A PROJECT ON “MERGERS&ACQUISITIONS” IN RANE ENGINE VALVE.LTD” (Report submitted to Jawaharlal Nehru Technological University, Hyderabad in partial fulfillment of the requirement for the award of the Degree of Masters in Business Administration) BY S.MURALIKRISHNA HT NO: 07N31E0027 Under the guidance of Mr. T. SATISH KUMAR Assoc. Professor DEPARTMENT OF BUSINESS MANAGEMENT MALLAREDDY COLLEGE OF ENGINEERING & THECHNOLOGY, MAISAMMAGUDA, DHULAPALLY SECUNDERABAD. (JAWAHARLAL NEHRU TECHNOLOGICAL UNIVERSITY) 2007-2009 1
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A PROJECT ON
“MERGERS&ACQUISITIONS”IN
RANE ENGINE VALVE.LTD”
(Report submitted to Jawaharlal Nehru Technological University, Hyderabad in partial fulfillment of the requirement for the award of the Degree of Masters in
Business Administration)
BYS.MURALIKRISHNAHT NO: 07N31E0027
Under the guidance ofMr. T. SATISH KUMAR
Assoc. Professor
DEPARTMENT OF BUSINESS MANAGEMENTMALLAREDDY COLLEGE OF
6. Rane Nastech Limited Energy Absorbing Steering Columns
Associate Companies
Kar Mobiles Limited• Automotive Valves,• Large Diesel valves for locomotive engines & defence application
J M A Rane Marketing Limited• Distribution company for auto components
Access to World Class Technology
The Group has access to World Class Technology through strong alliances :-
TRW Inc. - Power Steering systems,USA Ball Joints, Seat Belt Systems, &
Engine Valves
NSK - Energy Absorbing Steering Japan columns, Manual RCB Steering gears
Nisshinbo Ind., - Brake Linings, Disc Pads and Clutch
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Japan Facings
BBA, U K - Railway Brake Blocks
Unisia JKC, Japan - Hydraulic Steering Pumps
SALES PROFILE
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SALES BY APPLICATIONS
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MARKET SHARE
REVL Is the largest player in India in the valve train segment
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DOMESTIC OEM CUSTOMERS
Partial list in alphabetical order…. 1. Ashok Leyland2. Cummins India3. Eicher Motors4. Escorts5. Fiat (India) Ltd6. Hero Honda Motors7. Hindustan Motors8. Hindustan Power plus 9. Honda Siel Power products ltd10. Hyundai Motors11. Kinetic Engineering12. L & T John Deere
13. LML 14. Mahindra & Mahindra 15. Maruti Suzuki 16. New Holland Tractors India 17. Royal Enfield Motors 18. Simpson & Co. 19. Swaraj Mazda 20. Tata Cummins 21. Telco 22. T V S Motor Company Ltd
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23. Yamaha Motors India Ltd.
EXPORTS
REVL is one of the earliest exporters of auto components from India. Exports have been growing at a healthy rate during the past three years and represent 22% of sales.
Importing countries include Australia,U.K, Germany, Italy, Iran, USA, Middle East and the Far East.
REVL’s Overseas OE customers include reputed passenger cars, tractor and other engine manufacturers.
Product range - valves
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Product range – Cast products
Camshafts
Tappets
Guides
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Quality System
• All plants are QS – 9000 certified by RWTUV, Germany.
• Working for introducing TQM practices.
• Warranty rates less than 1 ppm.
• Continuous improvement in quality standards through SPC and employee
involvement.
• Well-equipped standards rooms and testing facilities to build quality into the
products.
• Won the National Award for Quality instituted by the Automotive Components
Manufacturers’ Association ( ACMA) for the year 1992-93.
• Five times winner of the “Best Vendor Award” from Maruti – Suzuki ( largest car
manufacturer in India) – 92-93, 95-96, 96-97, 98-99 & 00-01
• “Ship to use”status granted by Cummins India Ltd.& Tata Cummins Ltd.
• Excellent record in product quality and delivery.
• Selected by Ford India for sourcing valves for export.
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NEW PRODUCT DEVELOPMENT CAPABILITY
Valves had been one of the early items to be indigenised by several OEMs. With
well-established design, testing and NPD capability, REVL continues to be the
preferred source to all OEMs in the country. The development projects cover
major OEMs like Maruti – Suzuki, Hyundai Motors, Hero – Honda to mention a
few.
