Family Settlement through Restructuring - huConsultancy

1. Family Settlement through Restructuring A Mumbai based leading Merchant Banker was carrying on the business through the two legal entities (A) and (B). A was primarily involved in a business of Stock Broking and Primary issue marketing Whereas, B was carrying on the business of Merchant Banking. In addition to above, over the period both the companies invested the surplus fund into listed securities that have now become a sizable part of the Net worth of the companies. Both A and B were being managed by its two promoters – directors only. Key Problems & Issues • Complying with the “Minimum Net Worth Criteria” and “Shareholding Criteria”. • Reward some key senior employees. • Dealing with the Individual Membership cards of promoters. • To have the name of transferee company changed to that of one of the transferor company. Strategic objectives • In order to synergize the Capital Market operations, enhance the quality of service and reduce the cost of operations both the promoters intend to consolidate the service oriented activities under one roof. • Separating the Investment activities and core service activities to have clear management focus. • Reward some key senior employees. • Structuring the deal In a manner that meets all the regulatory requirements – SEBI, Stock Exchange, RBI, Company Law, etc. such as: “Net worth” Criteria. • As per the requirement of SEBI, post restructuring the entity must have minimum net worth of Rs.4000 Lacs. • To have the name of an entity comprising of the service-oriented activities – same as A Pvt. Ltd. Options Analysed The following options were analysed: • Option 1: Demerger of “Merchant Banking Division” of B into A and simultaneously demerging the “Investment Division” of A into B.

2. • Option 2: Demerger of “Stock Broking Division” and “Primary Issues Marketing Division” of A into B and simultaneously demerging the “Investment Division” of B into A. • Option 3: Demerger of “Stock Broking Division” and “Primary Issues Marketing Division” of A into C (a newly formed company) and “Merchant Banking Division” of B into C. • Option 4: Slump Sale of “Stock Broking Division” and “Primary Issues Marketing Division” of A into C (a newly formed company) and “Merchant Banking Division” of B into C. • Option 5: Demerger of “Investment Divisions” of both A and B into C (a newly formed company) and subsequent merger of A into B or vice – a –versa. • Option 6: Slump Sale of “Investment Divisions” of both A and B into C (a newly formed company) and subsequent merger of A into B or vice – a –versa. Our Recommendations Considering the complexity, regulatory hurdles and transaction cost involved under each alternative, Option 3 has been selected. Issues Addressed 1. Complying with the “Minimum Net worth Criteria” and “Shareholding Criteria” To take care of net worth requirements and have a smooth operation of both the business after completion of the demerger, A will subscribe to Preference shares or other instruments at a premium in the New Company. B will also subscribe to the preference shares/other instruments if required to take balance assets transferred from the said company.Later on, some Equity shares (20% of the fully diluted capital of the new company) will be issued to the ESOP Trust at par. Funds required by the Trust will be provided by the New Co. 2. Rewarding some key senior employees No individual employees will be given any shares, but the same will be allotted to the trust and through a scheme, they will be entitled to appreciation rights. The payments towards appreciation to an employee leaving the job will be charged to Profit & Loss Account of the Company. 3. Dealing with the Individual Membership cards of promoters Individual cards of the promoters would be transferred to the new company and the new Company would hold both the registration and merchant banking license under its fold.ORConvert individual membership into corporate membership into one new legal entity with similar ownership pattern and hive off businesses of both existing companies into this new company so that so far as SEBI is concerned it may be treated as corporation of individual membership 4. To have the name of transferee company changed to that of one of the transferor company

3. One clause has been incorporated in the scheme itself, stating that “With effect from the effective date the name of A will be and stand changed to D and that of C will stand changed to A, subject to the conditions that all the necessary actions required to be taken under the Act relating to change of name have complied with. However, approval of the scheme shall be deemed to be the approval for change of name as may be required” Our Service Offerings Mergers and AcquisitionsDivestment Advisory ServicesJoint VenturesFinancial Re-engineering Mergers and acquisitions have become an essential and integral part of corporate strategy and will gain more significance as competition intensifies and companies move up the growth curve. In fact, M&A should grow in magnitude across the scale regardless of type and size of corporate from the blue chips to S&M companies. For more details you can visit our website - http://huconsultancy.com/family- settlement-restructuring/