CORPORATE

RESTRUCTURING
(CHAPTER 14)

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CORPORATE RESTRUCTURING

 Internal Restructuring –
 Financial Restructuring
 Operational Restructuring
 External Restructuring
 Through asset transfer
 Subsidiarisation -
 Hive-off
 Demerger

 Through equity transfer

 Divestiture (sell-off)
 Spin-off
 Equity carve-out
CORPORATE RESTRUCTURING
CORPORATE RESTRUCTURING
Internal Restructuring
(No change in corporate
structure/ control)
 Financial
Restructuring – Debt
(debt swap, bail-outs,
etc) or Equity (Capital
reduction and other
methods)
 Operational
Restructuring, BPR
 Divisionalisation or
setting up of SBUs
External Restructuring (Split-ups)
(Change in corporate structure/control)
Through transfer of Assets
 Subsidiarisation
 Hive off
 De-merger
Through transfer of Equity
 Divestiture (Sell-off)
 Spin-off
 Equity Carve Out (Dilution)
CORPORATE RESTRUCTURING
 Through the asset route –
 Demerger – has the following features –

 Demerger results in transfer of business interests to

the ‘resultant’ company.
 The residual shrunk company after the demerger is
called the ‘demerged company’.
 The transfer of business interests by the demerged
company to the resultant company should belong to
an entire business and be able to form a balance
sheet, i.e. all the assets and liabilities belonging to
that activity need to be transferrred.
 The transfer of assets and liabilities by the demerged
company are transferred at values appearing in its
books of account immediately before the demerger.
CORPORATE RESTRUCTURING

 The resultant 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
become shareholders of the resulting company by
virtue of the demerger.
 The transfer of the undertaking is on a going
concern basis.
 Demerger is a process of de-pooling of interests of
distinct businesses of a company.
DEMERGER

Shareholders

Diversified Company
prior to De-merger

(Divisions I and II each consisting of

an independent SBU)

Shareholders Shareholders

De-merged Company Resultant Company

(Truncated to Division I only) (Erstwhile Division II)
TYPES OF DEMERGER

 A demerger wherein the destination balance sheet (resultant company) is a

new company formed for the purpose are known as ‘plain vanilla demergers’.
 Demerger to an existing destination balance sheet is known as ‘composite
demerger’. Both plain vanilla and composite demergers require application under section 230 of
CA 2013 (corresponding to section 391 of CA 1956).
 If demerger is made in a full spin-off structure, it would be known as ‘vertical
demerger’.
 Demerger with partial spin-off is known as ‘structured demerger’.
 If a business undertaking alone is being demerged and the rest of the business
continues in the demerged company, it amounts to a ‘partial demerger’ or
‘structured demerger’.
 If the complete business undertaking(s) are being demerged so as to make the
demerged company a shell, it would amount to a ‘complete demerger’. This is
usually resorted to in a divestiture when the buyer does not wish to acquire
the legal entity. This is used more in the context of a reconstruction rather
than a demerger.
CORPORATE RESTRUCTURING
 Business Hive-off
 Hive-off occurs when a de-merger is not done in entirety for separation of
assets and liabilities, i.e. there is a selective de-merger of assets and
liabilities or only the assets. Hive-off is done under the purchase
consideration method.
 Subsidiarisation through hive-off occurs when a hive-off is done into a
newly formed 100% subsidiary.
 A hive-off to a 100% SPV may result in no consideration being given to the
parent.
 Divestiture is the sale of a business to a purchaser for a consideration.
Divestiture is the sale of a complete business as compared to an asset sale
such as sale of a facility, brands or other assets.
 Divestiture is possible through a hive-off to the purchaser’s company or a
SPV.
 Hive-off can be executed through – (i) a scheme of arrangement, (ii) special
resolution under section 180(1)(a) corresponding to section 293(1)(a) of the
56 Act and (iii) by a special resolution passed under section 319 (not yet in
force) corresponding to section 494 of the 56 Act.
CORPORATE RESTRUCTURING
 BTA (Slump Sale) – Section 2(42C) of IT Act
 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.
 Slump sale results in easier negotiation and tax treatment.
 Usually used in divestitures involving hive-off of business
undertaking that cannot satisfy conditions of a demerger. A
slump sale is a convenient method of arriving at purchase
consideration in a restructuring in the nature of a divestiture.
 To be distinguished from asset sale.
CORPORATE RESTRUCTURING
 Through Equity Route
 De- Subsidiarisation through spin-off and equity carve out
 This method is used to set up a new business outside of the

existing balance sheet. Initially it is set up in a 100% subsidiary of

the existing company. Once the business attains critical mass, it is
spun-off or carved out of the parent.
 Spin-off is to provide direct stakes to the shareholders of the

parent in the subsidiary.

