic Finance Ltd.
1997
3 Anagram Finance 1998
4. Bank of Madura Ltd. 2001
5. Sangli Bank Ltd.2007
6. The Bank of Rajasthan Ltd. (BoR) 2010
8/12/2019 Forms of Corporate Restructuring
6/40
CONSOLIDATION
It involves creation of an altogether new companyowning assets, liabilities, loans and businesses (on
going concern basis) of two or more companies, both/all
of which cease to exist.
Example:- X ltd has a paid up equity capital of Rs. 10crore
consisting of Rs.10 each. Y ltd has paid up equity capital
of Rs.50 crore consisting of 5 crore shares of face value
of Rs.10 each. X ltd and Y ltd decide to consolidate
themselves into C ltd. In the process, based on relativevaluation of the shares of X ltd and y ltd, it is decided
that for every two shares of X ltd, shareholders of X ltd
will get one share of C ltd and for every five shares of Y
ltd, shareholders of Y ltd will get two shares of C ltd.
8/12/2019 Forms of Corporate Restructuring
7/40
CONSOLIDATION
Shares of X ltd and Y ltd will get cancelled sinceX ltd and Y ltd will cease to exhist through a
legal process.
All the assets and liabilities of X ltd and Y ltd willbe transferred to C ltd.
Business of X ltd and Y ltd will be conducted
under the name C ltd.
All the rights exercisable by X ltd and Y ltd
against the third parties will now be exercisable
by C ltd against them.
8/12/2019 Forms of Corporate Restructuring
8/40
ACQUISITION# Acquisition is an attempt or a
process by which a company or an
individual or a group of individuals
acquires control over anothercompany called target company.
# Acquiring control over a companymeans acquiring the right to control
its management and policy
decisions.
8/12/2019 Forms of Corporate Restructuring
9/40
ACQUISITION# It also means the right to appoint (and
remove) majority of the directors of acompany.
# In acquisition, often the target companysidentity remains intact.
Acquisition of a target company
through acquisition of its shares# The most common method is to acquire i.e.
purchase substantial voting capital (i.e. equitycapital) of the target company.
8/12/2019 Forms of Corporate Restructuring
10/40
ABSOLUTE CONTROL# This would mean an unfettered right to take
any decision. Needless to add that a 100 per
cent acquisition of equity shares of a
company would give such a control
# However, in such a case, the company cannot
become a listed company or continue to belisted company if it was listed earlier.
8/12/2019 Forms of Corporate Restructuring
11/40
ABSOLUTE CONTROL# This can be defined as an ability to get any and all
resolutions passed in the general body meeting of
the shareholders
# Most of the important decisions, such as further
issue of capital other than a rights issue, buy-back
of shares, reduction of capital, delisting of the
company, etc., can be taken, only by passing a
special resolution.
8/12/2019 Forms of Corporate Restructuring
12/40
SUBSTANTIAL ACQUISITION OF SHARES(A) The existing promoters being dislodged as
promoters and the acquirer stepping into their shoes
and becoming the promoter. This would be called a
successful acquisition.(B) The acquirer managing to acquire more or lessthe same percentage or a little less percentage of
shareholding than the existing promoters, thereby
getting fair representation on the board and some
say in the management of the target company but
not being able to dislodge the existing promoters.
This would be a partially unsuccessful acquisition.
8/12/2019 Forms of Corporate Restructuring
13/40
SUBSTANTIAL ACQUISITION OF SHARES(c) The acquirer not managing to get anysubstantial percentage of share capital. This
would be an unsuccessful acquisition.
Acquisition of a target company through power of
attorney, etc.This is not a commonly used way of effecting acquisition of a
company.
It could be used only as a short-term tactic, probably as a
precursor to the substantial acquisition of shares from existing
promoters or a faction of the existing promoters, who, pendingthe conclusion of Memorandum of Understanding (MOU) to sell
their shares to the acquirer, may allow him to vote on their behalf
on certain key resolutions.
8/12/2019 Forms of Corporate Restructuring
14/40
CASE STUDY: DAICHI SANKYO - RANBAXY
Ranbaxy grew at over 10% in 2007 while Daichi
only grew at 4.7%.
Daichi, the third largest drug manufacturer of Japan
purchased 34.81% of Ranbaxy Lab Ltd. at anegotiated price of Rs. 737.
The offer price was 31% over the market price of
the Ranbaxy Lab Ltd.
Two companies ranked at 15 in the world pharma
market.
Combination of these two company reached to 56
companies.
8/12/2019 Forms of Corporate Restructuring
15/40
DIVESTITUREDivestiture means an out and out sale of all or substantially allassets of the company or any of its business
undertaking/divisions, usually for cash (or for a combination of
cash and debt) and not against equity shares.
Divestiture means sale of assets, but not in a piecemealmanner.
Accordingly, all assets, i.e., fixed assets, capital works progress,
current assets and many a times even investments are sold as
one lump and the consideration is also determined as one lumpsum amount and not for each asset separately. Due to this
reason, it is also called slump sale under the Income Tax Act,
1961.
