PROJECT REPORT

CORPORATE
RESTRUCTURING

COMPILED BY:
Shalini Singh
ICSI REGN NO.: 221333259/02/2012

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 CONCEPT OF CORPORATE RESTRUCTURING
Corporate Restructuring is a tool that is used by corporate to meet the challenges posed by a
dynamic business environment. The dictionary meaning of the word restructuring is “to give
new structure to rebuild or re-arrange.”Corporate restructuring thus implies rearranging the
business for increased efficiency and profitability. It is basically a process undertaken by
business enterprise for the purpose of bringing about a change for the better and to make
business competitive. In other words, it is a comprehensive process, by which a company can
consolidate its business operations and strengthen its position for achieving corporate
objectives- synergies and continuing as competitive and successful entity.
Restructuring is basically the corporate management term for the act of reorganizing the legal,
ownership, operational, or other structures of a company for the purpose of making it more
profitable, or better organized for its present needs. Alternate reasons for restructuring include
a change of ownership or ownership structure, demerger, or a response to a crisis or major
change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be
described as corporate restructuring, debt restructuring and financial restructuring.
Executives involved in restructuring often hire financial and legal advisors to assist in the
transaction details and negotiation. It may also be done by a new CEO hired specifically to
make the difficult and controversial decisions required to save or reposition the company. It
generally involves financing debt, selling portions of the company to investors, and
reorganizing or reducing operations.
The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial
losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt
resolution of a distressed situation.
Corporate Restructuring is a tool that is used by corporate to meet the challenges passed by a
dynamic business environment. The dictionary meaning of the word restructuring is “to give
new structure to, rebuild or re-arrange. Corporate restructuring thus implies rearranging the
business for increased efficiency and profitability.
In other words, it is a comprehensive process by which a company can consolidate its business
operations and strengthen its position for achieving corporate objectives-synergies and
continuing as competitive and successful entity.

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The key drivers for corporate restructuring are:
• To focus on core strength and efficient allocation of managerial capabilities and
infrastructure.
• Consolidate and economy of scale by expansion and diversification to exploit extended
domestic and global markets.
• Revival and rehabilitation of a sick unit by adjusting losses of the unit with the profits of
a healthy company.
• Acquiring constant supply of raw materials and access to scientific research and
technological development.
• Improving return on capital employed through appropriate restructuring of debt and
equity funding so as to reduce the cost of servicing.

KINDS OF RESTRUCTURING
1. Financial: It deals with restructuring of capital base and raising funds for new a new
project which involves like Merger, Joint Venture and Strategic Alliance.

2. Technological: It deals inter alia, alliances with other companies to exploit

technological expertise.

3. Market: It involves decisions with respect to product market segments, where the
company plans to operate based on its core competencies.

4. Organizational: It involves establishing internal structure and procedures for

improving the capabilities of personnel in the organization to respond to change. This
kind of restructuring is required in order to facilitate and implement the above three
kinds of restructuring.

CORPORATE RESTRUCTURING TOOLS

Business portfolio restructuring can be done by varieties of ways like
• AMALGAMATION
• MERGER
• DEMERGER

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 • SLUMP SALE
• TAKEOVER
• JOINT VENTURE
• FOREIGN FRANCHISES
• STRATEGIC ALLIANCES ETC.

AMALGAMATION
Amalgamation is an ‘arrangement’ or ‘reconstruction’. Amalgamation is a legal process by
which two or more companies are joined together to form a new entity or one or more
companies are to be absorbed or blended with another and as a consequence the
amalgamating company loses its existence and its shareholders become the shareholders of a
new Company or the amalgamated Company. In simple terms, amalgamation is merger of two
or more business into a single entity.
Amalgamation as defined in section 2 (1B) of the Income Tax Act, 1961 means the merger of one
or more companies with another company or the merger of two or more companies to form one
company in such a manner that the following conditions are satisfied:
a) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.
b) All the liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the liabilities of the amalgamated company by virtue of the
amalgamation
c) Shareholders holding at least three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamated company or its nominee) becomes the shareholders of the amalgamated
company by virtue of the amalgamation.

MERGERS

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INTRODUCTION
A Company which is looking forward to accelerate its growth and want to enter into a new
business area which may or may not be connected to its existing business operations may
generally have three alternatives available to them:
a) The formation of a new Company.
b) The acquisition of an existing Company.
c) Merger with an existing Company.

And for a Company or any business organization desiring immediate growth and quick
returns, mergers can offer attractive opportunity as they obviate the need to start from ‘scratch’
and reduce the cost of entry into an existing business. The changing economic environment is
creating its own compulsions for consolidation of capacities and with this growing competition
and economic liberalization, the last two decades have witnessed a large numbers of corporate
mergers. However, this will need to be weighted against the fact unless the shareholders of the
transferor company (merging company) are paid the consideration in cash, part of the
ownership of the existing business with the former owner.