Today, REVL is single source for valves for as many as 10 OEMs.
ISO 9001 certification is a testimonial for REVL’s design capability. Exploiting
this strength, REVL has successfully implemented several Value Engineering
proposals for various customers.
Large export portfolio necessitates production of a large number of new products
making the NPD activity a part of routine in the company. The product range
covers 1500 applications at present.
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CHAPTER-4
REVIRE OF LITERATURE
INTRODUCTION
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Profitable growth constitutes one of the prime objectives of most of the
business firms. It can be achieved ‘internally’ either through the process of introducing\
developing new products or by expanding/enlarging the capacity of existing products.
Alternatively, the growth process can be facilitated ‘externally’ by acquisitions of
existing business firms. This acquisition may be in the form of mergers, acquisitions,
amalgamations, takeovers, absorption, consolidation, and so on. Although the legal
procedure involved in these are different, in view of the perspective of economic
considerations (motives and effect) these terms are used interchangeably here.
There are strengths and weaknesses of both the processes of promoting
growth. For instance, internal expansion apart from enabling the firm to retain control
with itself also provides flexibility in terms of choosing equipment, mode of technology,
location, and the like which are compatible with its existing operations.
Acquisition/merger obviates, in most of the situations, financing problems as
substantial/full payments are normally made in the form of shares of the purchasing
company.
A growing firm may, therefore, be in constant search for identifying
potential firms which may be merged. The finance manager’s job is to evaluate such
merger decisions. These decisions, in a way, are analogous to capital budgeting decisions
in that the cost of present investment (purchase consideration paid for acquisition of an
enterprise either through issuance of shares and/or cash) is to be compared with expected
future benefits accruing to the merging firm.
However, merger evaluations are relatively more difficult vis-à-vis capital
budgeting decisions, the two chief reasons being: (i) all benefits from merger are not
easily quantifiable and so also all costs, for instance, benefits of less competition and
economies of scale (technical, managerial, financial) are not easily measurable attributes;
and (ii) buying a company is more complicated than buying a new machine in that the
firm is to address itself to many tax, legal and accounting issues.
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The merger/amalgamations of corporates constitutes a subject-matter of the
companies Act, the courts and law there are well-laid down procedures for valuation of
shares and rights of investors. Section three covers the framework of
mergers/amalgamations. The acquisition/takeover bids fall under the purview of the
Securities and Exchange Board of India (SEBI) and the stock exchange listing
agreements.
TYPES, ECONOMICS AND LIMITATIONS OF MERGERS
Types
Notwithstanding terminological differences, mergers can be usefully distinguished into
the following three types: (i) horizontal, (ii) vertical and (iii) conglomerate.
Horizontal Merger Horizontal merger takes place when two or more corporate firms
dealing in similar lines of activity combine together. Elimination or reduction in
competition, putting an end to price-cutting, economies of scale in production, research
and development, marketing and management are the often cited motives underlying such
mergers.
Vertical Merger Vertical merger occurs when a firm acquires firms ‘upstream’ from
it and\or firms ‘downstream’ from it. In the case of an ‘upstream’ merger, it extends to
the suppliers of raw materials and to those firms that sell eventually to the customer in the
event of a ‘downstream’ merger. Thus, the combination involves two or more stages of
production or distribution that are usually separate. Lower buying cost of materials, lower
distribution costs, assured supplies and market, increasing or creating barriers to entry for
potential competitors or placing them at a cost advantage are the chief gains accruing
from such mergers.
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Conglomerate Merger In marked contrast, conglomerate merger is a combination
in which a firm established in one industry combines with a firm from an unrelated
industry. In other words, firms engaged in two different\unrelated economic/business
activities combine together. Diversification of risk constitutes the rationale for such
mergers.
Economics
The major economic advantages of merger are: (i) economies of scale, (ii) synergy,
(iii) fast growth, (iv) tax benefits and (v) diversification.
Economies of Scale The operating cost advantage in terms of economies of scale is
considered to be the primary motive for mergers, in particular, for horizontal and vertical
mergers. They result in lower average cost of production and sales due to higher level of
operations. In operational terms, real economies may arise from (i) the production
activity of the firm, (ii) the research and development \technological activities; (iii) the
synergy effects; (iv) marketing and distribution; (v) transport, storage, inventories; and
(vi) managerial economies.
