FINANCE PROJECT

FINANCE PROJECT

A Study on Amalgamation & Demerger trends in India

Reliance ADAG

Name: ANURAG KRegistration Number: 200747998SYMBIOSIS CENTER FOR DISTANCE LEARNING

PUNE

2007

DECLARATION BY THE LEARNER

This is to declare that I have carried out this project work myself in part fulfillment of the PGDBA-Finance Management Program of SCDL. The work is original, has not been copied from anywhere else and has not been submitted to any other University/Institute for an award of any degree/diploma.

Date:

Signature:

Place: Bangalore

Name: ANURAG KTABLE OF CONTENTS

Chapter 1:Introduction to ADAG..4 Chapter 2: Objective & Scope19Chapter 3:Amalgamation...21 Chapter 4:Demerger...27

Chapter 5:Reason for Amalgamation & Demerger.36Chapter 6:Legal Aspects.47Chapter 7:Procedures in India...52Chapter 8:Trends in Amalgamation & demerger58Chapter 9:India & New global Economic Scenario.69Chapter 10:Conclusion.74ANNEXUREI Proposal77II Bibliography.....79Chapter 1

1. Introduction -ADAGReliance Anil Dhirubhai Ambani Group(usually referred asReliance Group) is one of India's largestconglomerates, headquartered inNavi Mumbai, India. The company, which was formed afterDhirubhai Ambani's business empire was divided up, is headed by his younger sonAnil Ambani.It has amarket capitalizationof US$ 15 billion, net assets US$ 7 billion.The ADAG Reliance Group has a business presence that extends to over 20,000 towns and 4.5 lakhs (450,000) villages in India, and across the globe. The shareholder base is over 12 million, among the largest in the world. The group is present in many sectors including Telecom, Capital, Power, Infrastructure, Entertainment and Health.

History

Reliance group was founded byDhirubhai Ambaniin 1966 as a polyester firm. Dhirubhai started the equity cult in India. Reliance later entered into financial services, petroleum refining, power sector. By 2002 Reliance had grown into a $15 billion conglomerate. After the death of Dhirubhai Ambani on July 6, 2002, Reliance was headed by his sons. The group was formed after the two feuding brothersMukesh AmbaniandAnil Ambani, split Reliance Industries.Anil Ambani got the responsibility of Reliance Infocomm, Reliance Energy, Reliance Capital and RNRL. This led to a new beginning calledRELIANCE. Later this group entered the power sector through Reliance Power, and the entertainment sector by acquiring Adlabs.

Operations

Communications

Reliance World

Reliance Globalcom Reliance Infratel

Vanco Reliance World Reliance Globalcall

Reliance Icall

Reliance Digicom

Reliance BPO

IPTV

Reliance Hooker Bureau

Reliance Communication (R Com) is the second largest Telecom company in India in terms of customers. The Company has a customer base of 125 million including over 2.5 million individual overseas retail customers. It ranks among the Top 5 Telecom companies in the world by number of customers in a single country. Reliance Communications corporate clientele includes 2,100 Indian and multinational corporations, and over 800 global, regional and domestic carriers. A pan-India network, covering over 24,000 towns and 600,000 villages has been established by Reliance Communications. Reliance Communications owns and operates the next generation IP enabled connectivity infrastructure comprising over 190,000 kilometers of fiber optic cable systems in India, USA, Europe, Middle East, Bosnia, Herzegovina and the Asia Pacific region.

Reliance Globalcom serves over 2,100 enterprises, 200 carriers and 2.5 million retail customers in 163 countries across 6 continents.

Reliance Communication has acquired 3G license in 13 circles out of total 22 circles. Reliance has launched 3G services in 9 circles by 26 January 2011.

Capital

Reliance Life Insurance Reliance General Insurance Reliance Venture Reliance Mutual Fund

Reliance Money

Reliance Securities

Reliance Consumer Finance

Reliance Venture Capitalist

Reliance Asset Reconstruction

Reliance PMS

ICEX - Stock exchange

Reliance Capital(Rel Cap)has interests in asset management and mutual funds, life and general insurance, private equity and proprietary investments, stock broking, depository services, distribution of financial products, consumer finance and other activities in financial services.

Reliance Mutual Fundis India's largest mutual fund. Reliance General Insurance is a general insurance company and among the top 3 private sector insurers. Reliance Money is brokerage and distributor of financial products in India with over 2.7 million customers and has the largest distribution network. Its brokerage, arm Reliance Securities is planning to invest Rs 300 crore (Rs 3 billion) for upgrading infrastructure, hiring staff and enhancing the capability of its online trading platform.

In March, 2011Nippon LifeInsurance, Japan's biggest life assurer by assets, agreed to buy a 26 per cent stake in Reliance Life Insurance for Rs3,062 cr.

Power

Rosa Thermal Power Station

Electricity transmission grid in eastern India.

Reliance Natural Resources Limited(RNRL)

Reliance Coal Resources

Tilaya UMPP - 4000MW

Krishanapatnam UMPP - 4000MW -on hold Sasan UMPP - 4000MW

Dadri power plant - 8000MW -On hold Chitrangi power project - 4000MW

Rosa Power Project - 1200MW

Butibori power Project,Nagpur- 600MW

Samalkot Power Project - 2400MW

Dhirubhai Ambani Solar Park- 40MW

Wind Power- 400MW

Solar Power- 500MW

Hydropower- 2500MW

Distribution

BSES Delhi

BSES Rajdhani

BSES Yamuna

Reliance Power Mumbai

Reliance Power(R Power)currently has a generation capacity of 1500MW. The company is in the process of achieving 5000MW by 2012, 17000MW by 2015 and 35000MW by 2020. The company is present in all verticals from generation to transmission to distribution. The company is having pan India projects and is currently having a big presence in Mumbai and Uttar Pradesh. The United Nations registered Reliance Powers Sasan power project on Feb 2, 2011 to earn as many as 22.5 million credits in the next 10 years.

Infrastructure

Azad Nagar Station, Mumbai Under Construction

Mumbai Metro---- Line1 - 12km & Line2 - 40km

Delhi Airport Metro Express---- Orange Line - 23km

Reliance Airport Developers (RADPL)-5 Airports

Reliance Sealink pvt ltd ---- 2 Sealinks

Reliance Road projects ---- 11 Road Projects - 1000km

Reliance SEZ ---- Navi Mumbai & Kolkata

Reliance Power Transmission Pvt Ltd

Reliance Infrastructure(R Infra)has emerged as the largest concessionaire of NHAI with 11 road projects totaling 1,000km worth about Rs 120bn (US$ 2.6 billion) with more than 10,000 people working at various sites. Constructing Metro systems inDelhiandMumbaitotaling more than 75km of track. Reliance Infrastructure is also bidding for projects inNepalandMaldives.

Reliance BIG Entertainment

Movies and Television DreamWorksSKG Studios (Co-Partnership)

Reliance Pictures

Reliance MediaWorks Ltd(formerly Adlabs)

Reliance MediaWorld (formerlyLowry Digital)

Reliance Synergy

Reliance Animation

BIGFlix- Movies on rent

BIG Cinemas BIG Music & Video

Reliance Home Video

Reliance ND Studio

RMW Studio

Broadcasting BIG FM 92.7- Radio stations operating in more than 50 cities.

Reliance Broadcasting (RBNL)

Reliance Digicom

Reliance Digital TVBIG TV- DTH service

Imagine Showbiz

BIG Magic

BIG -CBSchannels

Big CBS Prime Big CBS Spark Big CBS LoveGaming Zapak Codemasters Jump Games

Internet BIGADDA.com - social networking site

BIGOYE.com

The Plot Blog -BIG Cinemas Zapak.com

Others BIG Street

BIG Maps

BIG Live

BIG Digital

BIG Reach

BIG Events

Big Cinema is Indias largest cinema chain with over 516 screens spread across India, US, Malaysia and Netherlands and caters to over 35 million consumers. BIG Cinemas has established leadership in film exhibition in India with 253 screens and accounts for 10 to 15% of box office contributions of large movies.BIG FM 92.7is a leading network of FM Radio stations with FM stations in more than 50 Indian cities.

Reliance Health

Reliance Health is providing integrated health services through one of the finest hospitals in Asia The Kokilaben Dhirubhai Ambani Hospitalat Andheri,Mumbai. It also plans to venture into diversified fields like Insurance Administration, Health care Delivery and Integrated Health, Health Informatics and Information Management and Consumer Health.