 Carve out is to dilute the parent’s stake in the subsidiary through

an IPO or strategic sale. An IPO is a very transparent way of

making a carve-out. A strategic sale is generally done to convert
the subsidiary into a JV. Carve-out is also made in two stages, i.e.
by offering stakes to PE investors at the first stage and going
forward, making an offer for sale / IPO.
 Exits through equity route (disinvestment) are normally done for

a consideration either in cash or in shares of the acquirer.

SPIN-OFF

Shareholders Shareholders

Holding Company Erstwhile Holding Erstwhile Subsidiary

Company Company

Wholly Owned Subsidiary

Pre-Spinoff Post-Spinoff
CORPORATE RESTRUCTURING
 Spin-off
 Spin-offs are cashless transactions and there is no purchase consideration

recorded in either balance sheet.

 The investment by the parent company (shares held in the subsidiary) are

distributed to its shareholders on a pro-rata basis as stock dividend. This

can be accomplished through a shareholders’ resolution as in the case of
payment of dividend.
 The consequent write-down has to be against the reserves of the parent

company (or to its equity capital to the extent unrepresented by reserves).

In the latter case, it amounts to a reduction of capital. Complying with the
requirements of the Companies Act, this process requires the approval of
the High Court (NCLT).
 In spin-off of a subsidiary, if the holding company is already listed, it

results in a back door listing for the unlisted subsidiary without an IPO.
Since ICDR Regulations presently permit back door listings only under a
scheme of arrangement, it would be necessary to go through a court route
for a pure equity spin-off as well under the circumstances.
CORPORATE RESTRUCTURING
 Spin-off
 It is not necessary that a spun off unlisted subsidiary of a
listed parent company should be listed automatically. If the
resolution or the scheme provides that the subsidiary shall
stay unlisted, the shareholders of the parent company would
become the owners of unlisted shares of the subsidiary.
 Spin-offs are generally tax neutral subject to specific cases.
 Spin-off also requires looking into FDI aspects and section
186 of the Companies Act 2013 when the shareholder is a
company.
 Equity carve outs are subject to capital gain tax.
CORPORATE RESTRUCTURING
METHODS FOR CORPORATE SPLIT-UPS

Through transfer of equity Through transfer of assets

De-merger
It is a combination of a hive- (1) Hive-off
off and a spin-off wherein the /Reconstruction and
Subsidiarisation
shareholders of the transferor (2) Divestiture
company are given shares pro-
 Held 100% by the through Slump Sale /
rata in the transferee company
parent company as consideration for the Asset Sale
 Usually the transfer.  An existing business
subsidiary sets up a segment or division is
new business with transferred to a new
capital contribution company or another
from the parent. Divestiture (Sell-off) existing company.
 The transferee
The transferor retains no future interest
in the business or assets sold off. company is either a
Consideration is usually settled in cash group company or an
or securities. The buyer is an outsider. outsider. Transferor
may retain the
De- business or exit.
subsidiarisation  Involves transfer of
through Spin-off De-subsidiarisation assets (and liabilities if
The parent’s holding through Dilution chosen) from the
in subsidiary is (Carve-out) transferor to the
allocated pro-rata to Offer for Sale by Parent / transferee.
parent’s shareholders. Issue of new shares by Sub.  Consideration is
usually stock in intra
group hive-off and
cash when the
transferee is an
outsider.
 Consideration is paid
to transferor company.
CORPORATE RESTRUCTURING

 Transaction Issues –
 Structuring the transaction keeping in mind areas such as SEBI
guidelines.
 Partner search if required.
 Valuation of business / assets and arriving at purchase
consideration or the share swap ratio.
 Financial due diligence
 Involvement of professionals such as investment bankers,
accountants, legal advisers, valuers etc.
 Management approvals, statutory approvals.
 Documentation and execution, preparation of scheme of
demerger, High Court Order.
 Post-acquisition formalities and Deal Closure.
CASE STUDIES IN CORPORATE RESTRUCTURING
 Larsen & Toubro Demerger
 Grasim acquired 10.5% of L&T from Reliance in 2001 at
Rs.306 per share. Made it 14.5% through creeping route.
 Announced open offer of 20% in 2002 at a price of Rs. 190
per share. L&T management was unhappy that the price was
lower than the expected Rs. 300.
 The open offer pre-empted L&T management’s efforts to
demerge its cement division and induct a strategic partner.
They resisted the open offer and sought institutional support.
 The open offer was finally cleared by SEBI.
 Grasim planned to either consolidate its stake in combined
L&T or demerge the cement division and take majority
control.
CASE STUDIES IN CORPORATE RESTRUCTURING
The L&T management’s plan was as follows:

Larsen &Toubro Ltd L&T Cement Ltd

Demerger (Structured Demerger)
Grasim – 14.5% L&T Ltd – 70%
LIC and UTI – 27% Shareholders of L&T – 30%
Other Institutional Investors – 18% (In the ratio of their L&T
Public and others – 60.5% holdings)

Strategic Sale

L&T Cement Ltd

L&T Ltd – 70%
Shareholders of L&T – 24%
Strategic Investor – 6%
CASE STUDIES IN CORPORATE RESTRUCTURING

The Grasim management’s plan was as follows:

Larsen &Toubro Ltd L&T Cement Ltd (listed Co)

(Vertical Demerger)
Demerger
Grasim – 14.5% Grasim – 14.5%
LIC and UTI – 27% LIC and UTI – 27%
Other Institutional Investors – Other Institutional investors -
18% 18%
Public and others – 60.5% Public and Others – 60.5%
CASE STUDIES IN CORPORATE RESTRUCTURING
 Final Deal Structure
 L&T would hive-off its cement business into a new company, which would

be christened UltraTech Cement Ltd. through a structured de-merger.

 L&T in its corporate capacity would hold 20% and the rest would be in the

nature of a de-merger to the existing shareholders of L&T.

 Grasim by virtue of its existing 15.7% stake in L&T would get a

representation of around 12.6% in UltraTech Cement. Grasim would then

acquire 8.5% of Ultra Tech from L&T (out of its 20%) at a price of Rs. 171
per share.
 Grasim would then make an open offer for 30% in UltraTech Cement at Rs.

171 per share. Thereby Grasim gets controlling interest in the cement
business of L&T post-demerger.
 Grasim would divest its 15.7% held in L&T to employee trust.

 L&T’s debt of Rs.3000 crore was transferred in the demerger.

 L&T continued to hold 11.5% in UltraTech Cement which it divested in later

years.
CASE STUDIES IN CORPORATE RESTRUCTURING

 Reliance Demerger
 A combination of asset spin-off and equity spin-off was
adopted since RIL has diversified its interests in other
businesses distinct from its own through a combination of use
of its own balance sheet and strategic investments made in
other companies.
 There had to be no direct shareholding for RIL in those
companies in its balance sheet post demerger.
 There had to be no cross-holdings between the two family
groups after the implementation of the scheme.
 Both the above considerations formed the core of the whole
split-up scheme of RIL. In effect, this was more of a spin-off
than a demerger.
CASE STUDIES IN CORPORATE RESTRUCTURING

 Features of the Scheme

 Demerger of the business undertakings from the balance sheet of
RIL. Four business verticals were identified and demerged – Coal
based energy, gas based energy, financial services and
telecommunications.
 Spin-off of the direct investments held by RIL in other companies
that needed to be removed from its fold.
 Ensure that as a result of the scheme, the shareholders of RIL had
listed shares in respective businesses that constituted a part of the
combined RIL share held by them. This was necessary since
RIL’s share was listed and shareholders should be able to have the
same liquidity as before.
CASE STUDIES IN CORPORATE RESTRUCTURING

 Features of the Scheme

 The demerger provided for the business undertakings as well as the
strategic investments to be removed on a combined basis.
 This was done so that the spin-off of the subsidiaries and strategic
investments would not give rise to tax implications and other legal
complications if made separately.
 A spin-off on a stand-alone basis would cause reduction in the
shareholders’ funds of RIL. The demerger scheme addresses this issue as
well.
 The issue of shares as above was envisaged for all existing shareholders
except a group of shareholders who were called ‘specified shareholders’ in
the scheme.
 Since all the resulting companies were unlisted, the scheme provided for
listing them
CASE STUDIES IN CORPORATE RESTRUCTURING

 Wipro Demerger
 Wipro proposed to demerge three non-IT business divisions, including
consumer products segment, into a privately-held company to be named
Wipro Enterprises Ltd.
 The scheme also envisaged transfer of ownership and usage rights all
brands and intellectual property rights of the various businesses of Wipro
from a third company called Wipro Trademarks Holdings Ltd. Wipro
Trademarks was a wholly owned subsidiary of Wipro.
 In consideration for the demerger, the resultant company proposed to issue
either equity shares or redeemable preference shares. The option of
redeemable preference shares was not available to non-resident
shareholders since it would not have been compliant with FDI policy and
FEMA Regulations.
CASE STUDIES IN CORPORATE RESTRUCTURING