Synergy It results from complementary activities. For instance, one firm may have a
substantial amount of financial resources, while the other has profitable investment
opportunities. Likewise, one firm may have a strong research and development (R & D)
team whereas the other may have a very efficiently organized production department.
Similarly, one firm may have well-established brands of its products but lacks marketing
organization and another firm may have a very strong marketing organization. The
merged concern in all these cases will be more efficient than the individual firms. And,
hence, the combined value of merged firms is likely to be greater than the sum of the
individual entities (units).
Fast Growth Merger often enables the amalgamating firm to grow at a rate faster
than is possible under internal expansion route via its own capital budgeting proposals
because the acquiring company enters a new market quickly, avoids the delay associated
with building a new plant and establishing the new line of product. ‘Internal growth is
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time-consuming, requiring research and development, organization of product, market
penetration and in general a smoothly working organization.’ Merger obviates all these
obstacles and thus steps up the pace of corporate growth.
Tax Benefits Under certain conditions, tax benefits may turn out to be the underlying
motive for a merger. These conditions relate to the tax laws allowing set-off and carry-
forward of losses. It may be beneficial to merge a firm, (saddled with large tax carry-
forward losses) with a firm having sufficient current earnings. The argument is that this
tax-loss carry forward will reduces the taxable income of the new merged firm, with its
obvious impact on the reduction of tax liability.
Diversification Diversification is yet another major advantage especially in
conglomerate merger. The argument is that a merger between two unrelated firms would
tend to reduce business risk, which, in turn, reduces the discount rate\required rate of
return (Ke) of the firm’s earnings (as investors are risk averse) and, thus, increases the
market value. In other words, such mergers help stabilize or smoothen overall corporate
income which would otherwise fluctuate due to seasonal or economic cycles.
Limitations
However, merger suffers from certain weaknesses. The chief ones are discussed as under:
First, a merger may not turn out to be a financially profitable proposition in view
of non-realization of potential economies in terms of cost reduction. Second, the
management of the two companies may not go along because of friction. Third,
dissenting minority shareholders may cause problems. Finally, it may attract government
anti-trust action in terms of the Monopolies and Restrictive Trade Practices Act.
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FINANCIAL FRAMEWORK
This section discusses the financial framework of a merger decision. It covers three inter
related aspects: (i) determining the firm’s value, (ii) financing techniques in merger, and
(iii) analysis of merger as a capital budgeting decision.
Determining the Firm’s Value
One of the first problems in analyzing a potential merger involves determining the value
of the acquired firm. The value of a firm depends not only upon its earnings but also upon
the operating and financial characteristics of the acquiring firm. It is, therefore, not
possible to place a single value for the acquired firm. To determine an acceptable price
for a firm, a number of factors, quantitative as well as qualitative, are relevant. The
quantitative factors relate to (i) the value of the assets and (ii) the earnings of the firm.
Based on the assets’ values and earnings, these factors include book value, appraisal
value, market value and earnings per share.
Book Value The book value of a firm is based on the balance sheet value of the
owner’s equity. It is determined by dividing net worth by the number of equity shares
outstanding. The book value, as the basis of determining a firm’s value, suffers from a
serious limitation as it is based on the historical costs of the assets of the firm. Historical
costs do not bear a relationship either to the value of the firm or to its ability to generate
earnings. Nevertheless, it is relevant to the determination of a firm’s value for several
reasons. (i) it can be used as a starting point to be compared and complemented by other
analyses, (ii) in industries where the ability to generate earnings requires large
investments in fixed assets, the book value could be a critical factor where especially
plant and equipment are relatively new, (iii) a study of the firm’s working capital is
particularly appropriate and necessary in mergers involving a business consisting
primarily of liquid assets such as financial institutions.
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Appraisal Value Appraisal value is another measure of determining a firm’s value.
Such a value is acquired from an independent appraisal agency. This value is normally
based on the replacement cost of assets. The appraisal value has several merits. In the
first place, it is an important factor in special situations such as in financial companies,
natural resource enterprises or organizations that have been operating at a loss.
Market Value The market value as reflected in the stock market quotations comprises
yet another approach for estimating the value of a business. The justification of market
value as an approximation of true worth of a firm is derived from the fact that market
quotations by and large indicate the consensus of investors as to the firm’s earning
potentials and the corresponding risk.