Other

Reliance Technology Ventures

Reliance Cement

Reliance Aviation Tour & Travels

Mudra Communication (49% stake, rest 51% sold toOmnicom Group)

Java Green- A cafe chain with more than 100 outlets.

NIS Sparta - A corporate training Institute.

DTDC Courier & Cargo Ltd. Yatra.comMajor acquisitions

Metro Cinema acquired by Big Entertainment c.2005

Codemasters company acquired in 2010

Vanco Company acquired in 2008

Lowry Digital

MAJOR Acquisitions May 2000- BSES---------------------------------------------- Reliance Energy(Infrastructure)

Oct 2003-FLAG Telecom, 207Mn$------------------------- Reliance Communication

July 2005-Metro Adlabs(51% stake), 74Mn$---------------- Reliance Big Entertainment

Nov 2006- Travelmate services (100% stake)------------------Reliance Capital

July 2007- Yipes Services USA, 300Mn$-------------------- Reliance Communication

July 2007- Swan Telecom (now Etisalat DB) (9.9% stake)------- Reliance Communication

Dec 2007- ND Studio (50% stake), 35Mn$-------------------- Reliance Big Entertainment

Apr 2008-Lowry DigitalUSA, 7.5Mn$-------------------- Reliance Big Entertainment

Apr 2008- eWaveWorldUK (90% stake)--------------------------Reliance Globalcom

May 2008-Vanco------------------------------------------Reliance Globalcom

Sept 2008- Wall street finance (36% stake)------------------Reliance MoneyExpress

Mar 2009- Synergy--------------------------------------------Reliance Mediaworks

Nov 2009- Quant Capital -------------------------------------Reliance Capital

Jan 2010- Ilab UK Ltd.---------------------------------------Reliance Mediaworks

Apr 2010-CodemastersUK (50% stake)--------------------Zapak

July 2010- Digicable ----------------------------------------Reliance Big Entertainment

Jan 2011- Imagine Showbiz------------------------------------Reliance BIG Entertainment

Oct 2011- Annapurna Studios----------------------------------Reliance BIG Entertainment

Sept 2011-Bloomberg UTV(66% stake)------------------------------Reliance Capital

MINOR Stakes Sept 2010- Kerala Airport (15% stake), 47Mn$---------------------Reliance Infrastructure

Sept 2010- Trent (9% stake), 4.5Mn$-----------------------------Reliance Capital

Aug 2010- ICEX (26% stake)-------------------------------------- Reliance Capital

Apr 2010- Pathway world (minor stake)----------------------------Reliance Equity

May 2010- Fame Cinema (47.5% stake)--------------------------------Reliance Mediaworks

Sept 2010- Trinethra Infra (5% stake)----------------------------Reliance Capital

May 2007- Network18 group (10% stake)----------------------------Reliance Capital

May 2007- TV Today group (14.02% stake)--------------------------Reliance Capital

Oct 2008- Hong Kong Mercantile (15% stake)-----------------------Reliance Capital

Failed deals Mar 2007- Reliance -Air Deccan June 2008- Reliance Communication -MTN Aug 2008-New CastleEPL club

Sept 2008- BIG Entertainment -MGM Sept 2010- Reliance Infratel - GTL

Major joint ventures

RBNL -CBS NIS Sparta

Reliance -DreamWorks Codemasters- A British video gaming company.

Reliance Infra - IRB Infra

BIG Entertainment -BBCLogo

TheRELIANCElogo was launched in 2006 by group brand ambassadorAmitabh Bachan. The Reliance Apex conveys the urge for progress. Blue represents stability and Red represents dynamism. Other brand ambassadors of companies areHritik Roshan,Anushka Sharmafor Reliance Communication,Abhishek BachchanandSonu Nigamfor Big 92.7 FM. EarlierVirender Sehwagused to be the brand ambassador of Reliance Communication then known as Reliance Infocom. Reliance Mobile is also the main sponsor ofICCCricket World CupandICCWorld Twenty20Cricket tournaments.

General Facts

Group companyReliance Globalcomis the world's largest sealink cables company with more than 1,50,000km of sea cables. Reliance Mutual Fund is India's largest mutual fund company with assets of more than 1.1 trillion rupees. Reliance Mediaworld operates the world's largest dome theater, IMAX, in Mumbai. Reliance power has placed World's largest order worth $8.29 billion toShanghai Electric Groupto supply power equipment based on supercritical technology.

Reliance Infrastructureis the first private company in India to construct a rail project (Delhi Airport Metro Express) on PPP basis, the project became operational on February, 2011. Reliance power has become the first Indian company to earn Carbon credits,United Nationsregistered Reliance Powers Sasan power project to earn as many as 22.5 million credits in the next 10 years, the UN Clean Development Mechanism, the worlds second- biggest greenhouse gas market issues tradable credits to emission-busting projects in developing countries.

Reliance Infrastructures Dahanu Thermal Power Station (DTPS). The 500 MW project, around 100km north of Mumbai, has emerged the only power plant in the world to win a certification - ISO 50001:2011 for energy management systems and endeavours in the field of energy use and environment conservation.

Reliance Communication was the first company in India to issue bills inbraillefor visually impaired customers.

Global Presence

Group companyBIG Cinemasis Indias largest cinema chain with over 516 screens spread across India, US, Malaysia and Netherlands and caters to over 35 million viewers. BIG Cinema has a panUSAfootprint with over 205 screens present across 24 cities, InMalaysiawith 72 screens that play Hollywood features besides Chinese and Tamil films that cater to the 1.5 million Tamil populations. In 2009, BIG Cinemas established a presence inNetherlandsby associating with Pathe Theatres across 3 cities to begin screening Indian movies. It also set upNepals first Multiplex in Kathmandu.

BIG FM 92.7is operating radio station inSingaporeandBhutan. Reliance Power is having coal mines inIndonesia. Reliance has also made major acquisitions inUKandUSA.

Corporate sponsorship

Reliance is the main sponsor ofCricketTournaments. Reliance sponserd the cricket world cupReliance World Cupin 1987 and 1996.

Reliance Mobile is the main sponsor ofICCCricket World CupandICCWorld Twenty20Cricket tournaments.

2011 Cricket World CupReliance sponsored the ICC2011 Cricket World Cupheld inIndia,Sri LankaandBangladesh. Reliance Capital, has tied up with the International Cricket Council and a global non-profit organisation, room to read, to promote literacy and gender equality in education by contributing Rs.25,000 for every six hit during the World Cup. The initiative is namedBoundaries For Books.

ICC World Twenty20Reliance Mobile also sponsored the ICC Cricket World Cup 2007 held inWest Indiesand ICC World Twenty20 in 2007, 2008 and 2010.

Reliance Group was in race in 2010 to sponsor theIndian national cricket teambut lost toSahara India Pariwar. Reliance Group also bid forIndian Premier Leaguefor Mumbai Team but missed by a small amount.

Reliance ICC Player RankingsThe Reliance ICC Player Rankings are the official guide to the relative merits of batsmen, bowlers and all-rounders in Test match and ODI cricket.

The Reliance Mobile ICC ODI Womens Rankings provide an opportunity to showcase the leading stars in the womens international game.

Corporate social responsibility

Education

Dhirubhai Ambani Institute of Information and Communication TechnologyDA-IICT-Gujarat.

Dhirubhai Ambani Institute of Information and Communication TechnologyDA-IICT-Kolkata. (Under Construction).

Jamnaben Hirachand Ambani School,Raigad Kokilaben Dhirubhai Ambani Nursing College (KDA-NC) -Mumbai.

BIG Animation Infotainment & Media School (BIG AIMS) -Pune.

Dhirubhai Ambani University (DAU) -Bhopal(Under Construction).

With an aim to provide focused studies and research in Information and Communication Technology (ICT), the Reliance Group announced the setting up of the Dhirubhai Ambani University (DAU). The DAU will be soon set up in 110 acres of land and the Reliance Group has earmarked Rs.100 crore for developing higher education in Madhya Pradesh, a company release said. The Government ofMadhya Pradeshhas issued a letter of intent and also provided land for the proposed varsity. The University will provide focused studies and research in ICT and also focus on niche programmes relevant to the economic development of the state. The DAU will offer both undergraduate and postgraduate programmes with emphasis on research activities in ICT and allied areas.

Hospitals

Kokilaben Dhirubhai Ambani Hospital & Medical Research Institute,Mumbai Kokilaben Ambani Hospital Guwahati Centre,Guwahati Dhirubhai Ambani Hospital, Lodhivali,Raigad districtChapter 2

2 Selection, Scope & Objectives

All over world people wish growth in positive direction. This project an attempt to study and analyse the science behind Amalgamation & Demerger of Companies.

