8/12/2019 Module-2 CR

1/34

Corporate Restructuring

Module 2

8/12/2019 Module-2 CR

2/34

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

8/12/2019 Module-2 CR

3/34

Accounting for M & A

Amalgamation or Business Combination

Transferor Company

Transferee Company Mergers

Acquisitions

Uniting of Interest Reserve

Purchase Consideration

Fair Value

212

8/12/2019 Module-2 CR

4/34

Amalgamation Types

Amalgamation in the nature of Merger

Amalgamation in the nature of Purchases

8/12/2019 Module-2 CR

5/34

Accounting Classification of

Amalgamation

A. The pooling of interests method

B. The purchase method

8/12/2019 Module-2 CR

6/34

Pooling of Interest Method (In

case of Merger)

i. Assets and liability recorded at existing carryingamount

ii. Reserves carried at existing figures

iii. P & L either aggregated or transferred to GR

iv. Difference of consideration adjusted in reserve

v. If conflict in accounting policies, it must dealthwith AS5.

8/12/2019 Module-2 CR

7/34

Purchase Method

i. Assets and liability recorded at existing carryingamount or values at the date of amalgamation

ii. Reserves not carried out except StatutoryReserve

iii. Difference of consideration adjusted asgoodwill and it must be amortised

iv. If consideration is lower than the value of netassets, difference treated as capital Reserve

v. If conflict in accounting policies, it must dealthwith AS5.

8/12/2019 Module-2 CR

8/34

If Amalgamation is in the Nature

of Merger

Share capital issued by absorbing company ----

- Total share capital taken over ----

Transferred to General Reserve ----

8/12/2019 Module-2 CR

9/34

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 AssetsPurchase consideration

8/12/2019 Module-2 CR

10/34

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

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Equ.share of 10 10,00,000 6,00,000 Land and Building 5,00,000 3,10,000

12% Pref share@10 4,40,000 3,40,000 Plant and machinery 6,50,000 3,40,000

General Reserve 1,00,000 50,000 Furniture 1,15,000 70,000

Export Profit Reserve 60,000 40,000 Investments 1,40,000 1,00,000

Invt. Allowance Reser - 20,000 Stock 2,50,000 1,90,000

Profit and Loss A/c 1,50,000 1,00,000 Debtors 1,80,000 2,06,000

14% Debenture@100 1,00,000 70,000 Cash and Bank 1,45,000 1,04,000

Creditors 90,000 70,000

Other curr.liability 40,000 30,000

19,80,000 13,20,000 19,80,000 13,20,000

8/12/2019 Module-2 CR

11/34

Adjustment1. 70,000 equity shares of Rs. 10 each fully paid to equity

shareholders of B Ltd.2. 14% preference shares of Rs. 100 each to make

payments to preference shareholders of B Ltd. at apremium of 10%

3. Debentures of B Ltd. were converted into equalnumber of debentures of A Ltd.

4. The statutory reserves of B Ltd. are still to be retained

for 2 more years.(a) Prepare b/s if amalgamation is in the nature of Merger

(b) Prepare b/s if amalgamation is in the nature of

Purchase.

8/12/2019 Module-2 CR

12/34

Computation of Purchase

Consideration

Fair Value Measurement

Tangible & Intangible Assets, Stock, QuotedInvestment, Monetary Assets and liabilities

Treatment of Goodwill

To amortise over a period not exceeding 5 yrs

8/12/2019 Module-2 CR

13/34

Computation of Purchase

Consideration

M & A Expenses

It should be charged to P & L A/c of theCombined Entity

Treatment of Reserves

8/12/2019 Module-2 CR

14/34

Accounting of Demerger

8/12/2019 Module-2 CR

15/34

Legal Aspects of Demerger

Assets and Liabilities transferred by theDemerged Company becomes the property ofthe resulting company

Transferred at values appearing in its books

In consideration, the shares issued onproportionate basis

Transfer of undertaking is on Going ConcernBasis

8/12/2019 Module-2 CR

16/34

Taxation Aspects of Demerger

Taxation of Shareholders in DemergedCompanyNo dividend and capital Gain

Tax benefit

Expenses are allowed 20% year from year

Depreciation shall be apportioned

The accumulated losses and unabsorbeddepreciation shall be allowed to be Carriedforward

8/12/2019 Module-2 CR

17/34

The Competition Act, 2002

To establish commission to prevent practiceshaving 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.

8/12/2019 Module-2 CR

18/34

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 latethan 4 working days of an agreement foracquisition of shares

Within 14 days from the date of announcement,a draft of letter of offer at minimum price has tobe filed with SEBI

8/12/2019 Module-2 CR

19/34

Company Laws for M & A

8/12/2019 Module-2 CR

20/34

Laws Governing Mergers

A. The Indian Companies Act, 1956

B. Industries Development and Regulation Act ,1951

C. Income Tax Act, 1961

D. Monopolies and Restrictive Trade practices

Act, 1969E. FEMA

F. Sick Industrial Companies Act, SICA, 1985

8/12/2019 Module-2 CR

21/34

Share Buyback Guidelines

8/12/2019 Module-2 CR

22/34

Methods of Buyback

1. Tender Offer Method

2. Open Market Offer Method

8/12/2019 Module-2 CR

23/34

New Policy for Buy Back

The legal Aspects of Share Buyback in India

8/12/2019 Module-2 CR

24/34

The Legal Aspects

A. Maximum Permissible Buyback

25% of total paid up capital and reserves

B. Available resources permitted for buy-backFree reserves, Securities premium a/c

C. Extinguishment or Cancellation of shares

8/12/2019 Module-2 CR

25/34

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

8/12/2019 Module-2 CR

26/34

The Legal Aspects

E. Declaration of Solvency

F. Sources from where shares can be purchased

1. Existing shareholders on pro-rata

2. Tender Offer

3. Open Market

4. Odd lots

5. Stock option or Sweat Equity

8/12/2019 Module-2 CR

27/34

Procedure for Buyback

1. Board Resolution and public announcement

2. Specific Date

3. Letter to SEBI4. Not less than 15 Days and not more than 30

5. Open a Escrow account

8/12/2019 Module-2 CR

28/34

Advantages of Buybacks

1. Prevents Undervaluation

2. Use of surplus fund

3. Promoters increases control4. Tool to increase shareholders value

8/12/2019 Module-2 CR

29/34

Disadvantages of Buybacks

1. Shareholders may be deprived of

2. Promoters may manipulate share prices

3.

No fixed commitment

8/12/2019 Module-2 CR

30/34

Motives Behind Buybacks

1. Return of surplus cash to shareholders

2. Enhancement of the EPS

3.

Argument for undervaluation of shares4. Increase of Promoters Voting power

5. Anti-takeover defense

8/12/2019 Module-2 CR

31/34

Tax Treatment of Buyback of

Shares

1. Sec 46 A, inserted in IT Act to treat theconsideration received by shareholders fromany company on purchase of its own shares as

Capital Gain.

8/12/2019 Module-2 CR

32/34

Accounting for Buyback

1. Buyback financeFree reserve or Securitypremium

2. Sum to be transferred to Capital RedemptionReserve

8/12/2019 Module-2 CR

33/34

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 reserveReserve A/c Dr.

To Capital Redemption Reserve A/c

8/12/2019 Module-2 CR

34/34

Calculation of Exchange Ratio