One plus one makes three: this equation is the special alchemy of a merger or an acquisition.
The key principle behind buying a company is to create shareholder value over and above that
of the sum of the two companies. Two companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to
companies when times are tough. Strong companies will act to buy other companies to create a
more competitive, cost efficient company. The companies will come together hoping to gain a
greater market share or to achieve greater efficiency. Because of these potential benefits, target
companies will often agree to be purchased when they know they cannot survive alone.

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DEFINITION
A merger can be defined as the fusion or absorption of one company by another. It may also be
understood as an arrangement, whereby the assets of two (or more) Companies get transferred
to, or come under the control of one company (which may or may not be one of the original two
companies).

It can also be said as the combination of two or more companies generally by offering the
stockholders of one Company securities in the acquiring company in exchange for the surrender
of their stock. In a merger one of the two existing companies merges its identity into another
existing Company or one or more existing Companies may form a new Company and merge
their identities into a new Company by transferring their businesses and undertaking including
all assets and liabilities to the new Companies, which is herein called as the merged Companies.
The shareholders of the Company or Companies, whose identity or identities has or have been
merged, are then issued shares in the capital of the merged Company.

These mergers are aimed at achieving Economies of Scale in production by eliminating

duplication of facilities and operations and broadening the product line, reducing investment in
working capital, eliminating competition through product concentration, reducing advertising
costs, increasing market segments and exercising better control over the market. It is also an
indirect route to achieving technical economies of large scale. For example, merger of Tata
Industrial Finance Ltd. With Tata Finance Ltd., GEC with EEC and TOMCO with HLL.

Therefore a merger may mean absorption of one Company by another Company, wherein one
of the two existing Company loses its legal identity after transferring all its assets, liabilities and
other properties to the other Company as per a scheme of arrangement approved by all or the
statutory majority of the shareholders of both the Companies in their separate general meetings
and sanctioned by the court.

DIFFERENCE IN CONCEPTION AS TO MERGER AND AMALGAMATION

“Very often, the two expressions ‘merger’ and ‘amalgamation’ are taken as synonymous. But
there is, in fact, a difference.

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Merger is fusion of two or more entities and it is a process in which the identity of one or more
entities is lost i.e. Merger is restricted to a case where the assets liabilities of the companies get
vested in another company, the Company which is merged losing its identity and its
shareholders becoming shareholders of the other Company.
On the other hand, Amalgamation is blending together of two or more business entities in a
fashion that both lose their identities and a new separate entity is born. It is an arrangement,
whereby the assets and liabilities of two or more Companies become vested in another
Company (which may or may not be one of the original companies) and which would have its
shareholders substantially, all the shareholders of the amalgamating Companies.”

CATEGORIES OF MERGER
• Horizontal Mergers – Also referred to as a ‘horizontal integration’, this kind of
merger takes place between entities engaged in competing businesses which are at the
same stage of the industrial process. A horizontal merger takes a company a step closer
towards monopoly by eliminating a competitor and establishing a stronger presence in
the market. The other benefits of this form of merger are the advantages of economies of
scale and economies of scope.

• Vertical Mergers – Vertical mergers refer to the combination of two entities at different
stages of the industrial or production process. For example, the merger of a company
engaged in the construction business with a company engaged in production of brick or
steel would lead to vertical integration. Companies stand to gain on account of lower
transaction costs and synchronization of demand and supply. Moreover, vertical
integration helps a company move towards greater independence and self-sufficiency.
The downside of a vertical merger involves large investments in technology in order to
compete effectively.

• Congeneric Mergers – These are mergers between entities engaged in the same
general industry and somewhat interrelated, but having no common customer-supplier
relationship. A company uses this type of merger in order to use the resulting ability to
use the same sales and distribution channels to reach the customers of both businesses.

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 • Conglomerate Mergers – A conglomerate merger is a merger between two entities in
unrelated industries. The principal reason for a conglomerate merger is utilization of
financial resources, enlargement of debt capacity, and increase in the value of
outstanding shares by increased leverage and earnings per share, and by lowering the
average cost of capital. A merger with a diverse business also helps the company to
foray into varied businesses without having to incur large start-up costs normally
associated with a new business.

• Cash Merger – In a typical merger, the merged entity combines the assets of the two
companies and grants the shareholders of each original company shares in the new
company based on the relative valuations of the two original companies. However, in
the case of a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one
entity receives cash in place of shares in the merged entity. This is a common practice in
cases where the shareholders of one of the merging entities do not want to be a part of
the merged entity.

• Triangular Merger – A triangular merger is often resorted to for regulatory and tax
reasons. As the name suggests, it is a tripartite arrangement in which the target merges
with a subsidiary of the acquirer. Based on which entity is the survivor after such
merger, a triangular merger may be forward (when the target merges into the subsidiary
and the subsidiary survives), or reverse (when the subsidiary merges into the target and
the target survives).