Earning Per Share According to this approach, the value of a prospective
acquisition is considered to be a function of the impact of the merger on the earnings per
share (EPS). In other words, the analysis could focus on whether the acquisition will have
a positive impact on the EPS after merger or it will have the effect of diluting it. The
future EPS will effect the firm’s share prices which is a function of price-earnings (P\E)
ratio and EPS.
Merger as a Capital Budgeting Decision
The capital budgeting decision, the merger decision requires comparison between the
expected benefits [measured in terms of the present value of expected benefits\cash
inflows (CFAT) from the merger] with the cost of the acquisition of the target firm. The
acquisition costs include the payment made to the target firm’s shareholders and the
payment made to discharge the external liabilities of the acquired firm less cash proceeds
expected to be realized by the acquiring firm from the sale of certain assets of the target
firm. The decision criterion is ‘to go for the merger’ if the net present value (NPV) is
positive; the decision would be ‘against the merger’ in the event of the NPV being
negative.
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Scheme of Merger\Amalgamation
Whenever two\more companies agree to merge with each other, they have to prepare a
scheme of amalgamation. The acquiring company should prepare the scheme in
consultation with its merchant bankers\financial consultants. The main contents of a
model scheme are as listed below.
Description of the transferor and the transferee company and the business of the
transferor.
Their authorized, issued and subscribed\paid-up capital.
Basis of scheme: Main terms of the scheme in self-contained paragraphs on the
recommendation of valuation report, covering transfer of assets/liabilities, transfer
date, reduction or consolidation of capital, application to financial institutions as
lead institution for permission and so on.
Change of name, object clause and accounting year.
Protection of employment.
Dividend position and prospects.
Management: Board of directors, their number and participation of transferee
company’s directors on the board.
Application under sections 391 and 394 of the companies Act, 1956, to obtain a
high court’s approval.
Expenses of amalgamation.
Conditions of the scheme to become effective and operative, effective date of
amalgamation.
The basis of merger\amalgamation in the scheme should be the reports of the valuers of
assets of both the merger partner companies. The scheme should be prepared on the basis
of the valuer’s report, reports of chartered accountants engaged for financial analysis and
fixation of exchange ratio, report of auditors and audited accounts of both the companies
prepared up to the appointed date. It should be ensured that the scheme is just and
equitable to the shareholders, employees of each of the amalgamating company and to the
public.
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Approvals for the Scheme The scheme of merger\amalgamation is governed by
the provisions of section 391-394 of the companies Act. The legal process requires
approval to the schemes as detailed below.
Approval from Shareholders In terms of Section 391, shareholders of both the
amalgamating and the amalgamated companies should hold their respective meetings
under the directions of the respective high courts and consider the scheme of
amalgamation. A separate meeting of both preference and the equity shareholders should
be convened are required to pass a special resolution for the issue of shares to the
shareholders of the amalgamating company in terms of the scheme of amalgamation.
Approval from Creditors\Financial Institutions\Banks Approvals are
required from the creditors, banks and financial institutions to the scheme of
amalgamation in terms of their respective agreements\arrangements with each of the
amalgamating and the amalgamated companies as also under Section 391.
Approvals from Respective High Court Approvals of the respective high
court in terms of sections 391-394, confirming the scheme of amalgamation are required.
The courts issue orders for dissolving the amalgamating company without winding up on
receipt of the reports from the official liquidator and the regional director, Company Law
Board, that the affairs of the amalgamating company have not been conducted in a
manner prejudicial to the interests of its members or to public interests.
Approval from Reserve Bank of India In terms of section 19 of Foreign
Exchange Regulation (FERA) Act, * 1973, when the amalgamated company issues any
shares to the non-resident shareholders of the amalgamating company, it is required to
obtain the permission of the Reserve Bank of India. Further, provisions of section 29 of
FERA also restrict the acquisition of the whole or any part of any undertaking in India, in
which non-residents’ interest is more than the specified percentage.
Thus, this approval is required only when non-resident interests are involved in the
merger or amalgamation.
