CASE:“There is a company which wants to hive off one of its units (you can presume your own reason for hive off) how can u hive off this unit - what strategies will u adopt will u go for slump sale, individual asset sale, or any other strategy”

Presented By : Darshna ChandeGagan Pareek

Parvez RangwallaSainatth Wagh

Sameer Sanghavi

ABC Healthcare:ABC healthcare is a Public limited company listed (NSE & BSE)The Parent Company ABC limited holds 52.1% of stake in ABC

healthcare.Low cost research and manufacturing abilities. largest custom manufacturing companies in India.ABC requires Cash for other activities.Market highly competitive , many bidders for acquiring business.

Brief SnapshotAcquirer XYZ Healthcare Private Limited, Karnataka IndiaSeller ABC Healthcare , Karnataka India

Assets acquired

Domestic Formulation Business (including mass market) which manufactures, markets and sells branded pharmaceutical products in finished form

Consideration USD 3.72 billion (approx. INR 175 billion)

XYZ Healthcare: XYZ Healthcare Pvt. Ltd is a wholly owned subsidiary of XYZ (NYSE)XYZ healthcare is not listed in India.Nature of business:-

Drug Discovery, Manufacture and Sale of healthcare products.Strategic move to gain benefits of progress in emerging market.Desires to expand geographical boundaries

Emerging markets will grow by 14% to 17% between now and 2014, compared with 3% to 6% in developed markets, according to an April 2010 report from IMS Health.

India`s pharmaceuticals market is expected to reach USD 20 billion and become one of the world`s top 10 pharmaceutical markets, overtaking Brazil, Mexico, South Korea and Turkey

Option 1: Slump Sale as an Alternative

XYZ, USA

XYZ Healthcare Pvt. Ltd.

ABC Group (Promoter Group)

Formulation Business

ABC Healthcare Ltd.

USA

India

100%52.1%

47.9%Cash USD3.72 Bio.

Business Transfer

Slump Sale- Legal Requirements:

Section 293(1)(a) of the companies act requires every company to obtain prior approval of its shareholders to undertake this activity. Approval is through simple majority. This kind of business transfer is not to be approved by HC.Legally it is possible for the promoters of ABC Healthcare to participate & vote on this resolution of business transfer. Approval of creditors will be contractually required depending on the terms & conditions of the respective loan agreement.

Slump Sale- Tax Implications:

A. Capital Gains tax: ABC healthcare will have to pay Capital Gains tax at 22.14% (Since, the period of holding is more than 36 months).(It would have been 33.22% in case period of holding would have been less than 36 months).

Capital gains from Business transfer = Sale Consideration – Net Worth of Formulation Business

A. Capital Gains tax: Capital gains from Business Transfer:

XYZ Healthcare proposes to pay ABC Healthcare USD 3.72 billionThe Net Worth of Formulation Business of ABC healthcare is about 0.140 million. Capital Gain arising from this business transfer= (3.72 – 0.14) = USD 3.57 billion.So, Capital Gains tax will be applicable on USD 3.57 billion.

Since, period of holding is more than 36 months hence, capital gains tax will be applicable at rate 20% + 7.5% surcharge + 3% education cess(approx. 22.14%).

Net tax amount = USD 3.57 billion x 22.14% ≈ USD 0.8 billion.

Payment of Consideration:USD 3.72 billion.Upfront payment: USD 2.12 billionFuture payment: USD 400 million payable upon each of the subsequent four anniversaries of the closing commencing in 2011.Mode of funding:Cash on balance sheet of XYZ healthcare Pvt Ltd.

B. VAT:VAT will not be applicable since, business is sold on going concern basis.

C. Stamp Duty:Stamp duty at 6% of the market value of the property.Approximate value of assets is USD 200 million.Stamp duty will be ≈ USD 12 million (max value).

XYZ, USA

XYZ Healthcare Pvt. Ltd.

ABC Group (Promoter Group)

Business Transfer ABC Healthcare Ltd.

USA

India

100%

Issuance of New Equity shares as consideration for demerger

Demerger

Option 2: Demerger as an Alternative

Formulation business can be demerged from ABC Healthcare & transferred as going concern into:1.XYZ Healthcare Ltd.2.Into a new company floated by XYZ Healthcare or XYZ, USA.

This type of demerger would require approval of the shareholders & creditors of both the demerged & resulting entity and should also be approved by the high court.