SYNERGIES OF MERGER
Synergy is the magic force that allows for enhanced cost efficiencies of the new business.
Synergy takes the form of revenue enhancement and cost savings. By merging, the companies
hope to benefit from the following:
• Staff reductions – As every employee knows, mergers tend to mean job losses.
Consider all the money saved from reducing the number of staff members from
accounting, marketing and other departments. Job cuts will also include the former
CEO, who typically leaves with a compensation package.

• Economies of scale – Yes, size matters. Whether it's purchasing stationery or a new
corporate IT system, a bigger company placing the orders can save more on costs.

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 Mergers also translate into improved purchasing power to buy equipment or office
supplies - when placing larger orders, companies have a greater ability to negotiate
prices with their suppliers.

• Acquiring new technology – To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller
company with unique technologies, a large company can maintain or develop a
competitive edge.

• Improved market reach and industry visibility – Companies buy companies to

reach new markets and grow revenues and earnings. A merge may expand two
companies' marketing and distribution, giving them new sales opportunities. A merger
can also improve a company's standing in the investment community: bigger firms often
have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two
companies merge. Sure, there ought to be economies of scale when two businesses are
combined, but sometimes a merger does just the opposite. In many cases, one and one add up
to less than two.

PURPOSE / OBJECTIVES BEHIND MERGER AND

AMALGAMATIONS
Following are the main reasons for the companies to go for mergers and amalgamation:

1) To achieve economies of Scale – The combination of two or more companies and

their resources – production facilities, marketing outlets, managerial skills, liquidity etc.
could be used to achieve economies of scale and thus, improve the profitability, and
attain synergetic operating economies. It will result in reduction in advertising costs,
administration costs and production costs.

2) To reduce the gestation period for new business – To develop new business will
need a gestation period and might amount to re-investing the wheel. If, however, a
company can acquire another company which has a profitable business running and
merged with it, it is possible to avoid the initial teething trouble period of a new
business and venture into new field with relative ease.

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3) To compete globally – In this era of globalization, unless a company is large in size
and capital, it will be very difficult to compete with global companies where the cost of
production is lower due to the benefits of economies of scale. In a free competitive
world, it is necessary to position oneself in such a manner to compete with the best and
prove oneself as better than the others. This could be achieved only by merger and
amalgamation of companies in the same line of business and create a niche world
market for oneself.

4) To utilize the liquidity available with the company for achieving growth
through diversification – Finance is a scarce resource. Liquidity can be better used by
acquiring competing and complementary businesses. Sometimes mergers take place by a
financially strapped company with a financially rich company and thus take advantage
of the finance available with the merged company.

5) To acquire and maximize the available managerial skills to increase the

profitability – It is possible that a company may have expertise and skilled managerial
personnel, but for the reasons beyond their control, the company may not be able to
compete with another company. In such cases, the other company would benefit by
merging with the former company and take full advantage of the available managerial
skills and thus, save costs to improve its own profitability and at the same time, the
skilled persons are also gainfully employed.

6) To Diversify the risk – Another reason for merger is to diversify the company’s
dependence on a number of segments of the economy. Diversification implies growth
through the combination of firms in unrelated businesses. All the businesses go through
cycles. So in decline stage the company can find it difficult to sustain itself and therefore
looks to diversify into the unrelated area of business. Such diversification helps to open
up the avenues of growth. In short - We are all aware of the famous saying: “Don’t put
all your eggs in one basket.” When a firm operates in many businesses, the downs in one
can be compensated by the ups in another. A good example of an Indian company
attempting to diversify and develop a new core is ITC. Among the businesses which ITC
has entered in recent years are apparel retailing and branding, ready-to-eat packaged
foods, confectionery items, InfoTech, paper and boards, Hotel Chain etc.

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 7) To avail the taxation advantages under the Income Tax Act, 1961 – Mergers and
amalgamation also take place to avail the taxation benefits available to amalgamating
companies (subject to fulfillment of certain conditions) under the Income Tax Act, 1961.
These benefits are available mainly by virtue of Sec 72A (Provisions relating to carry
forward and set off of accumulated loss and unabsorbed depreciation allowance in
amalgamation). Apart from these tax benefits are also available to amalgamating
companies and the shareholders of the amalgamated companies.

8) In the Public Interest – Where the Central Government is satisfied that it is essential
in public interest that two or more companies should amalgamate, it may, by notified
order in the Official Gazette, provide for the amalgamation of those companies into a
single company. This power is vested in the hands of Central Government under section
396 of the Companies Act, 1956.