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ACQUISITIONS\TAKEOVERS
Take over implies acquisition of controling intrest in a company by another company. It
does not lead to dissolution of the company whos shares are being\have been acquired. It
simply means a change of controlling intrest in a company through the acquisition of its
shares by another group the takeovers can assume three forms: (i) negotiated\friendly,
(ii) open market\hostile and (iii) bail-out. The first type of take over is organized by the
incumbent management with a due to part with the control of management to another
group through negotiation. The terms and conditions of the takeover are mutually settled
by the groups. The hostile takeovers are also referred to as raid on the company. In order
to takeover the management of, or acquire controlling interest in, the target company, a
person\group of persons acquire shares from the open market/financial
institutions/mutual funds/willing share holders at a price higher then the prevailing
market price. Such takeovers are hostile to the existing management. When a profit
earning company takes over a financially sick company to bail it out, it is known as bail-
out takeover. The takeover bids in respect of purchase price, track record of the acquirer
and his financial position are evaluated by a leading financial institution. The corporate
takeovers in the country are governed primarily by the listing agreement with stock
exchanges and the SBI code. The main elements of the regulatory framework for
takeovers and hostile takeover strategies and defensive strategies are briefly described in
this section.
LISTING AGREEMENT
The takeover of companies listed on the stock exchanges is regulated by clause 40-A and
40-B of the listing Agreement. The clause 40-A deals with substantial acquisition of
securities and clause 40-B details the requirements to be met when a takeover offer is
made to a company either voluntarily or otherwise.
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Substantial Acquisition of Securities. The Company agrees that the following would also
be the conditions for continued listing.
1. When a person acquires or agrees to acquire any securities in the company and
when the total nominal value of such securities so acquired or agreed to be
acquired together with the total nominal value of the securities already held by the
such person, exceeds or would exceed in the aggregate 4 percent of the voting
capital of the company, the stock exchange should be notified with in 2 days of
such acquisition or such agreement for acquisition, by the authorized intermediary
and also by the acquirer.
2. When any person holds securities which in the aggregate carry less than 10
percent of the voting rights in the company, he can not acquire any securities
which, when aggregated with the securities already held by him, would carry 10
percent or more of the voting rights unless he notifies the stock exchange and
fulfills the conditions specified in clause 40-B, unless the SEBI has specifically
granted exemption.
3. The company should notify the stock exchange within 7days about any
information which has an effect on its assets and liabilities or financial position or
on the general course of its business leading to substantial movements in the price
of the securities and in particular information about transactions mentioned above.
4. The above conditions are not applicable to an acquisition by a person whom has
announced his firm intention to make an offer to the company and also notified
the stock exchange.
REQUIREMENTS FOR TAKEOVER OFFER
The Company also agrees that it is a condition for continuous listing that whenever a
takeover offer is made to, or by it, whether voluntarily or compulsorily, the following
requirements would be fulfilled.
1. A public announcement of a take over offer would be made both by the offeror
company and the offeree company when (a) any person in his own name or in the
name of any other person acquires, whether by a series of transactions over a
period of time or otherwise, securities which when aggregated with securities
already held or acquired by such person would carry 10 percent or more of the
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total voting rights of the offeree company; or (b) secure the control of
management of a company, by acquiring or agreeing to acquire, irrespective of
the percentage of the voting capital, the securities of the directors or other
members, who by virtue of their holdings of securities together with the holdings
of their relatives, nominees, family interest and group control or manage of the
company.
2. If the offer is made by a person other than the ultimate offeror, the identify of
such other person would be disclosed at the outset in the public announcement as
also in the notification of stock exchange.
3. The offer should be placed, in the first instance, before the board of directors of
the offeree company containing the following particulars: (a) detailed terms of
offer, (b) identify of the offeror, (c) details of the offeror’s existing holding in the
offeree company, (d) all conditions to which the offer is subject, and (e)
confirmation by the offeror that resources available to the offeror are sufficient to
satisfy full acceptance of the offer.
4. All the above information would be made equally available to all the shareholders
both of the offeror company and the offeree company at the same time and in the
same manner, along with copies of all documents and announcements bearing an
offer which would simultaneously be lodged with SEBI.
5. The offer to the remaining shareholders of the transferee company would be
acquire from them an aggregate minimum of 20 percent of the voting capital of
the company,
6. From each of the shareholders accepting such offer, the acquirer should acquire
his full holding upto 100 shares of the face value of Rs 10 each or upto 10 shares
if the face value is Rs 100.
7. When the directors of an offeree company sell shares to a purchaser as result of
which the purchaser is required to make an offer, the directors should ensure that
as a condition of the sale, the purchaser undertakes to fulfill his obligations.
