Corporate Restructuring

Module 2

Module 2

Accounting for Mergers & Demergers Company Law and Competition Act, 2002 SEBIs rules & regulation for M & A Share Buyback guidelines Tax Implications Calculation of Exchange ratio

Accounting for M & A

Amalgamation or Business Combination Transferor Company Transferee Company Mergers Acquisitions Uniting of Interest 212 Reserve Purchase Consideration Fair Value

Amalgamation Types

Amalgamation in the nature of Merger Amalgamation in the nature of Purchases

Accounting Classification of Amalgamation

A.

B.

The pooling of interests method The purchase method

Pooling of Interest Method (In case of Merger)

i. ii. iii. iv. v.

Assets and liability recorded at existing carrying amount Reserves carried at existing figures P & L either aggregated or transferred to GR Difference of consideration adjusted in reserve If conflict in accounting policies, it must dealth with AS 5.

Purchase Method
i.

ii.

iii.

iv.

v.

Assets and liability recorded at existing carrying amount or values at the date of amalgamation Reserves not carried out except Statutory Reserve Difference of consideration adjusted as goodwill and it must be amortised If consideration is lower than the value of net assets, difference treated as capital Reserve If conflict in accounting policies, it must dealth with AS 5.

If Amalgamation is in the Nature of Merger

Share capital issued by absorbing company ---Total share capital taken over ---Transferred to General Reserve ----

If Amalgamation is in the Nature of Purchase

Purchase Consideration Shares issued to equity shareholder of absorbed company ---Pref.shares of absorbed company --- Net Assets Assets taken over ---Less: Liabilities Creditors Debentures Other Current Liabilities ----Capital Reserve = Net Assets Purchase consideration

A Ltd. and B Ltd. decides to amalgamate. A ltd. takes over B Ltd.

Liabilities Equ.share of 10 12% Pref share@10 General Reserve Export Profit Reserve Invt. Allowance Reser Profit and Loss A/c 14% Debenture@100 Creditors Other curr.liability A Ltd. 10,00,000 4,40,000 1,00,000 60,000 1,50,000 1,00,000 90,000 40,000 B Ltd. 6,00,000 3,40,000 50,000 40,000 20,000 1,00,000 70,000 70,000 30,000 Assets Land and Building Plant and machinery Furniture Investments Stock Debtors Cash and Bank A Ltd. 5,00,000 6,50,000 1,15,000 1,40,000 2,50,000 1,80,000 1,45,000 B Ltd. 3,10,000 3,40,000 70,000 1,00,000 1,90,000 2,06,000 1,04,000

19,80,000

13,20,000

19,80,000

13,20,000

Adjustment
1. 2.

3.

4.

(a) (b)

70,000 equity shares of Rs. 10 each fully paid to equity shareholders of B Ltd. 14% preference shares of Rs. 100 each to make payments to preference shareholders of B Ltd. at a premium of 10% Debentures of B Ltd. were converted into equal number of debentures of A Ltd. The statutory reserves of B Ltd. are still to be retained for 2 more years. Prepare b/s if amalgamation is in the nature of Merger Prepare b/s if amalgamation is in the nature of Purchase.

Computation of Purchase Consideration

Fair Value Measurement Tangible & Intangible Assets, Stock, Quoted Investment, Monetary Assets and liabilities Treatment of Goodwill To amortise over a period not exceeding 5 yrs

Computation of Purchase Consideration

M & A Expenses It should be charged to P & L A/c of the Combined Entity Treatment of Reserves

Accounting of Demerger

Legal Aspects of Demerger

Assets and Liabilities transferred by the Demerged Company becomes the property of the resulting company Transferred at values appearing in its books In consideration, the shares issued on proportionate basis Transfer of undertaking is on Going Concern Basis

Taxation Aspects of Demerger

Taxation of Shareholders in Demerged Company No dividend and capital Gain Tax benefit Expenses are allowed 20% year from year Depreciation shall be apportioned The accumulated losses and unabsorbed depreciation shall be allowed to be Carried forward

The Competition Act, 2002

To establish commission to prevent practices having adverse effect on competition To promote and sustain competition in markets To protect the interest of consumers To ensure freedom of trade carried on by any other participants in India.

SEBI (Substantial Acquisition of shares and takeovers) Regulations, 1997

It was reinforced to regulate the takeover bids. Appoint a merchant banker The public announcement shall be made not late than 4 working days of an agreement for acquisition of shares Within 14 days from the date of announcement, a draft of letter of offer at minimum price has to be filed with SEBI

Company Laws for M & A

Laws Governing Mergers

A.

B.

C. D.

E.
F.

The Indian Companies Act, 1956 Industries Development and Regulation Act , 1951 Income Tax Act, 1961 Monopolies and Restrictive Trade practices Act, 1969 FEMA Sick Industrial Companies Act, SICA, 1985

Share Buyback Guidelines

Methods of Buyback
1.

2.

Tender Offer Method Open Market Offer Method

New Policy for Buy Back

The legal Aspects of Share Buyback in India

The Legal Aspects

A.

B.

C.

Maximum Permissible Buyback 25% of total paid up capital and reserves Available resources permitted for buy-back Free reserves, Securities premium a/c Extinguishment or Cancellation of shares

The Legal Aspects

D.

Procedural Requirements Authorized by Articles Special resolution in GM No default in repayment No default in complying with the provisions Must be fully paid up

The Legal Aspects

E.

F.

Declaration of Solvency Sources from where shares can be purchased

Existing shareholders on pro-rata Tender Offer Open Market Odd lots Stock option or Sweat Equity

1. 2. 3. 4. 5.

Procedure for Buyback

1.

2.
3. 4. 5.

Board Resolution and public announcement Specific Date Letter to SEBI Not less than 15 Days and not more than 30 Open a Escrow account

Advantages of Buybacks
1.

2.
3. 4.

Prevents Undervaluation Use of surplus fund Promoters increases control Tool to increase shareholders value

Disadvantages of Buybacks
1.

2.
3.

Shareholders may be deprived of Promoters may manipulate share prices No fixed commitment

Motives Behind Buybacks

1.

2.
3. 4. 5.

Return of surplus cash to shareholders Enhancement of the EPS Argument for undervaluation of shares Increase of Promoters Voting power Anti-takeover defense

Tax Treatment of Buyback of Shares

1.

Sec 46 A, inserted in IT Act to treat the consideration received by shareholders from any company on purchase of its own shares as Capital Gain.

Accounting for Buyback

1.

2.

Buyback finance Free reserve or Security premium Sum to be transferred to Capital Redemption Reserve

Accounting for Buyback

1.

For the amount payable on buyback Equity Share Capital A/c Dr. Reserves (Premium) A/c Dr. To Equity Shareholders A/c For transfer to capital redemption reserve Reserve A/c Dr. To Capital Redemption Reserve A/c

Calculation of Exchange Ratio