ADVANTAGES OF MERGERS & ACQUISITIONS

The most common motives and advantages of mergers and acquisitions are:-
Accelerating a company's growth, particularly when its internal growth is constrained due to
paucity of resources. Internal growth requires that a company should develop its operating
facilities- manufacturing, research, marketing, etc. But, lack or inadequacy of resources and time
needed for internal development may constrain a company's pace of growth. Hence, a company
can acquire
• Production facilities as well as other resources from outside through mergers and
acquisitions. Specially, for entering in new products/markets, the company may lack
technical skills and may require special marketing skills and a wide distribution
network to access different segments of markets. The company can acquire existing
company or companies with requisite infrastructure and skills and grow quickly.

• Enhancing profitability because a combination of two or more companies may result in

more than average profitability due to cost reduction and efficient utilization of
resources. This may happen because of:
Economies of scale – arise when increase in the volume of production leads
to a reduction in the cost of production per unit. This is because, with merger,
fixed costs are distributed over a large volume of production causing the unit
cost of production to decline. Economies of scale may also arise from other

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 indivisibilities such as production facilities, management functions and
management resources and systems. This is because a given function, facility or
resource is utilized for a large scale of operations by the combined firm.
Operating economies – arise because a combination of two or more firms
may result in cost reduction due to operating economies. In other words, a
combined firm may avoid or reduce over-lapping functions and consolidate its
management functions such as manufacturing, marketing, R&D and thus
reduce operating costs. For example, a combined firm may eliminate duplicate
channels of distribution, or crate a centralized training center, or introduce an
integrated planning and control system.
Synergy – Implies a situation where the combined firm is more valuable than
the sum of the individual combining firms. It refers to benefits other than those
related to economies of scale. Operating economies are one form of synergy
benefits. But apart from operating economies, synergy may also arise from
enhanced managerial capabilities, creativity, innovativeness, R&D and market
coverage capacity due to the complementarity of resources and skills and a
widened horizon of opportunities.
• Diversifying the risks of the company, particularly when it acquires those businesses
whose income streams are not correlated. Diversification implies growth through the
combination of firms in unrelated businesses. It results in reduction of total risks
through substantial reduction of cyclicality of operations. The combination of
management and other systems strengthen the capacity of the combined firm to
withstand the severity of the unforeseen economic factors which could otherwise
endanger the survival of the individual companies.

• A merger may result in financial synergy and benefits for the firm in many ways:-

By eliminating financial constraints.

By enhancing debt capacity. This is because a merger of two companies can
bring stability of cash flows which in turn reduces the risk of insolvency and
enhances the capacity of the new entity to service a larger amount of debt
By lowering the financial costs. This is because due to financial stability, the
merged firm is able to borrow at a lower rate of interest.

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 • Limiting the severity of competition by increasing the company's market power. A
merger can increase the market share of the merged firm. This improves the profitability
of the firm due to economies of scale. The bargaining power of the firm vis-à-vis labour,
suppliers and buyers is also enhanced. The merged firm can exploit technological
breakthroughs against obsolescence and price wars.

PROCEDURE FOR EVALUATING THE DECISION FOR MERGERS

AND ACQUISITIONS
The three important steps involved in the analysis of mergers and acquisitions are:-
• Planning – of acquisition will require the analysis of industry-specific and firm-specific
information. The acquiring firm should review its objective of acquisition in the context
of its strengths and weaknesses and corporate goals. It will need industry data on
market growth, nature of competition, ease of entry, capital and labour intensity, degree
of regulation, etc. This will help in indicating the product-market strategies that are
appropriate for the company. It will also help the firm in identifying the business units
that should be dropped or added. On the other hand, the target firm will need
information about quality of management, market share and size, capital structure,
profitability, production and marketing capabilities, etc.

• Search and Screening – Search focuses on how and where to look for suitable
candidates for acquisition. Screening process short-lists a few candidates from many
available and obtains detailed information about each of them.

• Financial Evaluation – of a merger is needed to determine the earnings and cash

flows, areas of risk, the maximum price payable to the target company and the best way
to finance the merger. In a competitive market situation, the current market value is the
correct and fair value of the share of the target firm. The target firm will not accept any
offer below the current market value of its share. The target firm may, in fact, expect the
offer price to be more than the current market value of its share since it may expect that
merger benefits will accrue to the acquiring firm.

WHAT TO LOOK FOR

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It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on
the acquiring company. To find mergers that have a chance of success, investors should start by
looking for some of these simple criteria:
• A reasonable purchase price – A premium of, say, 10% above the market price seems
within the bounds of level-headedness. A premium of 50%, on the other hand, requires
synergy of stellar proportions for the deal to make sense. Stay away from companies
that participate in such contests.
• Cash transactions – Companies that pay in cash tend to be more careful when
calculating bids and valuations come closer to target. When stock is used as the
currency for acquisition, discipline can go by the wayside.
• Sensible appetite – An acquiring company should be targeting a company that is
smaller and in businesses that the acquiring company knows intimately. Synergy is
hard to create from companies in disparate business areas. Sadly, companies have a bad
habit of biting off more than they can chew in mergers.