All the assets liabilities pertaining to the formulation business will have to be transferred to XYZ Healthcare or the New Co. as the case may be, to ensure compliance with the requirements of section 2(19AA) of IT act.

As consideration for the demerger under the scheme, XYZ healthcare or New Co. as the case may be shall issue its share to all the shareholders of the ABC Healthcare based on a predetermined valuation.

The benefits of the demerger under the IT act would be available only when the consideration for demerger are shares not cash.

Demerger- Legal Requirements:

Issuance of shares pursuant to a scheme of arrangement under section 391-394 is an exempted transaction under the SEBI takeover code.

Tax Implications:

No capital gains tax liability for ABC Healthcare on satisfaction of specified conditions.(Conditions for tax-neutral demerger satisfied)

ABC Healthcare eligible to claim depreciation on assets transferred in proportion to number of days held

De-merger expenses can be amortized by ABC Healthcare over 5 years

Losses if any of the formulation business would be available for set-off to the New Co / XYZ Healthcare as the case may be.

Tax Implication for shareholders:

Gains on issue of shares by New Co, to Promoters not taxable

VAT:

No VAT since, business is transferred as a going concern

Stamp Duty:

De-merger to attract stamp duty, being higher of: 3% of market value of property transferred by ABC Healthcare;

(3%xUSD 200 Mio = USD 6 Mio.) Or

0.7% of aggregate value of shares issued and in addition, the amount of consideration paid, if any

(0.7%x USD 3.72 Bio ~ USD 26 Mio.)

Time frame required will be 6-9 months.

Option 3: Individual Asset Sale as an Alternative

XYZ, USA

XYZ Healthcare Pvt. Ltd.

ABC Group (Promoter Group)

Formulation Business

ABC Healthcare Ltd.

USA

India

100%52.1%

47.9%

Itemized SaleSelling Assets individually

Tax Implications:

1) Capital Gains Tax:High capital gains tax at transfer of building at market value (USD 150 mio) Net value of building is USD 350 mio (USD 350 * 22.14% = USD 116.27 mio)Depreciable assets such as machinery will be treated as short term capital assets and taxed 33.22%. (Net value USD 300 mio) (USD 300 * 33.22% = USD 99.66 mio)Non-depreciable assets such as land will be treated as long term capital assets and taxed at 22.14%. (Net value USD 145 mio) (USD 145 mio * 22.14% = USD 32.16 mio)Sale of stock in trade will be taxed at 33.22%.(Net value USD 35 mio) (USD 35 mio * 33.22% = USD 11.627 mio)

2) VAT:Immovable properties like building and land should not attract VAT.Sale of movable properties like machinery would attract VAT 5%

(USD 350 mio * 5% = USD 17.5 mio)

3) Stamp Duty:Stamp duty at 6% of property at market value.

So (USD 350 mio * 6% = USD 21 mio)

ComparisonTax and Regulatory

Implications Demerger Slump Sale Itemized sale

Capital Gains tax 1) Cash - (20 - L / 33 - S) 1) 20 - L / 33 - S 1) 20 - L / 33 - S 2) Share - NA -

Business Income tax - - on stock-in-trade

VAT - -Yes – on movable

assets

Stamp dutyYes – can, however, be claimed deductible for Income-tax purposes

Yes – may not be tax

deductible (6 %)Yes – may not be

tax deductible

Approval requirements Board of DirectorsBoard of Directors Board of Directors

Shareholders Creditors High Court

Timelines 6 to 9 months 4 to 6 weeks 2 to 3 weeksCash accumulation at ABC

level No Yes Yes

ComparisonTax and Regulatory

Implications Demerger Slump Sale Itemized sale

CONSIDERATION 1) Cash - USD 0.8 BL Cash - USD 3.72 bl CASH – 3.92

CAPITAL GAIN 2) Share - NA 22.14% * USD 3.57 bl 22.14/33%

USD 0.8 bl USD 0.8 bl USD 0.9 bl

Business Income tax - - USD 0.0162 bl

VAT - - USD 0.0175 bl

Stamp duty USD 0.026 bl USD 0.012 bl USD 0.21 bl

Approval requirements Board of Directors Board of Directors Board of Directors

Shareholders

Creditors

High Court

Timelines 6 to 9 months 4 to 6 weeks 2 to 3 weeks

Cash accumulation at ABC level No USD 3.72 bl USD 3.92 bl

Total Tax 1) Share - USD 0.026 bl USD 0.812 bl USD 1.143 bl 2) Cash USD 0.826 bl

Deal Benefits:

Thank You