SCOPE OF THE STUDY

This study encompasses analysis of business house ADAG Group India. The scope however is limited to research based on secondary data as the objective of the project is to analyze investor preference to Gold.

OBJECTIVES OF THE STUDY

To analyze and understand the procedures involved in Amalgamation & Demerger To understand the different reasons of Amalgamation & Demerger To study the benefits of Amalgamation & DemergerLIMITATION OF THE STUDY1) Various secondary sources were considered for getting the statistical data and hence the authenticity is limited to the source.

2) Being a non funded project Data freely available was used, sources of which are Internet sources , Books, Journals, different Websites etc.

Chapter 33.Amalgamation

Amalgamation (also called as Consolidation)is the act of merging many things into one. Inbusiness, it often refers to themergers and acquisitionsof many smallercompaniesinto much larger ones. In the context offinancial accounting,consolidationrefers to the aggregation offinancial statementsof a group company asconsolidated financial statements. Thetaxationterm of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under theHalsbury's Laws of England, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company". Thus, the two concepts are, substantially, the same. However, the term amalgamation is more common when the organizations being merged are private schools or regiments.

Types of business amalgamations

There are three forms of business combinations:

Statutory Merger: a business combination that results in the liquidation of the acquired companys assets and the survival of the purchasing company.

Statutory Consolidation: a business combination that creates a new company in which none of the previous companies survive.

Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of theCommon stockof the acquired company and both companies survive.

Amalgamation: Means an existing Company which is taken over by another existing company. In such course of amalgamation, the consideration may be paid in "cash" or in "kind", and the purchasing company survives in this process....

Terminology

Parent-subsidiary relationship: the result of a stock acquisition where the parent is the acquiring company and the subsidiary is the acquired company.

Controlling Interest: When the parent company owns a majority of the common stock.

Non-Controlling Interest orMinority Interest: the rest of the common stock that the other shareholders own.

Wholly owned subsidiary: when the parent owns all the outstanding common stock of the subsidiary.

Companyis formed when in the process of the amalgamation, the combined company is formed out of the transaction. The amalgamated company is otherwise called the transferee company. The company or companies, which merge into the new company, are called the transferor companies and, the company, into which the transferor companies merge, is known as the transferee company.

"Amalgamating company": The company or companies, which are merged, are called the "amalgamating companies". The amalgamating company or companies are also called the "transferor company/companies." dsd Date.

Accounting treatment (US GAAP)

A parent company can acquire another company in two ways:

By purchasing the net assets.

By purchasing the common stock of another company.

Regardless of the method of acquisition; direct costs, costs of issuing securities and indirect costs are treated as follows:

Direct costs, Indirect and general costs: the acquiring company expenses all acquisition related costs as they are incurred.

Costs of issuing securities: these costs reduce the issuing price of the stock.

Purchase of Net Assets

Treatment to the acquiring company:When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.

Treatment to the acquired company:The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company). If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.

Purchase of Common Stock

Treatment to the purchasing company:When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired.

Treatment to the acquired company:The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock.

FASB 141 Disclosure Requirements:FASB 141 requires disclosures in the notes of the financial statements when business combinations occur. Such disclosures are:

The name and description of the acquired entity and the percentage of the voting equity interest acquired.

The primary reasons for acquisition and descriptions of factors that contributed to recognition of goodwill.

The period for which results of operations of acquired entity are included in the income statement of the combining entity.

The cost of the acquired entity and if it applies the number of shares of equity interest issued, the value assigned to those interests and the basis for determining that value.

Any contingent payments, options or commitments.

The purchase and development assets acquired and written off.

Treatment of goodwill impairments: IfNon-Controlling Interest(NCI) based on fair value of identifiable assets: impairment taken against parent's income & R/E

If NCI based on fair value of purchase price: impairment taken against subsidiary's income & R/E

Reporting intercorporate interest investments in common stock

1. 20% ownership or less

When a company purchases 20% or less of the outstandingcommon stock, the purchasing companys influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence).

The purchasing company uses the cost method to account for this type of investment. Under the cost method, the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.

Liquidating dividends: Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared.

Impairment loss: An impairment loss occurs when there is a decline in the value of the investment other than temporary.

2. 20% to 50% ownership Associate company

When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing companys influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 (FIN 35) underlines the circumstances where the investor is unable to exercise significant influence).

To account for this type of investment, the purchasing company uses theequity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.

Treatment ofPurchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.

Purchase differentials have two components:

The difference between the fair market value of the underlying assets and their book value.

Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets.

Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.

3. More than 50% ownership Subsidiary

When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is thesubsidiary. The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.

Consolidated financial statementsshow the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. However, at the end of the year, a consolidation working paper is prepared to combine the separate balances and to eliminatethe intercompany transactions, the subsidiarys stockholder equity and the parents investment account. The result is one set of financial statements that reflect the financial results of the consolidated entity

Chapter 44.Demerger

Demergeris a form of corporate restructuring in which the an entity's business operations are segregated into one or more components.It is the converse of amerger or acquisition.

A demerger can take place through aspin outby distributed or transferring the shares in a subsidiary holding the business to company shareholders carrying out the demerger. The demerger can also occur by transferring the relevant business to a new company or business to which then that company's shareholders are issued shares of.

Demergers can be undertaken for various business and non-business reasons, such as government intervention, by way ofanti-trustlaw, or throughdecartelization.

. The act of splitting off a part of an existing company to become a new company, which operates completely separate from the original company. Shareholders of the original company are usually given an equivalent stake of ownership in the new company. A demerger is often done to help each of the segments operate more smoothly, as they can now focus on a more specific task. opposite of merger

A demerger is the opposite of an acquisition a company spins off some business it owns into a completely separate company. A demerger is usually carried out by distributing shares in the business to be spun off to shareholders of the company carrying out the demerger, in proportion to their shareholding in the original company.

Demergers can have beneficial effects on the quality of management as they allow the management of demerged companies to concentrate on their core business, they make companies easier for investors to analyse (by simplifying the business) and they often demonstrate a management focus on increasing shareholder value.A demerger may be full, or partial. A partial demerger means that the parent company retains a stake (sometimes a majority stake) in the demerged business.The motive for a partial demerger is sometimes to force the market to separately value the business that is demerged, in the expectation that this will lead to a higher sum of parts valuation of the parent company.

Demerger is a form of corporate restructuring. One of the prime reasons why large corporate houses go in for demerger is to increase the role of specialisation in the particular segment. In case of large conglomerates, demerging entities often are the departments which are growing at an impressive rate and have substantial potential. Demerger is the converse of a merger or acquisition. It describes a form of restructure in which shareholders or unit holders in the parent company gain direct ownership of the demerged entity or the subsidiary entity. Underlying ownership of the shares of the company/ trusts that formed part of the group does not change. The company or entity that ceases to own the entity is called the demerging entity. If the parent entity holds a majority stake in the demerged entity, the resulting company is referred to as the subsidiary.

Sections 391 to 394 of the Companies Act, 1956 deal, inter-alia with the reconstruction and amalgamation of companies or what is commonly referred to as mergers. The procedures contemplate an application by the company to the concerned High Court by way of a scheme of compromise or arrangement with its creditors or members or any class of its members. Such a Scheme is a viable option for the amalgamation of two or more Indian companies. Moreover, sections 391 to 394 of the Act envisage a single window clearance by providing a composite code for facilitating mergers and amalgamations which obviates the need for making multiple applications under the Act and ensures that the interested entities are not put through unnecessary and cumbersome procedures involving protracted consequences for implementing such schemes

Sec 390 - Interpretation of sections 391 and 393 (Companies Act, 1956).

[In sections 391 and 393,(b) the expression "arrangement" includes a reorganisation of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods] ; and

Sub Section 19AA of Section 2 of Income Tax Act, 1961:

[(19AA) demerger, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that

(i) 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;(ii) 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;(iii) 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;(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis;(v) 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 share-holders of the resulting company or companies by virtue of the demerger,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;

(vi) the transfer of the undertaking is on a going concern basis;(vii) 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. Explanation 1.For the purposes of this clause, undertaking shall include any part of an undertaking, or a unit or division of an undertaking or business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2.For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include (a) the liabilities which arise out of the activities or operations of the undertaking; (b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and (c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3.For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored.