APPROVALS IN SCHEME OF AMALGAMATION

i. Approval of Board of Directors
ii. Approval of Shareholders/ Creditors
iii. Approval of the Stock Exchanges
iv. Approval of Financial Institutions
v. Approval from the Land Holders
vi. Approval of the High Court
vii. Approval of Reserve Bank of India
viii. Approval of Central Government under MRTP Act

VALUATION ASPECTS OF M&A

Valuation is the central focus in fundamental analysis, wherein the underlying theme is that the
true value of the firm can be related to its financial characteristics, viz. its growth prospects, risk
profile and cash flows. In a business valuation exercise, the worth of an enterprise, which is
subject to merger or acquisition or demerger (the target), is assessed for quantification of the
purchase consideration or the transaction price.

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Generally, the value of the target from the bidder’s point of view is the pre-bid standalone value
of the target. On the other hand, the target companies may be unduly optimistic in estimating
value, especially in case of hostile takeovers, as their objective is to convince the shareholders
that the offer price is too low. Since valuation of the target depends on expectations of the
timing of realization as well as the magnitude of anticipated benefits, the bidder is exposed to
valuation risk. The degree of risk depends upon whether the target is a private or public
company, whether the bid is hostile or friendly and the due – diligence performed on the target.
The main value concepts viz.
• Owner Value
• Market Value
• Fair Value

METHODS OF VALUATION OF TARGET

Valuation based on assets
The valuation method is based on the simple assumption that adding the value of all the assets
of the company and sub-contracting the liabilities leaving a net asset valuation, can best
determine the value of a business. Although the balance sheet of a company usually gives an
accurate indication of the short-term assets and liabilities, this is not the case of long term ones
as they may be hidden by techniques such as “off balance sheet financing”. Moreover, valuation
being a forward looking exercise may not bear much relationship with the historical records of
assets and liabilities in the published balance sheet.
Valuations of listed companies have to be done on a different footing as compared to an
unlisted company. In case of listed companies, the real value of the assets may or may not be
reflected by the market price of the shares. However, in case of unlisted companies, only the
information relating to the profitability of the company as reflected in the accounts is available
and there is no indication of market price.
Valuation based on earnings
The normal purpose of the contemplated purchase is to provide for the buyer the annuity for
his investment outlay. The buyer would certainly expect yearly income, returns stable or
fluctuating but nevertheless some return which commensurate with the price paid therefore.
Valuation based on earnings, based on the rate of return on the capital employed, is a more
modern method being adopted.

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An alternate to this method is the use of the price earning (P/E) ratio instead of the rate of
return. The P/E ratio of a listed company can be calculated by dividing the current price of the
share by the earning per share (EPS). Therefore the reciprocal of the P/E ratio is called earnings-
price ratio or earning yield.
Thus P/E = P/ EPS, where P is the current price of the shares. The share price can therefore be
determined
As P = EPS × P/E ratio.
Similarly, several other valuation methodologies (including valuation based on sales, profit
after tax, and earnings before interest, tax, depreciation and amortization etc.) are commonly
used.

TAXATION ASPECTS OF M&A

Carry forward and set off of accumulated loss and unabsorbed depreciation
Under the Income-tax Act 1961, a special provision is made which governs the provisions
relating to carry forward and set off of accumulated business loss and unabsorbed depreciation
allowance in certain cases of amalgamations and demergers.
It is to be noted that as unabsorbed losses of the amalgamating company are deemed to be the
losses for the previous year in which the amalgamation was effected, the amalgamated
company (subject to fulfillment of certain conditions) will have the right to carry forward the
loss for a period of eight assessment years immediately succeeding the assessment year relevant
to the previous year in which the amalgamation was effected.
If any of the conditions for allowability of right to carry forward of loss, is violated in any year,
the set off of loss or allowance of depreciation made in any previous year in the hands of the
amalgamated company shall be deemed to be the income of the amalgamated company
chargeable to tax for the year in which the conditions are violated.
Capital gains
Capital gains tax is leviable if there arises capital gain due to transfer of capital assets. The term
“transfer” is defined in the Income-tax Act in an inclusive manner.
Under the Income-tax Act, “transfer” does not include any transfer in a scheme of
amalgamation of a capital asset by the amalgamating company to the amalgamated company, if
the later is an Indian company.

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From assessment year 1993-94, any transfer of shares of an Indian company held by a foreign
company to another foreign company in a scheme of amalgamation between the two foreign
companies will not be regarded as “transfer” for the purpose of levying capital gains tax,
subject to fulfilment of certain conditions.
Further, the term transfer also does not include any transfer by a shareholder in a scheme of
amalgamation of a capital asset being a share or the shares held by him in the amalgamating
company if the transfer is made in consideration of the allotment to him of any share or the
shares in the amalgamated company and the amalgamated company is an Indian company.
Similar exemptions have been provided to a ‘demerger’ under the Income-tax Act, 1961.