8. The board of directors of the offeree company should not, without the approval of
the shareholders in general meeting (a) issue any authorized but unissued shares;
(b) issue any securities carrying rights of conversion, into or subscription for,
shares; or (c) sell, dispose off or acquire assets of a substantial amount.
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9. The provisions of clause 40-A and clause 40-B of the listing agreement, do not
apply to acquisition of securities in the company of (a) Unit Trust of India, (b)
SEBI Capital Markets Ltd, (c) Canbank Financial Services Ltd, (d) LIC Mutual
Funds, (e) such other agencies or mutual funds as may be specified by SEBI from
10. time to time, (f) in pursuance to orders of amalgamations, mergers and
acquisitions passed by the court under sections 391 and 394 of the companies Act,
(g) in pursuance to orders passed by the BIFR under Sick Industrial Companies
(Special Provisions) Act, 1985.
11. The provisions contained in this clause are without prejudice to the approval
required to be obtained under the Companies Act, Monopolies and Restrictive
Trade Practices (MRTP) Act and Foreign Exchange (Regulation) Act, 1973.
Complying with the provisions of clause 40-B could be avoided in respect of an
intended takeover if SEBI has granted exemption vide proviso to clause 40-A(b)
of the standard listing agreement.
Securities and Exchange Board of India (SEBI) Substantial Acquisition of Shares
and Takeover Code, 1997. A takeover bid is generally understood to imply the
acquisition of shares carrying voting rights in a company in a direct or indirect
manner with a view to gaining control over the management of the company. Such
takeovers could take place through a process of friendly negotiation or in a hostile
manner in which the existing management resists the change in control. Both the
substantial acquisition of shares and change in the control of a listed company are
covered by takeover bids.
Disclosure of Shareholding and Control in Listed Companies:
Acquisition of Shares\Voting Rights Any acquirer of shares\voting rights
together with the existing holdings in excess of 5 percent in a company in pursuance of a
public issue or by one\more transaction or in any other manner is required to disclose to
the concerned company the aggregate of his holdings\voting rights within four working
days of the receipt of intimation of allotment\acquisition of shares. The concerned listed
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company must disclose the aggregate number of shares held by each such person within
seven days of the receipt of information to the concerned stock exchange.
Power to Call for Information The stock exchange and the concerned companies
would have to furnish to the SEBI information regarding disclosure of shareholding and
control as and when required.
Power to Remove Difficulties In order to remove any difficulties in the
interpretation\application of the provisions of this code, SEBI has powers to issue
directions through guidance notes\circulars which would be binding on the acquirers,
target company, shareholders and merchant bankers.
Acquisition of Fifteen Percent or More Shares\Voting Rights An acquirer
who agrees to acquire\acquire shares\voting rights, which together with existing holdings
by him\person working in concert with him entitle him to exercise 15 percent, or more of
the voting rights in a company has to make a public announcements to the effect.
Acquisition of Control Irrespective of whether or not there has been any acquisition
of shares\voting rights, no person can acquire control over the target company without
making a public announcement. A change in control in pursuance to a resolution of the
shareholders is exempted from this requirement. Where there are two or more persons in
control of the target company, the cessor of any one of them from such control or change
in the nature and quantum of control between them would not constitute change in
control of management.
Appointment of a Merchant Banker Before making any public announcement
of offer, the acquirer has to appoint a category I merchant banker who should not be a
group company\associate of the acquirer or the target company.
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Brochures and Advertisement Material The public announcement of the offer\
any other advertisement, circular, brochure, publicity material\letter of offer issued in
relation to the acquisition of the shares should not contain any misleading information.
Submission of letter of Offer to SEBI The acquirer should through its merchant
banker file with SEBI the draft of the letter of offer containing the specified disclosures
together with a fee of Rs.50,000 within 14 days from the date of public announcement.
The offer letter is required to be despatched to the shareholders not earlier than 21 days
from its submission to SEBI. If within 21days, SEBI indicates any changes, the merchant
banker-acquirer would have to carry them out before the despatch of the offer letter to the
shareholders.
Specified Date The public announcement should specify a date for the purpose of
determining the names of shareholders to whom the letter of offer would be sent. The
specified date cannot be later than the thirtieth (30 th) day from the date of public
announcement.
