CORPORATE RESTRUCTURING

Regulatory framework for Listed Companies & Strategies

CS CHANDRA AGARWAL PGDM(FIN), CS

GOVERNING PROVISION
SECTION 391-394 of Companies Act, 1956 Most liberal sections in the entire Companies Act, 1956. By way of SCHEME you can propose & achieve whatever you want

TYPES OF RESTRUCTURING
MERGER

DEMERGER REDUCTION OF CAPITAL

RESTRUCTURING
Approving Authorities

High Court

BIFR

MERGER
MERGER ´Combining of two or more commercial organizations into one in order to increase efficiency and sometimes to avoid competitionµ. REVERSE MERGER ´As a commercial term, it means when a Healthy Company (in terms of size, capital or listing status)is merging in a Weak Company (in terms of size, or unlisted)µ.

SECTION 391-394 of Companies Act, 1956

DEMERGER ´Division of a Company with two or more identifiable business units into two or more separate companies µ SECTION ² 2(19AA) of Income Tax Act. 1961. .

1956 .REDUCTION OF CAPITAL ´Extinguishing or Reducing the paid-up capital. Securities Premium Account or liability of members with respect to their unpaid callsµ -AN EFFECTIVE WAY OF INTERNAL RESTRUCTURING SECTION ² 100 105 of Companies Act. 1956 SECTION 100 to ²105 of Companies Act.

A FEW VARIETY OF MERGER  Unlisted with Listed  Listed with Unlisted  Merger of Subsidiary with Holding Company  Merger with Group Company  Healthy Company with Weak Company Merger through BIFR .

STOCK EXCHANGE·S ROLE REQUIREMENTS Listing Agreement Compliances Stock Exchange Internal Norms Compliance of Securities laws Compliance of Companies Act PERSPECTIVE Observations .

for approval. 394 and 101 of the Companies Act. 1956. at least a month before it is presented to the Court or Tribunal. with the stock exchange.Listing Agreement Compliances Clause 24(f) ³The Company agrees that it shall file any scheme/petition proposed to be filed before any Court or Tribunal under Sections 391.µ .

Listing Agreement Compliances. before issuing shares or other securities to the shareholders of Transferor Company.µ .. contd Clause 24(a) ´Company to obtain ¶in-principle· approval for listing from the exchanges having nationwide trading terminals where it is listed.

contd Clause 40A ´Company to comply with Continuous Listing requirements while framing a scheme of merger/demerger.µ ..Listing Agreement Compliances.

Stock Exchange(s) are laying various other norms before giving approval to the Companies for ¶Merger·.Stock Exchange·s Norms Presently. ¶Demerger· ¶Reduction of Capital· .

contd MINIMUM CAPITAL REQUIREMENTS 1.Stock Exchange Norms. Minimum Net Worth ² 20 crores (Post amalgamation) *BSE Stipulations .. Issued & paid up Equity Capital ² Rs 10 crores (if there is a change in management/control) OR Issued & paid up Equity Capital ² Rs 3 crores (If there is no change in management/control) AND 2.

contd CONTINUOUS LISTING NORMS (Transferee Co is Listed Co.Promoter Holding ² 25% of Post -merger Capital * (The entire holding of the shareholders of the transferor company be excluded)  If Non.Stock Exchange Norms. then the Promoters have to dilute excess portion. & Transferor Co is Unlisted Co.)  Non..Promoter Holding ² Falls below 25% of Post merger capital. *BSE Stipulations .

Stock Exchange Norms..contd LOCK IN REQUIRMENTS ´25% of the newly issued capital pursuant to the scheme of amalgamation should be kept under lock in for 3 yrs from the date of listingµ ´The lock in period are varied by the stock exchange on case to case basisµ *BSE Stipulations .

Compliance of Other Laws ´The Stock Exchange(s) alongside considers the compliance of Securities laws. applicable on the Company and Companies Act alsoµ . rules etc. regulations.

Compliance of Other laws..contd SEBI (SAST)REGULATIONS .1997 Regulation 3(1)(j)(ii) provides an exemption for acquisition of shares: ´Nothing contained in regulations 10. Indian or foreign.µ . 11 and 12 of these regulations shall apply to shares acquired Pursuant to a scheme : (ii) of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation.

‡Valuations Analysis ‡No undue benefit to Promoters / Particular group ‡Investors interest not to be affected ‡Back door Entry for listing ‡Change in Management/Control .