Explanation 4.For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils[such conditions as may be notified in the Official Gazette82, by the CentralGovernment];

(19AAA)demerged company means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company;]

Demerger of a company takes place when

1. De-merger is essentially a scheme of arrangement under Section 391 to 394 of the CompaniesAct, 1956 requiring approval by;i. majority of shareholders holding shares representing three-fourths value in meeting convened for the purpose, and; ii. Sanction of High Court.2. De-merger involves transfer of one or more undertakings.

3. The transfer of undertakings is by the demerged company, which is otherwise known as Transferor Company. The company to which the undertaking is transferred is known as resulting company which is otherwise known as Transferee Company.Existing provisions relating to amalgamations of companies were rationalised and new ones relating to demerger of companies, or sale/transfer of business as a going concern through slump sales were introduced

In demergers, tax benefits and concessions available to any undertaking are made available to the undertaking on its transfer to the resulting company. The condition regarding continuity of the same business for the allowability of loss to an assessee under Section 72 of the Income-Tax Act, 1961 was dispensed with. The accumulated losses and unabsorbed depreciation in a demerger is allowed to be carried forward by the resulting company if these are directly relatable to the undertaking proposed to be transferred. Where it is not possible to relate these to the undertaking, such losses and depreciation will be apportioned between the demerged company and the resulting company in proportion of the assets coming to the share of each as a result of demerger. Tax benefit to such business reorganisation is limited to transfer of specific assets, which would amount to sale of assets and not business reorganization

Demerger And Spin Off/Out:

Another term commonly associated with demerger is that of a spin out or spin off.Spin out refers to the process when a division of a company or organization becomes an independent business. The "spin-out" company takes assets, intellectual property, technology, and/or existing products from the parent organization. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks; thus, as the moment of spin-off, the ownership of the original and spun-off companies are identical.

A demerger can take place through a spin out by distributed or transferring the shares in a subsidiary holding the business to company shareholders carrying out the demerger. The demerger can also occur by transferring the relevant business to a new company or business to which then that company's shareholders are issued shares of.

Demerger also take place through the process of decartelisation, i.e. the transition of a national economy from monopoly control by groups of large businesses, known as cartels, to a free market economy.

Demerged Company and Resulting Company - Meaning of

According to Sub-section (19AAA) of Section 2 of the Income-tax Act, 1961,de-merged companymeans the company whose undertaking is transferred, pursuant to a de-merger, to a resulting company.

According to Sub-section (41A) of Section 2 of the Income-tax Act, 1961resulting companymeans one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the de-merged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the de-merged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.

The definition of resulting company has clearly brought out three important requirements while establishing its relationship with de-merging company. They are

1. Consideration for transfer of undertaking would be by issue of shares only by resulting company. [Price Consideration]

2. Such consideration would be paid only to the shareholders of de-merged company.3. Resulting company can also be a subsidiary company of a de-merged company.

It is now a just and proper statement to state that, demergers are a fairly common term involved with corporate restructuring nowadays. They provide an opportunity to create individual profit centres and investors in the company also benefit from the process as there is fresh valuation of the demerged entity which in turn often results in an increase in the share price. Demerger is often done with an eye to segregate, categories and more importantly specialise a particular segment of a corporate entity.However due to the creation of an altogether new business entity, the same requires prudence and astute decision making on the part of the investor.

The following are some of the important points and key notes that the investors must make and take heed of in case of Demerger of a corporate restructuring

Extent of separation

First, the activities separated at the time of demerger are a critical factor. It is important to remember that the overall size of the business entity and the extent of the profits that it makes is one important factor that determines the pricing of the newly-listed shares. Also, the future potential will determine the price impact after the demerger.

Identifying benefits

The key role for the investor is to identify an entity where the strong or profitable business remains. And then, look for the company which has a future potential.

Trading priceDemerger can lead to some immediate gains for the investors where the price of the separate entities shoots up. Too high a rise and one should immediately opt for the sell option. It is not uncommon to find valuations touch dizzying heights after a demerger and the benefits have to be booked.

Investor interestThere is often a high interest on a particular scrip, immediately after the demerger leading to a shooting up of the scrip. Following a thumb rule where the price of the scrip vis-a-vis actual valuation gives a fair idea about the extent of overvaluation or undervaluation taking place.Limitations/Hindrances in the Current Legal Provisions Relating to Demerger:

Questionable re-structuring exercises are undertaken with a view to strip parent companies ofvital assets and defeat revenue.In the process, the parent company's business is reduced to the minimum and no significant assets are left from which the I-T Department can recover its dues.The parent company becomes a shell company though styling itself as a holding company.

When the amendments were made, the Central Government was able to prescribe guidelines orconditions so as to ensure that the demergers were made for genuine business purposes. Section281 of the I-T Act declares certain transfers to be void. But this applies where such transfers aremade during the pendency of any proceeding under the Act. It also does not apply to assets notforming part of the stock-in trade of the business. It was not anticipated that the provisions would be abused not merely to take advantage of tax concessions but also to defeat legitimate tax revenues.

Asset-strippingis a favourite mechanism always used by errant taxpayers to defeat the Revenue. Such abuses have, however,notbecome widespread. Proper amendments should be made to the law to safeguard revenue.

The definition of demerger in Section 2 (19AA) requires fresh look. The property and liabilities of the undertaking being transferred by the demerged company, as per the definition, will be transferred at book value. Even a unit or a division or a business activity of an undertaking can be transferred. No doubt, all the property of the undertaking, including liabilities relatable to the undertaking being transferred by the demerged company, shall become the property and liabilities of the resulting company. But it is necessary to specifically lay down that demergers should not result in defeating the Revenue by way of transfer of assetsChapter 55Reasons for Amalgamation & De-Mergers The key determinants for success in the global market are the ability to achieve size, scale, integration and greater financial strength and flexibility, in the interests of maximizing overall shareholder value. Whatever is the fundamental objective, mergers must form part of the business and corporate strategies aimed at creating sustainable competitive advantage for the firm. It is believed that mergers and amalgamations are strategic decisions leading to the maximization of a companys

growth by enhancing its production and marketing operations, enhanced competition, breaking of trade barriers, free flow of capital, globalization of business etc.

Further, it has been stated that mergers and acquisitions are intended:

(a) To limit competition,

(b) To utilize under-utilized market power,

(c) To overcome the problem of slow growth and profitability in ones own

Industry, (e) to achieve diversification,

(f) To establish a transnational bridgehead without excessive start up costs to gain access to foreign market,

(g) To utilize under-utilized resources human and physical and managerial skills,

(h) To displace existing management,

(i) To circumvent Government regulations,

(j) To reap speculative gains attendant upon new security issue or change in P/E ratio

(k) To create an image of aggressiveness and strategic opportunism, empire building and to amass vast economic powers of the company.

[Courtesy : Ansoff H.L. et. Al. Acquisitive Behaviour of U.S. Manufacturing firms 1964-65, Vanderbilt university Press, 1971].

Some of the most common reasons and benefits of mergers and amalgamations include:

(i) maintaining or increasing a companys growth especially where internal growth is restricted due to scarcity of resources;

(ii) increasing or enhancing profitability, through cost reduction resulting from

economies of scale, operating efficiencies and synergy.

(iii) diversification of risks.

(iv) Accelerating companys market power and reducing the severity of competition.

(v) Reducing tax liability.

Some of the above mentioned reasons and benefits are discussed briefly hereunder.

Improving Economies of Scale

One of the most frequent reason given for mergers is to improve the economies of scale. Economies of scale arise when increase in volume of production leads to a reduction in cost of production per unit. They are generally associated with the manufacturing operations, so that the ratio of output to input improves with the volume of operations. Mergers and amalgamations help to expand the volume of production without a corresponding increase in fixed costs. Thus, the fixed costs are distributed over a large volume causing the unit cost of production to decline. Economies of scale may also be obtained from the optimum utilization of management resources and systems of planning, budgeting, reporting and control. A combined firm with a large size can make the optimum use of the management resources and systems resulting in economies of scale. This gives the company a competitive advantage by gaining an ability to reduce the prices to increase market share, or earn higher profits while maintaining a price.

Operating Economics

Apart from economies of scale, a combination of two or more firms may result in reduction of costs due to operating economies. A combined firm may avoid overlapping of function and facilities. Various functions may be consolidated and duplicate channels may be eliminated by implementing an integrated planning and control system. The merger of Sundaram Clayton Ltd. (SCL) with TVS Suzuki Ltd. (TSL) was motivated by operating economies and by virtue of this, TSL became the second largest producer of two wheelers. TSL needed to increase its volume of production but also needed a large manufacturing base to reduce its production costs. Large amount of funds would have been required for creating additional production capacity. SCL was also required to upgrade its technology and increase its production. Both the firms plants were closely located offering various advantages, the most versatile being the capability to share common R & D facilities.