Minimum Number of Shares to be Acquired The public offer should be made
to the shareholders of the target company to acquire an aggregate minimum of 20 percent
of the voting capital of the company. In case of the open offer consequent upon
consolidation of holdings with voting rights exceeding 75 percent, the public offer should
be for such percentage of the voting capital of the company as may be decided by the
acquirer.
General Obligations of the Acquirer The public announcement of offer to
acquire the shares of the target company should be made only when the acquirer is able to
implement the offer.
With in 14 days of the public announcement of the offer, the acquirer must send a
copy of the draft letter of offer to the target company at its registered office address, for
being placed before the board of directors and to all the stock exchanges where the shares
of the company are listed.
The acquirer must ensure that the letter of offer is sent to all the shareholders
(including non-resident Indians) of the target company, whose names appear on the
register of members of the company as on the specified date mentioned in the public
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announcement, so as to reach them with in 45 days from the date of public
announcement. The letter of offer should also sent to the custodians of the GDRs\ADRs
holders, holders of warrants\convertibles issued pursuant to a domestic issue when the
period for the exercise of the option falls within the offer period.
The date of opening of the offer should be not later than the 60th day from the date
of the public announcement.
The offer to acquire shares from the shareholders should remain open for a period
of a maximum of 30 days.
General Obligations of the Target Company The target company should
furnish to the acquirer, within 7 days of the request of the acquirer or within 7 days from
the specified date, whichever is later, a list of shareholders or warrant holders or
convertible debenture holders. This list should contain names, addresses, shareholding
and folio number. The list should also contain the names, addresses and the like of those
persons whose applications for registration of transfer of shares are pending with the
company.
Once the public announcement has been made, the board of directors of the target
company should not appoint as additional director in any casual vacancy any person
representing or having interest in the acquirer, till date of certification by the merchant
banker.
General Obligations of the Merchant Banker Before the public announcement
of offer is made, the merchant banker should ensure that (i) the acquirer is able to
implement the offer; (ii) the provision relating to escrow account has been made; (iii)
firm arrangement for funds and money for payment through verifiable means to fulfill the
obligations under the offer is in place; and (iv) the public announcement of the offer is
made in terms of the code\regulations.
Payment of Consideration For the amount of consideration payable in cash, the
acquirer must, within a period of 21 days from the date of closure of the offer, open a
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special account with a banker to an issue registered with SEBI. The acquirer must
deposit, in the account, such sum as would, together with 90 percent of the amount lying
in the escrow account, if any, make up the entire sum due and payable to the shareholders
as consideration for acceptances received and accepted and, for this purpose, transfer the
funds from the escrow account.
The unclaimed balance lying to the credit of the special account at the end of 3
years from the date of deposit should be transferred to the investor protection fund of the
regional stock exchange of the target company.
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CHAPTER-5
DATA ANALYSIS &INTERPRETATION
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Rane Engine Valves Limited (REVL)Apportionment of cost of acquisition of shares
Background
The hon’ble High Court of judicature at Madras, vide its order dated 20 th
December 2007 has approved the Scheme of Arrangement under Section 394 of
the compnies Act, 1956 for De-merger of the manufacturing undertaking of
REVL on a going concern basis to Techons Limited (since renamed as ‘Rane
Engine Valve Limited’) and merger of the remaining business of REVL into Rane
Holdings Limited (‘RHL’).
As per the approved “Scheme” every shareholder REVL will be alloted in shares
in RANE ENGINE VALVE LIMITED AND RANE HOLDINGS LIMITED in
the following proportion:
For every 100 shares in REVL:
100 shares in RANE ENGINE VALVE LIMITED and
56 shares in RANE HOLDINGS LIMITED
This presentation outlines the manner of apportionment of the cost of acquisition
of REVL’s shares for the purposes of the Income Tax Act, 1961(‘Act’)
With regard to the Cost of Acquisition of New Shares in Techcons (since renamed
as ‘Rane Engine Valve Limited’). Section 49(2C) of the Act provides formula for
splitting the original Cost of Acquisition of shares of REVL between New Shares
allotted in Techcons (since renamed as ‘Rane Engine Valve Limited’) and REVL.