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ISSUES  Whether application under Clause 24(f) of the Listing Agreements is an approval or information?  Whether no communication from Stock Exchange within 1 month amounts to approval? .

ISSUES  Whether Merger without approval under Clause 24(f) of the Listing Agreement is valid considering that the High Court approved the same?  Whether varied lock in period stipulations imposed by Stock exchange are valid? .

ISSUES  What are the repercussions in case the promoter·s shareholding goes beyond 75% of the post amalgamation capital?  Whether a Suspended Company is eligible to obtain in principle approval from stock exchange? .

ISSUES  Whether Shares placed to QIB's in an Unlisted Company prior to merger will be counted in the post merger non -promoter shareholding of a Listed Company? .

MERGER THROUGH BIFR AN EFFECTIVE WAY TO REVIVE YOUR SICK COMPANY .

1997 provides that: Nothing contained in Regulation 10. 1985 (1 of 1986).MERGER THROUGH BIFR EXEMPTION FROM TAKEOVER CODE Regulation 3(1)(j) of SAST Regulations. ja) Exemption to restructuring under Securitization law (Change in mgt by the secured creditors) . 11 & 12 shall applies to acquisition: j) Pursuant to a scheme : (i) framed under section 18 of the Sick Industrial Companies (Special Provisions) Act.

.MERGER THROUGH BIFR EXEMPTION FROM CL40A OF LISTING AGREEMENT Clause 40A as amended on 13th April. 2006 gives exemption to BIFR referred companies: The Non-Promoters· shareholding can be below 25% of the total capital of the company pursuant to BIFR Order in any rehabilitation scheme.

DEMERGER Reliance Capital Ventures Ltd Reliance Natural Resources Ltd .

 Distribution of shareholding in a Wholly owned Subsidiary among shareholders .TYPES OF DEMERGER  Listed Company demerging into two companies (both could be listed).  Listed Company is demerged into two companies and another unlisted entity is merging with the one of the demerged entity.

It shall offer at least 25 % of each class to the public through Advertisement & Shares applied in pursuance of such offer were allotted . 100 crores . At least 10 per cent of securities issued by a company was offered to the public through advertisement & following conditions were fulfilled: (a) minimum 20 lakh securities was offered to the public. and (c) the issue was made only through book building with allocation of 60 % of the issue size to QIBs Or 2. (b) the size of the offer to the public ” Rs.CONDITION FOR LISTING (Rule 19 (2) (b) of SCR Rules) 1.

8. the Resultant Company to get the benefit of listing.1 OF SEBI (DIP) GUIDELINES EXEMPTION FROM CONDITION OF RULE 19 (2) (b)  Listed Company merging with Unlisted Company. .  Demerger of a Listed Company.5.LISTING UNDER CL.3.

8. and such scheme has been sanctioned by the High Court/s of Judicature.3.Listing under Cl.5. . At least 25% of the paid-up share capital. of the unlisted transferee-company seeking listing comprises shares allotted to the public holders of shares in the listed transferorCompany. 1956. CONDITIONS FOR AVAILING EXEMPTION  Shares have been allotted by the unlisted company (transfereecompany) to the holders of securities of a listed company (transferor-company) pursuant to a scheme of reconstruction or amalgamation under the provision of the Companies Act. post scheme.1 of DIP Guidelines Cont«.

The unlisted company has not issued/reissued any shares. That the shares of the transferee-company issued in lieu of the locked-in-shares of the transferor-company are subjected to the lock-in for the remaining period. . 8.3.Listing under Cl.1 of DIP Guidelines Cont«. not covered under the scheme.5. There are no outstanding warrants /instruments/ agreements which gives to any person to take the shares in the unlisted transferee company at any future date.

 The balance of the entire pre-merger capital of the unlisted company shall also be lockedin for a period of 3 years from the date of listing of the shares of the unlisted company. 8. .5.3. for a period of 3 years from the date of listing of the shares of the unlisted company.  Promoters· shares shall be locked-in to the extent of 20% of the post merger paid-up capital of the unlisted company.Listing under Cl.1 of DIP Guidelines Cont«.

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condition of Inter-se transfer is transferor & transferee should be holding shares for three years.ISSUES««  Whether Demerger & Merger are possible in one scheme?  One of the pre . What is the status of shares held in the Resultant Company? Whether the three years condition will be deemed to be fulfilled in case the transferee & transferor are holding shares since last 3 years in the demerged company? .

