CORPORATE RESTRUCTURING Regulatory framework for Listed Companies & Strategies

1. CORPORATE RESTRUCTURINGRegulatory framework for Listed Companies& Strategies CS CHANDRA AGARWAL PGDM(FIN), CS

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

3. TYPES OF RESTRUCTURING MERGER DEMERGER REDUCTION OF CAPITAL

4. RESTRUCTURING Approving Authorities High Court BIFR

5. MERGER MERGER “Combining of two or more commercial organizations into one in order to increase efficiency and sometimes to avoid competition”. REVERSE MERGER “As a commercial term, it means when a Healthy Company (in terms of size, capital or listing status)is merging in a Weak Company (in terms of size, or unlisted)”. SECTION 391-394 of Companies Act, 1956

6. DEMERGER “Division of a Company with two or more identifiable business units into two or more separate companies ” SECTION – 2(19AA) of Income Tax Act, 1961.

7. REDUCTION OF CAPITAL “Extinguishing or Reducing the paid-up capital, Securities Premium Account or liability of members with respect to their unpaid calls” -AN EFFECTIVE WAY OF INTERNAL RESTRUCTURING SECTION – 100 – 105 of Companies Act, 1956 SECTION 100 to 105 of Companies Act, 1956

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

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

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

11. Listing Agreement Compliances.. contd Clause 24(a) “Company to obtain ‘in-principle’ approval for listing from the exchanges having nationwide trading terminals where it is listed, before issuing shares or other securities to the shareholders of Transferor Company.”

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

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

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

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

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

17. Compliance of Other Laws “The Stock Exchange(s) alongside considers the compliance of Securities laws, regulations, rules etc. applicable on the Company and Companies Act also”

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

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

20. I SSUES

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

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

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

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

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

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

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

28. DEMERGER Reliance Capital Ventures Ltd Reliance Natural Resources Ltd

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

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

31. LISTING UNDER CL. 8.3.5.1 OF SEBI (DIP) GUIDELINES EXEMPTION FROM CONDITION OF RULE 19 (2) (b) • Listed Company merging with Unlisted Company. • Demerger of a Listed Company, the Resultant Company to get the benefit of listing.

32. Listing under Cl. 8.3.5.1 of DIP Guidelines Cont…. • CONDITIONS FOR AVAILING EXEMPTION • Shares have been allotted by the unlisted company (transferee-company) to the holders of securities of a listed company (transferor-company) pursuant to a scheme of reconstruction or amalgamation under the provision of the Companies Act, 1956, and such scheme has been sanctioned by the High Court/s of Judicature. • At least 25% of the paid-up share capital, post scheme, of the unlisted transferee-company seeking listing comprises shares allotted to the public holders of shares in the listed transferor-Company.

33. Listing under Cl. 8.3.5.1 of DIP GuidelinesCont…. • The unlisted company has not issued/reissued any shares, not covered under the scheme. • There are no outstanding warrants /instruments/ agreements which gives to any person to take the shares in the unlisted transferee company at any future date. • That the shares of the transferee-company issued in lieu of the locked-in-shares of the transferor-company are subjected to the lock-in for the remaining period.

34. Listing under Cl. 8.3.5.1 of DIP GuidelinesCont…. • Promoters’ shares shall be locked-in to the extent of 20% of the post merger paid-up capital of the unlisted company, for a period of 3 years from the date of listing of the shares of the unlisted company. • The balance of the entire pre-merger capital of the unlisted company shall also be locked-in for a period of 3 years from the date of listing of the shares of the unlisted company.

35. ISSUES

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

37. Case Studies

38. Reliance Industries Limited - A Unique Scheme of Arrangement- • PRE –ARRANGEMENT SCENARIO • Reliance Industries Limited was engaged in various businesses: • Coal based power business; • Gas based power business; • Financial services business; • Tele-Communication business FACTS

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

40. RIL… demerger • As a result of demerger the shareholders of Reliance Industries Ltd. other than “Specified Investors” got one share each in the following four resulting companies for each share held in RIL as on the record date: • Reliance Energy Venture Ltd. (REVL) • Reliance Communication Venture Ltd. (RCOVL) • Reliance Capital Venture Ltd. (RCVL) • Reliance Natural Resources Limited (RNRL) • The shares of all these resulting companies got listed on the stock exchanges under the provisions of Cl 8.5.3.1 of the SEBI (DIP) Guidelines.

41. Benefits achieved……..

42. REDUCTION OF CAPITAL

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

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

45. RESTRUCTURING STRATEGIES What's Your Move??

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

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

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

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

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