Market Leadership

Some of the mergers and amalgamations take place with a view to seek additional strength in the market. The amalgamation can enhance value for shareholders of both companies through the amalgamated entitys access to greater number of market resources. With the additional combined market share, a company can afford to control the price in a better manner with a consequent increase in profitability. The bargaining power of the firm vis--vis labour, suppliers and buyers is also enhanced.

The merged firm can also export technological breakthrough against obsolescence

and price wars. In the case of the amalgamation of Reliance Petroleum Limited with Reliance Industries Limited, the main consideration had been that the amalgamation will contribute towards strengthening Reliances existing market leadership in all its major products. It was foreseen that the amalgamated entity will be a major player in the energy and petrochemical sector, bringing together Reliances leading positions in different product categories.

Financial Benefits

A merger or amalgamation is capable of offering various financial synergies and benefits such as eliminating financial constraints, deployment of surplus cash, enhancing debt capacity and lowering the cost of financing. Mergers and amalgamations enable external growth by exchange of shares releasing thereby, the financial constraint.

Also, sometime cash rich companies may not have enough internal opportunities to invest surplus cash. Their wealth may increase through an increase in the market value of their shares if surplus cash is used to acquire another company. A merger can bring stability of cash flows of the combined company, enhance the capacity of the new entity to service a larger amount of debt, allowing a higher interest tax shield thereby adding to the shareholders wealth. Also, in a merger since the probability of insolvency is reduced due to financial stability, the merged firm should be able to borrow at a lower rate of interest. Apart from this, a merged firm is able to realize economies of scale in floatation and transaction costs related to an issue of capital i.e. issue costs are saved when the merged firm makes a larger security issue.

Acquiring a New Product or Brand Name

A company, for strategic reasons, may wish to produce or market a particular product, but may not have the required production, marketing or managerial facilities for completing a product line or for meeting all the needs of a customer segment. Getting the required know-how from others sources installing and commissioning a plant and then launching the new product may take much time and result in loss of advantages for getting into the associated business. Instead, amalgamation would provide readymade facilities, which would provide a quicker entry for encashing the comparative advantage of the new product before new entrants make the market much more competitive and much less profitable.

Diversifying the Portfolio

Another reason for merger is to diversity the companys dependence on number segments of the economy. Diversification implies growth through the combination of firms in unrelated businesses. All businesses go through cycles and if the fortunes of a company were linked to only one or a few products then in the decline stage of their product life cycles, the company would find it difficult to sustain itself. The company therefore looks for either related or unrelated diversifications and may decide to do so not internally by setting up new projects, but externally by merging with companies of the desired product profile. Such diversification helps to widen the growth opportunities for the company and smoothen the ups and downs of their life cycles.

Synergies

Synergy refers to a situation where the combined firm is more valuable than the sum of individual combining firms (2+2=5). The combination of operations can create a unique level of integration for the amalgamated entity spanning the entire value chain in the line of business. This will enable the amalgamated entity to achieve substantial savings in costs, significantly enhancing its earnings potential. Synergies can be expected to flow from more focused operational efforts, rationalization, standardization and simplification of business processes, productivity improvements, improved procurement, and the elimination of duplication.

Taxation or Investment Incentives

A company, which has incurred losses in the past, can carry such losses forward and offset them against future taxable profits and reduce tax liabilities. Such a company when merged with a company with large taxable profits would help to absorb the tax liability of the latter.

A similar advantage exists when a company is modernizing or investing heavily in plant and machinery, which entitles it to substantial investment incentives, but has not much taxable profits to offset them with. Acquiring or merging such a company with a highly profitable company would help make full use of the investment incentives for the latter.

Survey findings

In the early seventies, the Organization for Economic Cooperation and Development (OECD) published a Report of their Committee of Experts on Restrictive Business Practices, on Mergers and Competition Policy. The report listed twelve motives most often cited for mergers, which may be grouped together under the following categories:

A. Economies of Scale

1 Obtain Real Economies of Scale Related Reasons

2 Acquire Capacity at Reduced Prices

B. Market share Reasons

3 Increase market power

4 Expand production without price reduction

5 Build an empire

6 Rationalize production

C. Financial Synergy

7 Obtain Tax advantages Related Reasons

8 Obtain monetary economies of scale

9 Use complementary resources

10 Gain promotional profits

D. Diversification of Risk

11 Spread risks by diversification Related Reasons

12 Avoid firms failure

The key determinants for success in the global market are the ability to achieve size, scale, integration and greater financial strength and flexibility, in the interests of maximizing overall shareholder value. Whatever is the fundamental objective, mergers must form part of the business and corporate strategies aimed at creating sustainable competitive advantage for the firm. It is believed that mergers and amalgamations are strategic decisions leading to the maximization of a companys

growth by enhancing its production and marketing operations, enhanced competition, breaking of trade barriers, free flow of capital, globalization of business etc.

Further, it has been stated that mergers and acquisitions are intended:

(a) To limit competition,

(b) To utilize under-utilized market power,

(c) To overcome the problem of slow growth and profitability in ones own

Industry, (e) to achieve diversification,

(f) To establish a transnational bridgehead without excessive start up costs to gain access to foreign market,

(g) To utilize under-utilized resources human and physical and managerial skills,

(h) To displace existing management,

(i) To circumvent Government regulations,

(j) To reap speculative gains attendant upon new security issue or change in P/E ratio

(k) To create an image of aggressiveness and strategic opportunism, empire building and to amass vast economic powers of the company.

[Courtesy : Ansoff H.L. et. Al. Acquisitive Behaviour of U.S. Manufacturing firms 1964-65, Vanderbilt university Press, 1971].

Some of the most common reasons and benefits of mergers and amalgamations include:

(i) maintaining or increasing a companys growth especially where internal growth is restricted due to scarcity of resources;

(ii) increasing or enhancing profitability, through cost reduction resulting from

Economies of scale, operating efficiencies and synergy.

(iii) Diversification of risks.

(iv) Accelerating companys market power and reducing the severity of competition.

(v) Reducing tax liability.

Some of the above mentioned reasons and benefits are discussed briefly hereunder.

Improving Economies of Scale

One of the most frequent reason given for mergers is to improve the economies of scale. Economies of scale arise when increase in volume of production leads to a reduction in cost of production per unit. They are generally associated with the manufacturing operations, so that the ratio of output to input improves with the volume of operations. Mergers and amalgamations help to expand the volume of production without a corresponding increase in fixed costs. Thus, the fixed costs are distributed over a large volume causing the unit cost of production to decline. Economies of scale may also be obtained from the optimum utilization of management resources and systems of planning, budgeting, reporting and control. A combined firm with a large size can make the optimum use of the management resources and systems resulting in economies of scale. This gives the company a competitive advantage by gaining an ability to reduce the prices to increase market share, or earn higher profits while maintaining a price.

Operating Economics

Apart from economies of scale, a combination of two or more firms may result in reduction of costs due to operating economies. A combined firm may avoid overlapping of function and facilities. Various functions may be consolidated and duplicate channels may be eliminated by implementing an integrated planning and control system. The merger of Sundaram Clayton Ltd. (SCL) with TVS Suzuki Ltd. (TSL) was motivated by operating economies and by virtue of this, TSL became the second largest producer of two wheelers. TSL needed to increase its volume of production but also needed a large manufacturing base to reduce its production costs. Large amount of funds would have been required for creating additional production capacity. SCL was also required to upgrade its technology and increase its production. Both the firms plants were closely located offering various advantages, the most versatile being the capability to share common R & D facilities.

Market Leadership

Some of the mergers and amalgamations take place with a view to seek additional strength in the market. The amalgamation can enhance value for shareholders of both companies through the amalgamated entitys access to greater number of market resources. With the additional combined market share, a company can afford to control the price in a better manner with a consequent increase in profitability. The bargaining power of the firm vis--vis labour, suppliers and buyers is also enhanced.

The merged firm can also export technological breakthrough against obsolescence

and price wars. In the case of the amalgamation of Reliance Petroleum Limited with Reliance Industries Limited, the main consideration had been that the amalgamation will contribute towards strengthening Reliances existing market leadership in all its major products. It was foreseen that the amalgamated entity will be a major player in the energy and petrochemical sector, bringing together Reliances leading positions in different product categories.

