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Issues
(1) Advise on financial and other strategic issues relating to Demerger (2) The process of demerger (3) Drafting of the Joint Venture Agreement (4) Formation of JVC & commencement of operations. (5) Conversion of a company into a wholly owned subsidiary (WOS) (6) Drafting of Stock Purchase Agreement (7) Issues relating to :
(1) (2) (3) (4) (5) Sales Tax / Income Tax / Stamp Duty / FEMA-RBI and Accounting treatment
S-Global Consulting / pramod7jain@vsnl.net 2
1.Financial and strategic issues relating to Demerger for both Piaggio and Greaves
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 3
1. 2. 3. 4. 5. 6. 7.
Piaggio
Entry in Indian Market Ready to use manufacturing facilities Partner with understanding of Indian Market Ready marketing set up Other infrastructure Influential partner Recovery of initial investment by Technical Know how fees and supply of Plant & Equipment
Greaves
1. Stop bleeding 2. Profitable sale of the plant 3. Partnership with international major 4. Good investment opportunity 5. Revenue from sharing of infrastructure 6. Assured customer for the engine supplies
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Approaches to Demerger
1. Process of Demerger under Section 293 (1)(a), referred as Slump Sale 2. Spinning off of one or more of the undertakings into another company. (Section 391-394), referred as Demerger.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 5
1. Shareholding pattern 2. Future Financing pattern 3. Management of JVC 4. Restriction on Transfer of shares 5. Deadlock Resolution 6. Activities 7. Pre-closing
covenants
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2. Annexure B
Industries where FDI is allowed with Sectoral caps
3. Press Note 18
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 18
Indian Partner:
Application to ROC Receive Incorporation Certificate Pay equity subscription Receive Consideration from the JVC Handover the Unit to the JVC
2.
JVC:
Hold first Board Meeting for initial matters
Appointment of Auditors Open Bank Account Appoint Directors Allot shares and Issue Share Certificates
Pay consideration for Auto Unit Acquire the Auto Unit Commence operations Transfer of MIDC Land Tripartite Agreement with SICOM
S-Global Consulting / pramod7jain@vsnl.net 19
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Resolution for name change Convening of EOGM for the above on the same day.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 27
5. Closing
Nominees of Selling partner (Greaves) resign Consideration is paid by the Buyer (Piaggio) to Seller through a mandate to the Bank S T D is handed over by the Seller to the Buyer
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 28
6. BOD - II of JVC:
Resignation of the Nominees of the Selling partner (Greaves) accepted The Share Transfer endorsed in favour of the Acquiring partner (Piaggio) Reconstitution of Board by the Piaggio India Pvt. Ltd.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 29
6.
1. Price of the share 2. Duties and obligations of the Buyer (Piaggio) 3. Duties and obligations of the Seller (Greaves) 4. Closing date 5. Closing covenants 6. Other incidental clauses
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 32
1. Sales Tax
The entire undertaking is sold as a going concern on as is where is basis. It is a slump sale. Slump Sale was exempt from Sales Tax. Sales Tax now has been replaced by VAT.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 34
2. Income Tax
Was it a Slump Sale or Demerger under Section 391-394 of the Companies Act?
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400 40 75 65 34%
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Question
In case an undertaking is transferred against the allotment of shares in the acquiring company and not against cash payment, would such a transaction qualify as a Slump Sale under the Act?.
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What is the cashflow impact on the Transferor company in case of Slump Sale and Demerger?
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Chargeability of Slump Sale under Income Tax Any profit arising from the Slump Sale shall be chargeable as capital gains. It shall be deemed to be the income of the PY in which the transaction takes place.
PY , AY , Actg Y , FY
Benefit of Indexation is not allowed. If the undertaking is owned and held by the assessee for not more than 36 months, it shall be treated as short-term capital asset.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 48
Undertaking defined for Slump Sale [(Section 2(42C)] Undertaking is defined to include any part of an undertaking or a unit or division of an undertaking or a business activity as a whole, but does not include individual assets or liabilities or any combination thereof not constituting business activity. Implication?
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Income Tax provisions in case of a Slump Sale The Transferor company (Greaves) to account for capital gains from the sale of the unit and pay tax thereon. What should be the effect on the Transferee company (JVC)?. Unabsorbed depreciation and brought forward losses relating to the undertaking not transferred under Slump Sale.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 56
What is unabsorbed Depreciation and Unabsorbed Loss and how to compute it?
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 57
3. Stamp Duty
The transfer is liable for stamp duty under the Bombay Stamps Act. Get the Sale Deed adjudicated and pay the Stamp Duty so assessed.
What is adjudication?