 Wipro Demerger
 All equity shares received from the Resultant Company by domestic
shareholders and all non-resident / ADR holders were meant to be
compulsorily exchanged for shares in the Demerged Company (Wipro)
from shares to be provided by promoters.
 The Scheme also proposed that with respect to the shares of the Demerged
Company to be received by the Custodian of ADR holders pursuant to the
share exchange, the Demerged Company shall enter into appropriate
agreements with the Custodian and Overseas Depository for issue of
additional ADRs to eligible ADR holders as per their entitlement ratio.
 The resultant company would be unlisted.
 The company had to find a way to accomplish two things – (a) keep the
resultant company unlisted but provide a way to compensate its
shareholders with listed shares and (b) enable its ADR holders to a similar
benefit of listed ADRs as consideration.
CASE STUDIES IN CORPORATE RESTRUCTURING

 Wipro Demerger
 In order to achieve both the above objectives, the demerger scheme had two
interesting features –
 (a) The share exchange scheme using promoters’ shares in Wipro Ltd and
 (b) the proposal to provide additional ADRs to its investors against
underlying shares received by the Custodian from the Special Trust.
 In short, as per the proposal, the scheme would have resulted in the
promoters paying a purchase consideration by way of the stock of Wipro
Ltd. to the shareholders of Wipro Ltd. for transferring the non-IT businesses
to an unlisted entity owned by them. If this had to be done directly by the
promoters with Wipro Ltd, there would have been two problems – (a) Wipro
would have had to resort to a hive-off or a slump sale both of which would
have given rise to tax implications for Wipro Ltd. and (2) Since the
promoters had planned to settle the transaction through shares that they
owned in Wipro, the transaction would have given rise to treasury shares on
Wipro balance sheet.
CASE STUDIES IN CORPORATE RESTRUCTURING

 Wipro Demerger
 The unique demerger scheme devised by the company obviates
both the above issues by making the transaction compliant with
the demerger law and thereby providing the necessary tax
neutrality.
 At the same time, it enables the promoters to do a cashless
transaction to get complete control of the non-IT businesses of
Wipro Ltd.
 To a lesser extent, it also enabled them to keep the non-IT
businesses unlisted and wholly owned by the promoters for
pursuing every possible growth strategy thereafter.
CASE STUDIES – PIRAMAL (DIVESTITURE THROUGH SLUMP SALE)

 Piramal Healthcare Ltd is a listed company with 47.9% public

shareholding at the time.
 It divested its domestic formulations division to Abbott Healthcare Pvt
Ltd, the Indian subsidiary of Abbott Labs USA structured through a
slump sale by way of a business transfer agreement in 2010. Piramal
was a listed company.
 The deal consideration was agreed at USD 3.72b including a fee of Rs.
350 crore for non-compete obligation for eight years. It was an all cash
deal with a staggered payment structure to be financed entirely with cash
on the balance sheet.
 The deal price translated into a premium of 70% over the ruling market
price. The demerged division constituted about 55% of the company.
 Piramal envisaged using the cash to retire debt and increase R&D spend.
 Section 293(1)(a) of Comp Act 56 was used in this case.
CASE STUDIES – PIRAMAL (DIVESTITURE THROUGH SLUMP SALE)

 The alternative structure would have been to use the demerger

route to separate the divested business into Abbot India or into a
separate company.
 Demerger would have been tax neutral for Piramal. Slump sale
meant LT capital gain tax (estimated at Rs. 3800 crore) and any
distribution of the cash received to shareholders would attract
DDT. Slump sale also attracted stamp duty on the BTA.
 Why was a demerger route not used in this case?
CASE STUDIES – PIRAMAL (DIVESTITURE THROUGH SLUMP SALE)

 Demerger is a time consuming court appointed process. Usually

in a M&A context, time is of essence. Demergers are more
appropriate for internal reorganisations without tax implication.
 In all cash deals involving divestitures, demergers are
inappropriate as they involve shareholder carry.
 Since the consideration is received in cash it does not require
additional liquidity on the balance sheet of the seller to pay tax.
 Since the seller is listed in this case, either the demerged business
would have required listing under the scheme or the public had to
be provided a cash exit by the buyer.
CASE STUDIES – PIRAMAL (DIVESTITURE THROUGH SLUMP SALE)

 Another remote possibility would have been for Abbot to acquire

Piramal Healthcare. This would have been unworkable in this
case since it meant a takeover of the seller –
 Piramal would have had to completely exit the healthcare business
 Abbot would have had to make an open offer to the public
 The character of the transaction would have got transformed which may
not align with the objectives of the deal and the intentions of the buyer and
seller.