Financial Benefits

A merger or amalgamation is capable of offering various financial synergies and benefits such as eliminating financial constraints, deployment of surplus cash, enhancing debt capacity and lowering the cost of financing. Mergers and amalgamations enable external growth by exchange of shares releasing thereby, the financial constraint.

Also, sometime cash rich companies may not have enough internal opportunities to invest surplus cash. Their wealth may increase through an increase in the market value of their shares if surplus cash is used to acquire another company. A merger can bring stability of cash flows of the combined company, enhance the capacity of the new entity to service a larger amount of debt, allowing a higher interest tax shield thereby adding to the shareholders wealth. Also, in a merger since the probability of insolvency is reduced due to financial stability, the merged firm should be able to borrow at a lower rate of interest. Apart from this, a merged firm is able to realize economies of scale in floatation and transaction costs related to an issue of capital i.e. issue costs are saved when the merged firm makes a larger security issue.

Acquiring a New Product or Brand Name

A company, for strategic reasons, may wish to produce or market a particular product, but may not have the required production, marketing or managerial facilities for completing a product line or for meeting all the needs of a customer segment. Getting the required know-how from others sources installing and commissioning a plant and then launching the new product may take much time and result in loss of advantages for getting into the associated business. Instead, amalgamation would provide readymade facilities, which would provide a quicker entry for encashing the comparative advantage of the new product before new entrants make the market much more competitive and much less profitable.

Diversifying the Portfolio

Another reason for merger is to diversity the companys dependence on a number segments of the economy. Diversification implies growth through the combination of firms in unrelated businesses. All businesses go through cycles and if the fortunes of a company were linked to only one or a few products then in the decline stage of their product life cycles, the company would find it difficult to sustain itself. The company therefore looks for either related or unrelated diversifications and may decide to do so not internally by setting up new projects, but externally by merging with companies of the desired product profile. Such diversification helps to widen the growth opportunities for the company and smoothen the ups and downs of their life cycles.

Synergies

Synergy refers to a situation where the combined firm is more valuable than the sum of individual combining firms (2+2=5). The combination of operations can create a unique level of integration for the amalgamated entity spanning the entire value chain in the line of business. This will enable the amalgamated entity to achieve substantial savings in costs, significantly enhancing its earnings potential. Synergies can be expected to flow from more focused operational efforts, rationalization, standardization and simplification of business processes, productivity improvements, improved procurement, and the elimination of duplication.

Taxation or Investment Incentives

A company, which has incurred losses in the past, can carry such losses forward and offset them against future taxable profits and reduce tax liabilities. Such a company when merged with a company with large taxable profits would help to absorb the tax liability of the latter.

A similar advantage exists when a company is modernizing or investing heavily in plant and machinery, which entitles it to substantial investment incentives, but has not much taxable profits to offset them with. Acquiring or merging such a company with a highly profitable company would help make full use of the investment incentives for the latter.

Survey findings

In the early seventies, the Organization for Economic Cooperation and Development (OECD) published a Report of their Committee of Experts on Restrictive Business Practices, on Mergers and Competition Policy. The report listed twelve motives most often cited for mergers, which may be grouped together under the following categories:

A. Economies of Scale

1 Obtain Real Economies of Scale Related Reasons

2 Acquire Capacity at Reduced Prices

B. Market share Reasons

3 Increase market power

4 Expand production without price reduction

5 Build an empire

6 Rationalize production

C. Financial Synergy

7 Obtain Tax advantages Related Reasons

8 Obtain monetary economies of scale

9 Use complementary resources

10 Gain promotional profits

D. Diversification of Risk

11 Spread risks by diversification Related Reasons

12 Avoid firms failure

Chapter 66Tax Implications on Demergers & Legal Aspect Generally, the gains arising from a demerger are exempt from capital gains tax, while those arising from a slump sale are not. But, then, what exactly is a demerger for the purposes of the exemption from capital gains tax? Can a demerger ever be characterized as a slump sale? Several sections of the Income Tax Act, 1961 deal with these issues.

The statutory provisions in the Income Tax Act:

A.Section 2(19AA)says that a demerger means a transfer pursuant to a scheme under Sections 391-394 of the Companies Act, 1956 (by a demerged company of its one or more undertakings to any resulting company) such that a list of seven conditions enumerated in separate clauses is fulfilled. Clause [iv] is particularly relevant for the present discussion. It says that the resulting company must issue,in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis.

B. A slump sale is defined inSection 2(42C)to mean the transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to independent assets and liabilities.

C. According toSection 45, any profits or gains arising from the transfer of a capital asset are chargeable to capital gains tax.

D. UnderSection 47(vii), the provisions of Section 45 do not apply to a transfer in a demerger of a capital asset by the demerged company to a resulting company if the resulting company is an Indian company.

E. UnderSection 50-B, capital gains arising from slump sales are chargeable to tax. The capital gains from such slum sales are to be calculated by subtracting the net worth of the undertaking that is transferred from the lump-sum consideration (as per Explanations 1 and 2 to the Section).

In short, if a transfer is a demerger under the Income Tax Act, capital gains liability would not arise. If it is a slump sale, such liability would arise. For the transfer to be a demerger, the conditions mentioned in Section 2(19AA) must be complied with. But what happens when one or more of the conditions are irrelevant to a particular transaction? How this may happen is exemplified by the facts of the complex case of Avaya Global Connect v. ACIT, ITA No.832/Mum/07

The Facts:

The assessee A was a company having two divisions B and T. T was transferred by A to I, an Indian company. For this transfer, a scheme of arrangement filed before the Bombay High Court provided, Twithout any further act, instrument or deed shall stand vested in or deemed to be vested in I as a going concern Significantly, the scheme went on to say Upon the demerger of T into I, Iwould not pay considerationeither to A or to the shareholders of A (Emphasis supplied.) The Bombay High Court sanctioned this scheme. The value of the assets taken over by I was less than the value of the liabilities; and A showed the difference in the capital reserve account in the balance sheet. A question arose as to whether the gains which accrued to the assessee (as it had transferred more liabilities than assets) would be chargeable to capital gains.

The claims:

The Department took the view that the scheme would not qualify as a demerger; on the basis that clause [iv] mentioned above was not satisfied. The assessee contended that clause [iv] was inapplicable to the case, as the clause would have effect only when there was some consideration for the transfer. In the case, the value of its liabilities exceeded its assets, leading to negative net worth. Therefore, there was no consideration for the transfer as a practical matter, it was impossible for there to be any consideration. As there was no consideration whatsoever, the question of complying with clause [iv] would not arise. Without prejudice, it was argued by the assessee that the transfer could not have been a slump sale given that no lump-sum consideration was paid. Further, it was contended that there being no sale consideration received in respect of the transfer, no question of computing capital gains arose.

The AO and the CIT (Appeals) however rejected these contentions. It was held that the transactionwas a slump sale. The assessee had not received consideration as such; yet it had transferred liabilities in excess of assets and had credited the difference to its capital reserve account. This was sufficient to constitute consideration received on account of the transfer; and the assessee was liable to pay capital gains tax.The issues before the Tribunal:

Essentially, the Tribunal faced the following questions:

A. Was the transfer to be characterized as a demerger for the purposes of the Income Tax Act, 1961?

B. If not, could it be referred to as a slump sale? If it was a slump sale, would there be any capital gain on facts (considering the negative net worth of the assessee and the fact that no actual consideration was received)?

C. What would be the position if the transfer was categorized as neither a demerger nor a slump sale?

The decision:

A. The Tribunal agreed with the lower authorities that there was no demerger in the present case. It was held that the legislature must be presumed to have foreseen all practical possibilities while adding the conditions. The fact that there was no consideration whatsoever (as a matter of practical impossibility) would not be sufficient to hold that the condition was inapplicable.

B. The Tribunal then went on to hold that it is only a transfer as a result of a sale which can be considered as a slump sale. The presence of a money consideration is essential for a sale. Also, when a Court sanctions a scheme under the Companies Act, the transfer in pursuance of that scheme would be not be a result of sale, but would be a result of the operation of law.

C. Essentially, the capital asset which was transferred in the case was a going concern. It would not be possible to conceptualize the cost of acquisition of a going concern (or) the date of acquisition thereof As such, it was held that the computation provisions of the Act in Section 48 would fail in the given factual matrix. In such a scenario, no capital gains could be levied. Accordingly, the assessees appeal was allowed.