8/12/2019 Forms of Corporate Restructuring
16/40
DIVESTITUREThe consideration is normally payable in cash for two
reasons:
to pay off the liabilities and secured/unsecured loans.
to bring cash into the company for pumping into
remaining business or to start a new business.
No part of consideration is payable in the form of equityshares.
8/12/2019 Forms of Corporate Restructuring
17/40
DEMERGERForms of Demerger:
Spin-off
Split-up
Split-off
8/12/2019 Forms of Corporate Restructuring
18/40
SPIN-OFFSpin-off involves transfer of all or substantially
all the assets, liabilities, loans and business (on
a going concern basis) of one of the business
divisions or undertakings to another company
whose shares are allotted to the shareholders ofthe transferor company on a proportionate basis.
In spin-off, the transferor company continues tocarry on at least one of the businesses.
8/12/2019 Forms of Corporate Restructuring
19/40
SPLIT UPSplit-up involves transfer of all or
substantially all assets, liabilities, loans andbusinesses (on a going concern basis) of the
company to two or more companies in which,again like spin-off, the shares in each of thenew companies are allotted to the original
shareholders of the company on aproportionate basis but unlike spin-off, thetransferor company ceases to exist.
8/12/2019 Forms of Corporate Restructuring
20/40
SPIN-OFF AND SPLIT-UP In case of both, i.e., spin-off and split-up, the shares of the resulting
company, i.e., transferee company have to be issued to the
shareholders of the transferor company in proportion to their
shareholding in the transferor company.
Spin-off and split-ups are normally resorted to achieve focus in the
respective businesses, especially if the businesses are unrelated
(non-synergistic).
They are used to improve the price earning ratio and consequently,the market capitalization by demerging not so profitable businessesinto a separate company or companies.
8/12/2019 Forms of Corporate Restructuring
21/40
EXAMPLE
ABC ltd has three business divisions, A, B and
C. A is engaged in textiles, B is engaged in Steel
and C is engaged in software. If ABC Ltd
transfers the assets, liabilities and business of its
division C, i.e. software business to a separatecompany complying with other conditions
mentioned below and continues its other two
division A and B. It is a case of Spin off.
However if the parent company will transfer allits assets and liabilities of its three divisions to
two or three companies and the ABC limited will
either remain as a shell company or cease to
exist. Then it will be a case of Split-Up.
8/12/2019 Forms of Corporate Restructuring
22/40
SPLIT-OFF
A split-off differs from a spin-off in that theshareholders in a split off must relinquish their
shares of stock in the parent corporation in order to
receive shares of the subsidiary corporation,
whereas the shareholders in a spin off need not doso.
For example :- Viacom announced a split off of its
interest in blockbuster in 2004. Whereby Viacom
offered stock in Blockbuster in exchange for an
appropriate amount of Viacom stock.
8/12/2019 Forms of Corporate Restructuring
23/40
CARVE-OUT It is a hybrid of divestiture and spin-off.
In carve-out, a company transfers all the
assets, liabilities, loans and business ofone of its divisions/undertakings to its 100
per cent subsidiary .
At the time of transfer, the shares are
issued to the transferor company itself and
not to its shareholders.
8/12/2019 Forms of Corporate Restructuring
24/40
CARVE OUT Later on, the company sells the shares
in parts to outsiders - whether
institutional investors by private
placement or to retail investors by offerfor sale.
In case of carve-out, the consideration
for transfer of business to a newcompany eventually comes in the
coffers of the transferor company.
8/12/2019 Forms of Corporate Restructuring
25/40
CARVE-OUT Carve-outs are normally used to mobilize funds
for core business or businesses of a company by
realizing the value of non-core businesses.
They are also used to carve out capital hungrybusinesses from the businesses requiring normal
levels of capital so that further fund raising by
equity dilution can be restricted to capital intensive
businesses sparing the other businesses fromequity dilution.
8/12/2019 Forms of Corporate Restructuring
26/40
JOINT VENTURES It is an arrangement in which two or more
companies (called joint venture partners)
contribute to the equity capital of a new
company (called joint venture) in pre-decidedproportions.
Normally, joint venture partners are limited
companies, one or all of them may not be limited
companies. The biggest joint venture in India,
viz., Maruti Suzuki had the Government of India
as one of the joint venture partners.
8/12/2019 Forms of Corporate Restructuring
27/40
JOINT VENTURE Normally, joint ventures are formed to pool the
resources of the partners and carry out a
business or a specific project beneficial to both
the partners but which none of the partnerswants to carry out under its own corporate entity
for any one of the given reasons:
The venture may be highly risky.
Joint venture partners may otherwise be
competitors but may be wanting to collaborate
only for a specific project or business.
8/12/2019 Forms of Corporate Restructuring
28/40
JOINT VENTURENeither of the partners may be willing to dilute
control on their business by accepting funding,
especially equity funding, in their own balance
sheet.