Purchase Deed signed between JVC and Greaves was submitted to the Stamps Collectors Office for adjudication and Stamp Duty was paid accordingly @ applicable rate i.e. 5%.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 60
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5. Accounting Treatment
What are the Accounting Standards? Is there any Accounting Standard applicable to Demerger ? AS 14 applicable in respect of Amalgamations.
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Transferee (JVC) to take the assets and liabilities on record in its books and reduce the bank balance by the amount of consideration paid to Greaves by passing a Journal Entry.
What should be the Journal Entry?
Value of the net assets received was Rs. 28.0 crore and the price paid was Rs. 32.0 crore. How would you account for the difference?
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 63
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What if the same assets would have been bought at Rs. 700 crores, how the Balance Sheet of Sunil Bharti would look like .
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Demerger
Spinning off of one or more of the undertakings into another company. (Section 391-394).
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Refinery Div.
August 17, 2007
Telecom Div.
Capital Div.
Infrastructure Div.
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Reliance Communication
Reliance Infrastructure
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File affidavits with the high courts confirming fulfillment of the HC directives HC to direct for filing of the demerger petition File demerger petition
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 75
Release Notice in the papers Hearing Takes place, HC passes the order Stamping of the Order if applicable / Adjudication File the Order with the ROC The Demerger becomes effective with filing of the High Court Order with ROC. Initiate consequent steps
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 76
Income Tax provisions of Demerger under the Income Tax Act, 1961
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 77
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c) So much of the general purpose or multipurpose borrowings 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 the demerged company immediately before the merger.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 82
Liability Examples
a) A Term Loan of Rs. 500 cr. was taken from FIs for financing the assets of the undertaking transferred to the Resulting company. FIs have a pari passu first charge on these assets of the undertaking. Carrying amount of these assets on the effective date is Rs. 300 cr where the amount of loan outstanding on that is Rs. 250 cr.. b) Comment on the transferability of the assets and liabilities in this case?.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 83
Liability Examples
a) The demerged company had availed working capital facility of Rs. 400 cr. from a consortium of bankers for financing the working capital of the entire demerged company including the resulting company. Total working capital of the demerged company was Rs. 800 cr. Out of which the resulting company accounted for Rs. 200 cr. On the date of the demerger the entire WC facility was utilised by the demerged company. The resulting companys share in such utilisation was in the proportion of its WC to the WC of the demerged company as a whole. How much of the Working Capital loan and the Current Assets would be transferred in this case to the Resulting Company?.
b) c)
d)
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Accounting in case of Demerger involves the following Removal of assets and liabilities from the Balance Sheet of the Demerged Company. Adjustment to the General Reserves amount of the Demerged company. Accounting of the assets and liabilities by the Resulting company in its Balance Sheet Issuance of fresh share capital by the Resulting company and accounting for the same in its books.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 87
Balance Sheet of XYZ Ltd. Liabilities Resulting Co. Share Capital General Reserves Term Loans Bank Borrowings Creditors 400 300 700 600 500 1100 Amount Demerged Co. Total 1000 3000 3000 1000 800 8800 1800 7000 8800 Current Assets 800 5000 5800 Fixed Assets Assets Resulting Co. 1000 Amount Demerged Co. 2000 Total 3000
From the above table, determine the ratio in which shares will be issued by the Resulting company to the shareholders of the Demerged Company
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 88
Determine the amount by which the General Reserves of the Demerged Company will reduce.
August 17, 2007 S-Global Consulting / pramod7jain@vsnl.net 90
A demerger transaction fulfilling the conditions of Section 2(19AA) is free from capital gains tax both with respect to: The transfer of assets and
No CG Tax on the Demerged Entity
2.
Section 2(22) of the Act has been amended to provide that the issue of shares directly to the shareholders pursuant to the demerger of an undertaking will not constitute deemed dividend. Implication?
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Depreciable assets base for tax purposes in the hands of the resulting company would be tax written down value in the hands of the demerged company.
Tax Written Down Value of the assets being transferred to the RESCO on the date of demerger is Rs. 350 cr. This will become depreciable assets base in the hands of RESCO upon the demerger.
The tax depreciable assets base for the demerged company will be reduced by the tax written value of the assets transferred in the demerger process.
The tax depreciable assets base of the DEMCO prior to demerger was Rs. 1000 cr. Out of this, Rs. 350 cr has been transferred to the RESCO. The tax depreciable assets base of the DEMCO now stands reduced to Rs. 650 cr.
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How will you determine the cost of acquisition of shares in the resulting company since the shareholder does pay a dime?.
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What is the difference in tax treatment in case of Slump Sale and Demerger?
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