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An extract of the provisions of Section 49(2C) is reproduced below for your
reference:
“…the cost of acquisition of shares in the resulting company shall be the amount
which bears to the cost of acquisition of the shares held by the assessee in the
demegered company the same proportion as the net book valve of the assets
transferred in a demerger bears to the net worth of the demerged company
immediately before such demerger…”
“…Explanation – for the purpose of this section, net worth shall mean the aggregate
of the paid up share capital and general reserves as appearing in the books of accounts
of the demerged company immediately before the demerger…”
With regard to the Cost of Acquisition of Shares in REVL, Section 49(2D) of the
Act provides the formula for splitting the original Cost of Acquisition of Shares of
REVL between New Shares allotted in Techcons since renamed as ‘Rane Engine
Valve Limited’) and REVL.
An extract of the provisions of Section 49(2D) is reproduced below for your
reference:
“…the cost of acquisition of the original shares held by the shareholder in the
demerged company shall be deemed to have been reduced by the amount so arrived at
under sub-section (2C)…”
On amalgamation, the cost of acquisition of shares in RHL shall be deemed to be
the cost of acquisition of shares in the amalgamating company i.e. REVL.
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Accordingly, cost attributed to shares of REVL upon de-merger shall be deemed
to be the cost of acquisition of shares in RHL.
Computation of Net-worth of REVL as on March 31, 2007
Particulars REVLPaid up share capital 51,510General reserve 685,412Surplus in profit and loss account 48,211Securities premium account** 155,532Capital reserve** 2,772Capital reserves arising on amalgamation** 2,923Capital subsidy** 2,281Export incentive reserve** 1,908Less : Miscellaneous expenditure** (4,174)Net worth as on March 31, 2007 946,375Net book value of assets transferred by REVL to Techcons 801,451Ratio of net book value of assets transferred to net-worth of REVL
84.69%
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Prerequisities until getting the Court Order
• Identify all the areas of statutory / legal requirements for starting new business
• Coordinate and check with the respective government departments , explain the Demerger scheme and get to know the procedures to be complied with
• Get the forms, fill in and collect all the required annexures
• Show the filled in forms, clarify all the doubts and ensure that forms once presented will be cleared and approval given
• On getting the Court Order / ROC certification, file with the government departments and get the Fresh registration/consent immediately.
• To apply for name change from Techcons Limited to Rane Engine Valves Limited
• To fulfill all the requirements for commencing the operations
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CHAPTER-6
Findings, Suggestions, Conclusion & Bibliography
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FINDINGS
The cost of acquisition figures have been computed on certain assumptions and hence
are indicative in nature.
The implications discussed are based on advice received from our consultants and the
understanding and interpretation of the legislations as on the date of this presentation
in process flow of scheme.
Based on the merger objective the REV Ltd acheived the sales volume of 1841
millions.
In merging period(2007-2008) the net sales and operating income are raised up to
1841 millions from 1150 millions.
The market price of share increased to Rs.50 from Rs.44
The merger activity in march 2007 share capital of maufacturing division increased
to 51 millions and also shareholders fund was raised to 799 millions.
The market share of engine valves raised to 33% as REV Ltd entered into various
geographical areas & business realted to engine valves.
The income statement of 2007 indicates that the PAT was acheived 127 millions. It
shows the company financial position is satisfactory condition.
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SUGGSETIONS
New Registration and Transfer of existing accounts (or) intimation of the
Demerge and change of entity.
All plant properties to be registered in the name of Techons Ltd. Corresponding
property tax/water & sewage tax etc. also be transfered to Techons ltd.
All agreements in the name of REVL has to be changed to Techons ltd.
Adequate C Forms to be kept ready and it is suggessted to issue C Forms for all
purchases upto Sep-07 immediately and for Oct-Dec in Jan-07.
All stationaries like P.O / Invoice / Letter head etc incorporating the new Excise /
Vat registration numbers has to be printed.
The existing bank accounts will be transfered to Techons Ltd.
Approval for transfer of Export obligations of pending advance licences/EPCG
licences from REVL to Techons Ltd.
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CONCLUSION
If there is a change, including a change having a retrospective effect, in
the statutory laws and regulations, the comments expressed in this presentation would
necessarily have to be re-evaluated in light of the changes. We do not have
responsibility of updating this presentation.
All plant properties to be registered in the name of Techons Ltd.
Corresponding property tax/water & sewage tax etc. also be transfered to Techons ltd.
To analyze the financial performance of the company after merger. All agreements in
the name of REVL has to be changed to Techons ltd.
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BIBILOGRAPHY
BOOK AUTHORS
Essentials of financial management Prasanna chandra
Essentials of financial management S. N. Maheswari