To ensure that management control of the
common business or project is shared in the
agreed proportion through charter of the joint
venture company.To ensure that rewards of the common business
or the project are shared in the predetermined
ratio without the possibility of manipulation in
favour of either side.
8/12/2019 Forms of Corporate Restructuring
29/40
JOINT VENTURE-BASIC OBJECTIVES To obtain distribution channels or raw materials
supply.
To overcome insufficient financial or technicalability to enter a particular line of business.
To achieve economies of scale.
To share technology and general management
skills in the organization.
8/12/2019 Forms of Corporate Restructuring
30/40
REDUCTION OF CAPITAL This is a legal process underCompanies
Act, 1956, by which a company is allowed
to extinguish or reduce liability on any of
its shares in respect of share capital not
paid up or is allowed to cancel any paid-up
share capital which is lost or is allowed to
pay off any paid-up capital which is inexcess of its requirements.
8/12/2019 Forms of Corporate Restructuring
31/40
REDUCTION OF CAPITAL WHY?(A) By extinguishing or reducing the liability in respect
of share capital not paid-up.
# A company may have come out with an issue ofcapital, wherein shareholders would be required to
pay the issue price in stages, as and when called.
Before all the calls are made, the project may be
over and further funds may not be immediatelyrequired.
8/12/2019 Forms of Corporate Restructuring
32/40
REDUCTION OF CAPITAL WHY?(B) By writing off or cancelling the capital which is
lost.
# If a company has been incurring losses for a long
period of time and the accumulated loss has gonebeyond the reserves (if any) which it had built in past,it would have actually lost a part of its paid-up capital,i.e., a part of the paid-up capital is no morerepresented by any real assets.
Hence, the company would have been showing theaccumulated loss as a fictitious asset on the asset sideof the balance sheet and simultaneously would havebeen showing its paid-up capital at the historical figure.
8/12/2019 Forms of Corporate Restructuring
33/40
REDUCTION OF CAPITAL WHY?(c) By paying off or returning excess capital that is
not required by the company.
# A company may have been extremely profitableand thereby, it may be having excess/ surplus
cash. In such a case, the company may want to
return the excess cash to its shareholders since
idle cash will reduce its ROCE and ROE.
8/12/2019 Forms of Corporate Restructuring
34/40
REDUCTION OF CAPITAL WHY? By returning the excess cash and in process,
reducing either the face value of its shares or
the number of outstanding shares, it can not
only maintain/improve its ROCE and ROE,but also boost its earnings per share,
thereby, pushing the market price up.
It may also want to effect early redemption ofits preference share capital if any.
8/12/2019 Forms of Corporate Restructuring
35/40
BUY BACK OF SECURITIES This is yet another important tool of capital
restructuring.
If the company is holding excess cash and there
is no profitable ventures, then its prudent toreturn this excess cash to its shareholders.
Buy-back of equity shares indirectly increases
the promoters stake in the voting (equity) capital
of the company without being required to make
an open offer and reduces or eliminates the
possibility of takeover bid by an outsider.
8/12/2019 Forms of Corporate Restructuring
36/40
BUY BACK OF SECURITIES ABC ltd. has a paid up capital of Rs.100 crore consisting of
10 crore shares of face value Rs.10 each. The promoters
are holding 3 crore shares i.e. a stake of 30%.ABC ltd.
come with a but back of 25% and reduces the paid up
capital to 7.5 crore shares. The promoter's stake will go upto 46.67 per cent.
Companies find it prudent to reduce the capital base by
either resorting to reduction of capital under sections 100 to104 of the Companies Act, 1956,or to buy-back its equity
(sometimes even preference) shares.
8/12/2019 Forms of Corporate Restructuring
37/40
BUY BACK OF SECURITIES Reasons why a company may still resort to
reduction of capital under section 100 to 104
and not buy-back under section 77A:
# Under section 77A, a company can buy-back
only 25 percent of its paid-up equity capital in a
financial year. If a company wants to effect alarger buy-back, it will have to follow the
reduction of capital route.
8/12/2019 Forms of Corporate Restructuring
38/40
BUY BACK OF SECURITIES# In buy-back under section 77A, shareholders may
or may not participate even after passing a
special resolution in general meeting.
# Other conditions of section 77A, such as, post buy-
back debt equity of 2:1, buy-back amount not to
exceed 25 percent of share capital plus free
reserves, are not applicable to reduction of capital
under sections 100 to 104.
8/12/2019 Forms of Corporate Restructuring
39/40
DELISTINGDelisting of a security is delisting of any of
the securities (and not necessarily all)
from any of the stock exchanges (and not
necessarily all).
Delisting of a company as a form of
corporate restructuring refers to delisting
of its equity shares from all stockexchanges.
8/12/2019 Forms of Corporate Restructuring
40/40
DELISTING WHY? To reduce costs of maintaining large number of
reports and having an expensive work force.
To avoid sharing a lot of information in public
domain. Promoters delist to make use of the level of
freedom that unlisted companies enjoy.
MNCs especially delist so that they do not get
listed at very low prices due to FERA requirements.