Proposed tax treatment under Direct Tax Code (‘the Code’)

It is to be noted that recently, the Finance Minister has released the new Direct Tax Code which
seeks to bring about a structural change in the tax system currently governed by the Income- tax
Act, 1961.
Summarized below are the key proposed provisions that are likely to have an impact on the
mergers and acquisitions in India:
• Currently, the definition of ‘amalgamation’ covers only amalgamation between
companies. It is now proposed to include, subject to fulfillment of certain conditions,
even amalgamation amongst co-operative societies and amalgamation of sole
proprietary concern and unincorporated bodies (firm, association of persons and body
of individuals) into a company in this definition.
• For amalgamation of companies to be tax neutral, in addition to existing conditions the
Code proposes that amalgamation should be in accordance with the provisions of the
Companies Act, 1956.
• In case of demerger, resulting company can issue only equity shares (as against both
equity and preference shares as per existing provisions) as consideration to the
shareholders of demerged company, for the demerger to qualify as tax neutral
demerger.
• Irrespective of sectors (ie manufacturing or service), the benefit of carry forward and set
off of losses of predecessor in the hands of successor Company is proposed to be

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 available to all the companies. As per existing provisions in view of definition of
“industrial undertaking” certain companies were not able to utilize the benefit of losses
as a result of amalgamation. Further, the Code provides for indefinite carry forward of
business losses as against restrictive limit of 8 years under existing provisions.
• Profit from the slump sale of any undertaking is proposed to be taxed as a business
income as against capital gains income.
• Code seeks to eliminate the distinction between long term and short term capital asset.
• Introduction of General Anti Avoidance Rule (‘GAAR’) which empowers the
Commissioner of Income-tax (‘CIT’) to declare an arrangement as impermissible if the
same has been entered into with the objective of obtaining tax benefit and which lacks
commercial substance.

Stamp duty aspects of M&A

Stamp duty is payable on the value of immovable property transferred by the demerged/
amalgamating/ transferor company or value of shares issued/consideration paid by the
resulting/ amalgamated/ transferee company. In certain States there are specific provisions for
levy of stamp duty on amalgamation/ demerger order viz. Maharashtra, Gujarat, Rajasthan etc.
However in other States these provisions are still to be introduced.
Thus in respect of States where there is no specific provision, there exists an ambiguity as to
whether the stamp duty is payable as per the conveyance entry or the market value of
immovable property. The High Court order is regarded as a conveyance deed for mutation of
ownership of the transferred property. Stamp duty is payable in the States where the registered
office of the transferor and transferred companies is situated. In addition to the same, stamp
duty may also be payable in the States in which the immovable properties of the transferred
business are situated. Normally, set off for stamp duty paid in a particular State is available
against stamp duty payable in the other State. However, the same depends upon the stamp
laws under the various states.
In addition to the stamp duty on transfer of business, additional stamp duty on issue of shares
is also payable based on the rates prevailing in the State in which shares are issued.

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 DEMERGER
Demerger is a common form of corporate restructuring. In the past we have seen a number of
companies following a demerger route to unlock value in their businesses. Demerger has
several advantages including the following:
• Creating a better value for shareholders by both improving profitability of businesses
and changing perception of the investors as to what are the businesses of the Company
and what is the future direction;
• Improving the resource raising ability of the businesses;
• Providing better focus to businesses and thereby improve overall profitability;
• Hedging risk by inviting participation from investors.
Demerger is a court approved process and requires compliance with the provisions of sections
391-394 of the Companies Act, 1956. It requires approval from the High Courts of the States in
which the registered offices of the demerged and resulting companies are located. Under the
Income-tax Act, 1961, “demerger”, in relation to companies, means the transfer, pursuant to a
scheme of arrangement, by a demerged company of its one or more undertakings to any
resulting company in such a manner that:
• all the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting company by
virtue of the demerger;
• all the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the resulting
company by virtue of the demerger;
• the property and the liabilities of the undertaking or undertakings being transferred by
the demerged company are transferred at values appearing in its books of account
immediately before the demerger;
• the resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis;
• the shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or, its subsidiary) become
shareholders of the resulting company or companies by virtue of the demerger,

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 otherwise than as a result of the acquisition of the property or assets of the demerged
company or any undertaking thereof by the resulting company;
• the transfer of the undertaking is on a going concern basis;
• the demerger is in accordance with the conditions, if any, notified under sub-section (5)
of section 72A by the Central Government in this behalf.
As evident from the above definition, demerger entails transfer of one or more undertakings of
the demerged company to the resulting company and the resultant issue of shares by the
resulting company to the shareholders of the demerged company. The satisfaction of the above
conditions is necessary to ensure tax neutrality of the demerger.
In case of demerger of a listed company of its undertaking, the shares of the resulting company
are listed on the stock exchange where the demerged company’s shares are traded. For instance,
the largest demerger in India was in the case of Reliance Industries wherein its 4 businesses
where demerged into separate companies and the resulting companies were listed on the stock
exchanges.
The shareholders of Reliance Industries were allotted shares in the resulting companies based
on a predetermined share swap ratio.