The significance:

From the point of view of the corporate world, the judgment serves to highlight an important point. Merely because a transfer is carried out in accordance with a scheme for a demerger under the Companies Act sanctioned by the competent High Court, the transfer will not be characterized as a demerger for the purposes of taxation. At the same time, such a transfer will not be a slump sale; and liability to capital gains will depend on whether or not the provisions for computation of capital gains would be workable. The safer course, it appears, would be to ensure that the requirements for a demerger under tax laws are complied with in the first place.

Chapter 77.Procedure In India

Demerger Process Under Indian Companies Act, 1956

Demerger, in relation to companies, means the transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company in the manner specified in Section 2(19AA) of the Income Tax Act. The provisions of Section 395 of the Companies Act, 1956 are available to protect the interest of shareholders dissenting from the scheme approved by the majority. Section 2(42C) of the Income Tax Act, 1961 and introduced a concept of slump sale. Slump sale means the transfer of one or more undertakings as a result of sale fro a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. Therefore, demerger cannot be accomplished with slump sales since such a sale is only for sale of undertaking. The demerger should be in accordance with the act by the Central Government in this behalf which envisages the Companies Act, 1956. If the original company which is split into several companies after divisions is wound up voluntarily, the provisions of Sections484 to 498 of the Companies act to be followed.

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 courts 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: Courts order on petition sanctioning the scheme of demerger

ACTIVITIES FROM BOARD MEETING FOR APPROVAL OF DEMERGER SCHEME TO COURT ORDER: Intimation in Stock Exchange of Board Meeting date for considering Demerger

Board Approval for the Scheme

Informing Stock Exchange of Boards decision

Consent from shareholders to the Scheme for Resulting Companies (in case of Closely held unlisted Companies)

Filing scheme with the Stock Exchanges

NOC/ Approval from Stock Exchanges (BSE/NSE)

Filing of application under section 391(1) with High Court (along with Judges summons, affidavit in support of summons and draft minutes of order)

Finalizing the Notice/Explanatory Statement for Meeting of the Shareholders/Secured and unsecured Creditors

Receiving authenticated copy of order for holding/ dispensing with the Meeting of Shareholders/ Secured and unsecured Creditors

Obtaining certified copy of order of High court for court

Convened Meeting

Commencement of Printing of Notice for court convened meetings

Completion of dispatch of notices for meeting under UCP

Advertisement of notice of meetings

Filing of Notice Advertisement of meeting with stock Exchange(s)

Filing of advertisement of meeting with court

Filing of Affidavit signed by Chairman of the meeting or other person directed by the court verifying that the directions regarding the issue of notices and the advertisements have been duly complied with

Meeting of Creditors and Members

Reporting the decision of the poll to the High Court

Filing of petition with the Court along with relevant documents

Admission of the petition

Minutes of order by judge fixing the date of hearing of petition and advertisement of notice of hearing

Advertising the notice of hearing in news paper

Obtaining certified copy of order on admission of petition

Filing of copy of petition with annexures with RD / ROC through FORM 61 (eform)

Filing of affidavit confirming service of notice of petition and publication in newspaper

28 Follow up with RD/ ROC

Receipt of letter, queries etc., from RD and ROC

Follow up with RD/ROC/ Legal Counsel to resolve issues, if any

Initial date of hearing of petition

Adjoined hearing if any

Filing of amended petition if any

Final date of hearing of petition

Obtaining certified copy of order on petition

Payment of Stamp duty, if required

Filing of certified order with RD / ROC along with Form 21

ACTIVITIES FROM COURT ORDER TILL RECORD DATE

Acknowledgement of receipt from ROC and certified true copy of court order to be filed with the Stock Exchange.

Notice to Stock Exchange for Record Date to determine eligibility to receive shares of the Resulting Companies and voluntarily give advertisement of the Record Date in National Dailies ( 30 day notice)

Agreement with CDSL and NSDL for admitting its securities

Printing of stationery Allotment Advice, Share Certificate, Envelopes

Application seeking exemption for relaxation of Rule 19(2)(b) from SEBI through the designated Stock Exchange

Application to Stock exchange for in principle approval for listing of shares

Designated Stock exchange to forward the application to

SEBI for approval under Rule 19 (2)(b) of SCRA Rules

Prepare Information Memorandum (IM)

Compliance with clause 49 prerequisite For Listing

File Information Memorandum with BSE and NSE

Keep share certificates, covering letter, envelop of the resulting companies ready for over printing.

Keep text and stationery ready for intimation of corporate actions for the Resulting Companies

Letter relating to cost of Acquisition to be sent to Shareholders

Ex Date for Stock Exchange for F & O

Record Date

ACTIVITIES FROM RECORD DATE TILL LISTING:

Procure details of Register of Members from R&T agent as on Record Date

Prepare list of eligible shareholders of the resulting companies, including details of the shareholding

Hold Board Meeting of Resulting Companies for allotment of shares

File Form 2 with ROC

COMPLIANCES RELATING TO DE-MERGER:

Resulting Companies to submit the Corporate Action

Forms to depositories and pay fee for the same

Over Printing of share certificates, cover letter, envelops and Dispatch of Share certificates or demat credit of equity shares of the resulting companies.

Dispatching share certificate

Send intimation to the shareholders of each of the resulting companies regarding the corporate Action

Application to Stock exchange, attaching dispatch certificate/demat credit certificate and copy of advertisement, for trading permission

Publication of the Advertisement (as per Schedule 28 of SEBI DIP Guidelines) in one English daily, Hindi Daily and Regional Daily

Trading of shares at Stock Exchange

DOCUMENTS TO BE FILED ALONG WITH COMPANY APPLICATION WITH THE HIGH COURT:

Application is to be filed with the High Court where the Registered Office is situated for directions to convene a meeting for considering the draft Scheme of Demerger or for dispensing with the meeting. The following documents are necessary at this stage:

Judges Summons under Order XIV read with Rule 67 (or Rule 9, 11(b) & 19) read with Sections 391 to 393 and 394 of the Companies Act (to be filed in Form No. 33 of the Companies (Court) Rules, 1959).

An affidavit in support of summons in Form No. 34 of the Companies (Court) Rules, 1959.

Memorandum and Articles of Association of the company.

Latest Audited Balance Sheet.

List of Shareholders (if meetings are to be dispensed with).

List of Secured Creditors.

Scheme of Demerger.

Consent affidavits from all shareholders (if meetings areto be dispensed with).

Consent letters from secured creditors.

If the company does not have any secured creditor, a certificate to that effect from the statutory auditor must be obtained.

Valuation Report regarding share exchange ratio.

Extract of the Board Resolution approving the draft Scheme of Demerger.

Draft notice of meeting, Explanatory Statement pursuant to Section 393 of the Companies Act, form of proxy (In case meetings are convened)

COURT PROCEDURE TIME FRAME:

Submission of application under section 391 along with affidavit (F-34) in terms of Companies (Court) Rules, 1959:

Notice and the explanatory statement under section 393

Obtain summon for direction in F-35 in terms of Companies (Court) Rules, 1959

Settlement of notice convening shareholders meeting

Dispatch of notice to the shareholders

Publication of notice convening shareholders meeting

Submission of 3 copies of the published notice to stock exchangeChapter 88.Trends in Amalgamation & demerger

In the recent years India has witnessed tremendous growth in the number of mergers, acquisitions, and amalgamations. The trend is dramatically growing with the increase in cut throat competition and the moreover with the globalization of business.

At present India has become a major country entering into cross border transactions with regards to business amalgamations. Some of the known examples of amalgamation in India are as follow:

. Tata Steel acquired UK based Corus Group at a deal value of US $ 12 million. . Suzlon Energy acquired Belgium based Hansen Group at US $ 565 million.

. HPCL targeted Kenya Petroleum Refinery Ltd at US $ 500 million.

. Ranbaxy Labs at a deal of US $ 324 million acquired Romania based Terapia SA.

. Videocon acquired Thomson SA of France at about US $ 290 million.

. Hindalco targeted Canada to acquire Novelis at US $ 5982 million.

. Tata Chemicals acquired British salt based in UK with a deal of US $ 13 billion.

. Reliance Power and Reliance Natural Resources combined their operations at a deal of US $11 billion.

. Airtel acquired Zain in Africa with an amount of US $ 10.7 billion.

. ICICI Bank acquired Bank of Rajasthan at about Rs 3000 Crore.

. Fortis Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd for around Rs 882 Crore.

. Wipro bought US based InfoCrossing at US $ 600 million.