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Reliance Industries Limited .A Unique Scheme of ArrangementPRE ²ARRANGEMENT SCENARIO Reliance Industries Limited was engaged in various businesses: FACTS (i) Coal based power business. (iv) Tele-Communication business . (ii) Gas based power business. (iii) Financial services business.

 RIIHL and Petroleum Trust were described as ´Specified Investorsµ which renounced their rights in the scheme itself. Reliance Industrial Investments and Holdings Limited (RIIHL) along with a Private Trust (Petroleum Trust).RIL« demerger The family arrangement aims at Segregation between the two Ambani Brothers Provision for Specified Investors was made:  Holdings of RIL and other companies in the control of Mr. . Mukesh Ambani were transferred to a wholly owned subsidiary.

(RCOVL)  Reliance Capital Venture Ltd. .5.RIL« demerger As a result of demerger the shareholders of Reliance Industries Ltd. (RCVL)  Reliance Natural Resources Limited (RNRL) The shares of all these resulting companies got listed on the stock exchanges under the provisions of Cl 8.3. (REVL)  Reliance Communication Venture Ltd.1 of the SEBI (DIP) Guidelines. other than ´Specified Investorsµ got one share each in the following four resulting companies for each share held in RIL as on the record date:  Reliance Energy Venture Ltd.

2007 100 shares @928 92800 (@708) (@38) (@290) (@24) (@23) 70800 3800 29000 2400 2300 108300 15500 (@2700) 270000 Shares in RIL Shares in REL Shares in RCOL Shares in RCL Shares in RNRL Total Net benefit 100 100 100 100 100 (@1900) (@706) (@2376) (@163) 90000 70600 237600 16300 684500 576200 .2006) (A) Amount (Rs.) 20th December..) 24th March 2006 Value of the shares held by a shareholder as on record date (25th Jan.Benefits achieved««. Particulars Amount (Rs.

REDUCTION OF CAPITAL .

Capitalization Distinguishment of the Liability in respect of unpaid portion of face value. .Types of Reduction of Capital Writing off Losses & Fictitious Assets Correction of Over. Distribution of accumulated profits by Payment to shareholders a part of share capital.

A Strategic Step To Clean-up the Balance Sheet To rationalize the capital base Revival of Sick Company .Reduction of Capital.

RESTRUCTURING STRATEGIES What's Your Move?? .

FEW STRATEGIC MOVES Strategy I Strategy II LISTING (Without offer to Public) RAISING PROMOTERS· HOLDING (Beyond 55%) .

FEW STRATEGIC MOVES.. (Exemption from Takeover Code) INCREASEING THE RESOURCES (Without raising Capital) .contd Strategy III Strategy IV ACQUISITION OF LISTED CO.

Unlocking value of business Brings liquidity Attract investors for further growth .Strategy I LISTING Direct listing is costly & complicated But Listing of Company provides for«..

Strategy IA LISTING THROUGH MERGER  Small/loss making listed companies are selected by unlisted strong companies  Unlisted company is merged with listed company with maximum possible shares to promoters of unlisted Company  Promoters of Unlisted Company get shares in a listed entity .

Strategy IB LISTING THROUGH MERGER Acquisition of Regional Listed Company(RSE) Merger of financially sound unlisted co with listed co INDONEXT LISTING Now your Company is ready for Listing DIRECT LISTING .

RAISING PROMOTERS· HOLDING Strategy II Revised provisions of SEBI Takeover Code does not allow promoters to acquire even a single share beyond 55% Specific exemption to Merger/Demerger  An Unlisted company is created by Promoters This entity is merged with listed company  Promoters· holding is raised up to 75% .

ACQUISITION OF LISTED COMPANY Strategy III SEBI Takeover Code does not allow acquisition of shares of a listed company beyond 15% or Change in Control by any outsider without a PA Specific exemption to Merger/Demerger  An Unlisted company is created by Acquirer This company is merged with listed company  Acquirers· holding may go up to 75% of increased capital base The Management may also change. .

increases EPS. Effectively . capital base remain low. but the it also increases the capital base High capital base make servicing of capital difficult  Proposed transferee company acquires shares in transferor company Companies are merged  Crossholdings get cancelled Resources got clubbed.Strategy IV INCREASING THE RESOURCES Basic purpose of merger is to Synergy of Resources. .

To sum up«« Restructuring offers tremendous opportunities for companies to grow & add value to the shareholders It unlocks the true potential of the company It is a Strategy for Growth & Expansion It also helps in Cleaning up & create Synergy of Resources .

Thanks a lot« Pavan Kumar Vijay .

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