SCHEME OF DEMERGER:

The demerger of a company follows almost the same rules as are applicable to the merger of a
company. A demerger is also an arrangement under the section 390 of the Act as it defines the
demerger of the company in terms of the division of the shares of the company. The framing of
the scheme for the demerger of the company derives from the sections 390 to 396A of the
Companies Act, 1956. The demerger must have the approval of the court apart from the
approval of all the people concerned with the company.

PROCEDURE OF DEMERGER:

As per the companies act, the sale of the whole or the part of a company follows a two pronged
process for the demerger of the said company the first step of which would entail the approval

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of the entire process by the company’s board of directors and then by obtaining the necessary
approval of the shareholders at a general meeting of the company by passing a special
resolution and the resulting company has to ensure that the objects it now has include the
carrying on of the business that it sought to prior to the demerger of the company. This
process of the company’s demerger should confirm to the provisions of either the section
293(1)(a) or sections 391 to 393 of the Companies Act.
However, the procedure as per the above act cannot be considered as a demerger as per the
provisions of the IT Act in a holistic and definite manner. The section 2(19AA) applies to the
process of demerger as per which the it is a compromise restructuring process by which one or
more undertakings of a company are transferred to another, usually the subsidiary of the
demerging company. All the property as well as the liability of the demerging company,
becomes the property of the resulting company and are transferred at values appearing in the
former’s books of account just before the demerger. The shareholders who hold not less than
three fourth of the shares of the demerged company become the shareholders of the resulting
company

STEPS TO DEMERGER:
Generally the following steps are adopted in a demerger process:
Step-1: Preparation of scheme of demerger
Step-2: Application to court for direction to hold meeting of the members/creditor
Step-3: Obtaining court’s order for holding meetings of members/creditors
Step-4: Notice of the meetings of members/creditors
Step-5: Holding meeting(s) of members/creditors
Step-6: Reporting the result of the meeting by the chairman to the court
Step-7: Petition to the court for sanctioning the scheme of demerger
Step-8: Obtain order of the court sanctioning the scheme
Step-9: Court’s order on petition sanctioning the scheme of demerger

SLUMP SALE
Meaning of ‘slump sale’:
In simple words, ‘slump sale’ is nothing but transfer of a whole or part of business concern as a
going concern; lock stock and barrel. As per S. 2(42C), introduced by the Finance Act, 1999,

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‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the individual assets and liabilities in such
sales. ‘Undertaking’ has the same meaning as in Explanation 1 to S. 2(19AA) defining
‘demerger’. Explanation 2 to S. 2(42C) clarifies that the determination of value of an asset or
liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded
as assignment of values to individual assets and liabilities. Thus, if value is assigned to land for
stamp duty purposes, the transaction will not cease to be a slump sale.

Meaning of ‘undertaking’:
As per Explanation 1 to S. 2(19AA), ‘undertaking’ shall include any part of an undertaking or a
unit or division of an undertaking or a business activity taken as a whole, but does not include
individual assets or liabilities or any combination thereof not constituting a business activity.

Taxability of gains arising on slump sale:

S. 50B provides the mechanism for computation of capital gains arising on slump sale. On a
plain reading of the Section, some basic points which arise are :
1. S. 50B reads as ‘Special provision for computation of capital gains in case of slump
sale’. Since slump sale is governed by a ‘special provision’, this Section overrides all
other provisions of the Act.
2. Capital gains arising on transfer of an undertaking are deemed to be long-term capital
gains. However, if the undertaking is ‘owned and held’ for not more than 36 months
immediately before the date of transfer, gains shall be treated as short-term capital gains.
It is important to note that Circular No. 779, dated 14-9-1999, issued at the time of
introduction of S. 50B, has used the words ‘held’ instead of ‘owned and held’ used in the
text of S. 50B. It is not clear whether this difference in terminology is of any significance.
Where an undertaking was acquired by an assessee under a will, and such an
undertaking is transferred by him as a slump sale within a year, the undertaking will be
classified as short-term or a long-term asset based on the period for which the previous
owner ‘owned and held’ the undertaking [S. 49(1)(ii)].
3. Taxability arises in the year of transfer of the undertaking. The undertaking will be
deemed to be transferred on execution of the agreement and registration thereof coupled
with the handing over of possession of the undertaking to the transferee. However, if the