. GTL Infrastructure acquired Aircel Towers at US $ 1.8 billion.

Company Amalgamation in India.Name of the CompanyReasons

A.T.E. trading & Manufacturing Co. Ltd.Amalgamation with Motex Engineering Co. Pvt. Ltd.

Ador Technopack LtdAmalgamation with J.B. Advani & Company Pvt. Ltd.

Akash Housing Ltd.Amalgamation with Vijay Shanthi Builders Ltd.

Alcheme Organics Ltd.Amalgamation with Aarti Industries Ltd.

Allied Resins & Chemicals LimitedAmalgamation with ARCL Organics Limited (an unlisted Company)

Alpha Drug India Ltd.Amalgamation with Punjab Chemicals & Crop Protection Ltd.

Ambuja Cement Eastern Ltd.Amalgamation with Gujarat Ambuja Cement Ltd.

Ambuja Cement Rajasthan Ltd.Amalgamation with Gujarat Ambuja Cement Ltd.

Ambuja Shipyard & Software Ltd.Amalgamation with Galaxy Appliances Ltd.

American Remedies Ltd.Amalgamation with Dr. Reddy's Laboratories Ltd.

Amrapali Developers (India) LimitedAmalgamation with Amrapali Industries Limited

Andhra Valley Power Supply Co. Ltd.Amalgamation with Tata Power Co. Ltd.

Anmol Dairy Ltd.Amalgamation with Dairy Den Ltd.

Annapurna Foils Ltd.Amalgamation with Indian Aluminium Company Ltd.

APR Ltd.Amalgamation with Ballarpur Industries Ltd.

Aristocrat Luggage LimitedAmalgamation with VIP Industries Limited

Arlem Breweries Ltd.Amalgamation with Aurangabad Breweries Ltd.

Arrow Webtex LtdAmalgamation with Creole Holdings Company Private Ltd

Arvind Polycot LimitedAmalgamation with Arvind Products Ltd.

Aryan Pesticides Ltd.Amalgamation with Deepak Nitrite Ltd.

Ashim Investment Co. Ltd.Amalgamation with Bengal & Assam Company Ltd.

Ashok Leyland Finance Ltd.Amalgamation with IndusInd Bank Ltd.

Ashok Leyland Finance Ltd.Amalgamation with IndusInd Bank Ltd.

Asian Coffee Ltd.Amalgamation with Consolidated Coffee Ltd.

Aztecsoft LimitedAmalgamation with Mindtree Limited

Bajaj Hindusthan Sugar & Industries LimitedAmalgamation with Bajaj Hindusthan Limited

Balaji Distilleries Limited (BDL)Merger of the Brewery Division into Chennai Breweries Pvt. Ltd. and merger of residual BDL (Distillery Division) with United Spirits Limited.

Bank of Madura Ltd.Amalgamation with ICICI Bank Ltd.

Bank of Punjab Ltd.Amalgamation with Centurion Bank Ltd.

Bank of Rajasthan LimitedAmalgamation with ICICI Bank Limited

Banswara Textiles Mills Ltd.Amalgamation with Banswara Syntex Ltd.

Bayer Cropscience Ltd.Amalgamation with Bayer (India) Ltd.

Bharat Starch Industries Ltd.Amalgamation with English Indian Clays Ltd.

Birla Century Finance Ltd.Amalgamation with Kesoram Industries Ltd.

Birla Global Finance LtdAmalgamation with Aditya Birla Nuvo Ltd

Bishnauth Tea Ltd.Amalgamation with Eveready Industries India Ltd.

Blow Plast LtdAmalgamation with V.I.P Industries Ltd

Bombay Drugs and Pharmas Ltd.Amalgamation with Strides Arcolab Ltd.

Bombay Paints LimitedAmalgamation with Grauer & Weil (India) Limited

Bongaigaon Refinery & Petrochemicals LimitedAmalgamation with Indian Oil Corporation Limited

Brabourne Enterprises LimitedAmalgamation with RPG Itochu Finance Limited

Brite Automotive and Plastics Ltd.Amalgamation with Bright Brothers Ltd.

Burroughs Wellcome (India) Ltd.Amalgamation with GlaxoSmithkline Pharmaceuticals Ltd.

Casil Health Products Ltd.Amalgamation with Genvista Pharmaceuticals Pvt. Ltd.

Cauvery Sugars and Chemicals Ltd.Amalgamation with EID Parry Ltd.

Ceejay Finance Ltd.Amalgamation with Heritage Packaging Ltd.

Central India Polyesters LtdAmalgamation with Indian Petrochemicals Corporation Ltd

Centurion Bank of Punjab LimitedAmalgamation with HDFC Bank Limited

Charminar Breweries Ltd.Amalgamation with Skol Breweries Ltd.

Cheminor Drugs Ltd.Amalgamation with Dr. Reddy's Laboratories Ltd.

CHI Investments LimitedAmalgamation with RPG Itochu Finance Limited

Chicago Pneumatic Ltd.Amalgamation with Atlas Copco India Ltd.

Ciba India LimitedAmalgamation with BASF India Limited

Clariant (India) Ltd.Amalgamation with Colour - Chem Ltd.

CLC Global Ltd.Amalgamation with Spentex Industries Ltd.

Coastal Papers Ltd.Amalgamation with Andhra Pradesh Paper Mills Ltd.

Cochin Refineries Balmer Lawrie Ltd.Amalgamation with Kochi Refineries Ltd.

Compulink Systems LimitedAmalgamation with Glodyne Technoserve Limited

Consortium Finance Ltd.Amalgamation with Magma Leasing Ltd.

Cynamid Agro Ltd.Amalgamation with BASF India Ltd.

Daurala Organics Ltd.Amalgamation with DCM Shriram Industries Ltd.

Dawn Mills Company LtdAmalgamation with Peninsula Land Ltd.

Delstar Commercial & Finance Ltd.Amalgamation with Vicky Investments Ltd.

Dolphin Laboratories LimitedAmalgamation with Intas Pharmaceuticals Ltd.

Elgi Finance LimitedAmalgamation with Elgi Equipments Limited

Elgi Rubber Company LimitedAmalgamation with Elgi Rubber International Limited

ETC Networks LimitedAmalgamation with Zee Interactive Learning Systems Limited

ETC Networks LimitedAmalgamation with Zee Entertainment Enterprises Limited

ETC Networks Ltd. (old scrip code)Amalgamation with Econnect India Ltd. (Unlisted Company)

FAL Industries LtdAmalgamation with Forbes Gokak Ltd.

FCGL Industries LtdAmalgamation with Gujarat NRE Coke Ltd.

FCL Technologies & Products LtdAmalgamation with Flex Industries Ltd

Fem Care Pharma LimitedAmalgamation with Dabur India Limited

Ficom Organics LtdAmalgamation with Coromandel Fertilisers Ltd.

Fine Drugs and Chemicals Ltd.Amalgamation with Matrix Laboratories Ltd.

Flex Engineering LtdAmalgamation with Flex Industries Ltd

Floatglass India Ltd.Amalgamation with Asahi India Glass Ltd.

German Remedies Ltd.Amalgamation with Cadila Healthcare Ltd.

Gestetner (India) Ltd.Amalgamation with Ricoh India Ltd.

GIS Ltd.Amalgamation with Gillanders Arbuthnot & Co. Ltd.

Global trust Bank Ltd.Amalgamation with Oriental Bank of Commerce Ltd.

Glofame Cotspin Industries Ltd.Amalgamation with Welspun India Ltd.

Graphite India Ltd.Amalgamation with Carbon Everflow Ltd.

Grabal Alok Impex LimitedAmalgamation with Alok Industries Limited

Growmore Solvent Ltd.Amalgamation with Kengold (India Ltd.)

Gujarat Project & Profins Ltd.Amalgamation with Galaxy Appliances Ltd.

Gujarat Propack Ltd.Amalgamation with Cosmo Films Ltd.

Gulf Oil India Ltd.Amalgamation with IDL Industries Ltd.

Gulshan Sugars & Chemicals Ltd.Amalgamation with Gulshan Polyols Ltd.

Harleystreet Pharmaceuticals LimitedAmalgamation with Makers Laboratories Limited

Haryana Breweries Ltd.Amalgamation with Skol Breweries Ltd.

Henkel SPIC India Ltd.Amalgamation with Henkel India Ltd.

Herbertsons LtdAmalgamation with McDowell & Company Ltd

Hind Lever Chemicals Ltd.Amalgamation with