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year of the agreement of the undertaking and registration thereof and the year of its
possession fall in two different previous years, then the previous year in which the
possession of the undertaking is handed over to the transferee will be considered as the
year of transfer.
4. Capital gains arising on slump sale are calculated as the difference between sale
consideration and the net worth of the undertaking. Net worth is deemed to be the cost
of acquisition and cost of improvement for S. 48 and S. 49 of the Act.
5. As per S. 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.
6. In the year of transfer of the undertaking, the assessee has to furnish an accountant’s
report in Form 3CEA along with the return of income indicating the computation of net
worth arrived at and certifying that the figure of net worth has been correctly arrived at.
Although the certification of computation is based on the information and explanations
obtained by the accountant, the essence of the form is on reporting that the computation
is ‘true and correct’ rather than ‘true and fair’.
7. In case of slump sale of more than one undertaking, the computation should be done
separately for each undertaking. This is substantiated by Note 5 to Form 3CEA, which
requires the computation of net worth of each undertaking to be indicated separately.
8. In case of slump sale in the nature of succession of a firm or a proprietary concern by a
company, capital gains made on slump sale may be entitled to exemptionu/s.47(xiii)
and (xiv), respectively, provided the other conditions of these Sections are satisfied. In
case of violation of conditions of S. 47(xiii) or (xiv) in any subsequent year, the benefit
availed by the firm or the sole proprietor will be taxable in the hands of the successor
company in the year in which the violation takes place as per S. 47A(3).
Besides, if the successor company violates the conditions of S. 47(xiii) or (xiv) by
transferring that undertaking under a slump sale within three years of conversion, the
undertaking will be classified as a short-term capital asset as per S. 50B. Then, the
company would have to pay for the loss of tax benefit due to violation of conditions, as
well as tax on the short-term capital gains arising on the slump sale.
9. Gains made by a foreign resident from the alienation of a permanent establishment or
a fixed base in India by way of slump sale, shall be taxable in India as per S. 50B read

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 with Article 13 (Capital Gains) of the UN/ OECD Model Convention on Double
Taxation Avoidance Agreement.

Advantages :
If the undertaking is owned and held for more than 36 months, the long-term capital gains are
taxable @ 20% (plus surcharge and education cess), even though there may be some assets held
only for a few months. Further, long-term capital gains are eligible for deduction u/s.54EC and
u/s.54F [ACIT v. Raka Food Products, 277 ITR 261 (Mad)]. Since S. 50B overrides the Sections
which provide the mode of computation of capital gains on sale of an asset, S. 50C, providing
for substitution of sale consideration of land/building by its value as per valuation of stamp
valuation authority, is not applicable where land/building is part of the undertaking. Thus, the
effective rate of long-term gains may turn out to be much lower than 20%.
Disadvantages :
No indexation benefit is available. Also, where the undertaking comprises plots of land
acquired prior to 1-4-1981, whose value has appreciated, cost cannot be substituted by the FMV
as on 1-4-1981. In case the undertaking is a short-term capital asset, capital gains made on
slump sale are taxable at normal rates of tax, without availability of exemption.
Conclusion :
In view of the above provisions, an assessee may select what is most appropriate for him — an
itemised sale or a slump sale, so as to minimise the capital gains tax liability. Where itemised
sale is more beneficial, one can simply break up the sale consideration by assigning values to
individual assets and liabilities. Since sale consideration of an undertaking is expected to be
sizable, determining sale consideration appropriately can save huge tax liability.

TAKEOVER
It is a strategy of acquiring control over the management of another company either directly by
acquiring shares or indirectly by participating in the management. Thus, takeover implies
acquisition of control of a company, which is already in existence through the purchase or
exchange of shares or controlling the management.

JOINT VENTURE
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 A joint Venture is a collaboration formed between two or more parties to undertake similar
economic activity together. The parties agree to create a new entity by both contributing equity
and they then share in the revenue, expenses, and control of the enterprise. The venture can be
for one specific project only, or a contributing business relationship.

FRANCHISING
It is a contract expressed or implied between two or more parties by which franchisee is granted
the right to engage in business of offering , selling, distributing goods and services prescribed in
part by franchiser. Operation of franchisee’s business is associated with franchisers’s trade
mark, service mark or logo or advertisement or commercial symbol. Francisee pays the fees to
the franchiser. The franchising may cover the entire system or a specified territory etc.

STRATEGIC ALLIANCES
Any arrangement or agreement under which two or more companies co-operate in order to
achieve common objective. It is often motivated by consideration such as reduction in coast,
technology sharing, product development, market access to capital.

STRATEGY:
The word strategy is used to describe the direction that the organization chooses to follow in
order to fulfill mission. The 5 P’s of Strategy are:
• Plan
• Ploy
• Pattern
• Position
• Perspective

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REMARKS:

Mr. Saniay Khandelwal [Under whom the training has been

pursued)

This proiect has been takbn up by Ms. Shalini Singh who has
completed his 15 Months apprenticeship training in my firm named
S. Khandelwal & Co.

She has taken up the project very sincerely and with utmost
attention. And the project is satisfactory in my view.

Shalini Singh Mr. Saniay

(Trainee) Secretary in Practice
M. No: 5945
C.P. No: 6LZB