Nestlé India Limited (‘the Company’) is a public limited company, incorporated on March 28, 1959 under the Indian Companies Act, 1956 (‘the Act’). The equity shares of the Company are listed on BSE Limited (‘BSE’) and National Stock Exchange of India Limited (‘NSE’). The Company is authorised to and is engaged in the business of, inter alia, manufacture and sale of processed foods under several reputed brands.
Proposed Transaction:
The details of the ‘Other Equity’ of the Company, including the General Reserves, as set out in the Balance Sheet of the Company as on 31 December 2020, are as under:
Particulars | Amount (Rs. in Crores) |
General Reserves (as defined and referred to in this Scheme) | 837.43 |
Other Equity Reserve not forming part of the reclassification specified in Part B of this Scheme | |
Retained Earnings | 1,117.52 |
Total Reserves and Surplus | 1,954.95 |
Items of Other Comprehensive Income | (32.03) |
Total Other Equity | 1,922.92 |
The General Reserves of the Company, amounting to Rs. 837.43 Crores as on the December 31, 2020 have been, primarily, built up over the years through the transfer of profits to the reserves by the Company as mandatory condition prior to declaration of dividend in accordance with the provisions of the erstwhile Companies Act, 1956 and the erstwhile rules notified thereunder, namely, the Companies (Transfer of Profits to Reserves) Rules, 1975.
Management of the Company is proposing to enter into an arrangement between the Company and the shareholders of the Company to reclassify the entire amount of Rs. 837.43 Crores standing to the credit of the General Reserves of the Company by transferring the balance to the credit of ‘Retained Earnings’ of the Company as on the Appointed Date. Such transferred balance in the retained earnings of the Company shall constitute accumulated profits of the Company.
Key features of the above Reclassification:
Key features | Transaction: Reclassification of Reserves of the Company |
Appointed Date | January 1, 2022 |
Effective Date | Date of filling of certified copy of approving authority being NCLT with ROC |
Jurisdictional Authority(ies) |
|
Consideration | No consideration shall be discharged by the Company for the reclassification of general reserve |
Accounting Treatment | In the books of the Company – debit General Reserve account against the credit of Retained Earning account |
Taxation | No adverse tax implications Under the provisions of the Income Tax Act, 1961, there are no adverse tax implications upon transfer of balance in General Reserves account to the credit of Retained Earnings Account. |
Pre and Post shareholding patterns of the group companies, pursuant to effectiveness of the Scheme:
Name of the Company | Pre-Scheme Shareholding | Post-Scheme Shareholding | ||
% Promoter Shareholding | % Public Shareholding | % Promoter Shareholding | % Public Shareholding | |
Nestle India Limited | 62.76% | 37.24% | 62.76% | 37.24% |
Purpose of the reclassification:
The Company has demonstrated consistent growth, sustained improvement in profitability and cash generation over the years. The key financial highlights for the past five years that demonstrates strong operating performance of the Company are as follows:
Parameter / Financial Year# | 2020 | 2019^ | 2018 | 2017 | 2016 |
Sales (Rs. in Crores) | 13,290 | 12,295 | 11,216 | 10,135 | 9,410 |
Profit Before Tax (% of Sales) | 21.2% | 21.8% | 21.7% | 18.1% | 15.7% |
Profit After Tax (% of Sales) | 15.7% | 16.0% | 14.3% | 12.1% | 10.6% |
Return on Average Equity | 105.8% | 70.4% | 45.3% | 36.6% | 32.8% |
Operating Cash Flow (Rs. in Crores) | 2,455 | 2,295 | 2,053 | 1,818 | 1,466 |
Earnings Per Share (Rs.) | 216.00 | 204.2 | 166.7 | 127.1 | 103.9 |
Dividend Per Share (Rs.) * | 200.0 | 342.0 | 115.0 | 86.0 | 63.0 |
Capital Expenditure (Rs. in Crores) | 474 | 152 | 163 | 196 | 113 |
Capex as % of Sales | 3.6% | 1.2% | 1.5% | 1.9% | 1.2% |
Dividend Payout Ratio | 92.6% | 167.4% | 69.0% | 67.7% | 65.6% |
# The Financial Year of the Company is calendar year 1st January to 31st December.
^ Figures have been reinstated in accordance with implementation of Ind AS 116 Leases.
* In 2019, Special interim dividend of INR180 per share paid out of accumulated profits of previous years
As it can be seen from above, the Company has demonstrated consistent growth in sales, maintained strong margin profile. This has helped the Company to maintain a strong track record of operating cash generation and distribution of dividends to its shareholders.
Further, the Company has net cash and cash equivalent and investments of INR 2,477.74 Crores as on December 31, 2020. The Company has financial liabilities – borrowings worth INR 34.84 Crores as on December 31, 2020 which are adequately covered by available cash and cash equivalents. Other than the above, the Company does not have any secured or unsecured loans, fixed deposits or preference shares which entail repayment obligations.
Reclassification of reserves of the Company would enable the Company to deploy the funds lying in the retained earning account for various purposes. The Company intends to deploy the funds after considering the foreseeable investments required for such opportunities over the next few years, barring unforeseen circumstances. Looking at the track record of the Company, management of the Company is quite confidant of meeting its ongoing and future capital expenditure programmes and working capital requirements through generation of own funds and other financing options.
The reclassification of reserves would provide greater flexibility for the utilisation of the funds for distribution as dividend to its shareholders.
Regulatory Considerations:
Under the erstwhile Companies Act 1956, section 205(2A) mandated every Company to transfer a certain percentage of profits to its reserves not exceeding 10% prior to a declaration of Dividend.
Further, under the Companies (Declaration of Dividend out of Reserves) Rules, 1975, in case of dividend distributed out of reserves, rate of dividend declared was restricted to the average of the rates at which dividend was declared by such company in the past 5 years immediately preceding that year or 10% of the paid-up capital, whichever is less.
Under the currently applicable provisions of the Companies Act 2013, section 123 which pertains to declaration of dividend, no such mandatory condition for such transfer has been imposed on the company proposing to declare dividend. Under the Companies Act, 2013, companies have discretion to transfer certain percentage of profits to general reserve.
Thus, prior to enactment of the Companies Act 2013, balance in the General Reserve of several companies (that declared dividend), primarily consisted of the retained earning which was transferred out of the retained earnings / profit & loss account of the company as a mandatory statutory condition under the applicable law.
As in the instant case, it is observed from the table above, the Company has strong track record of declaring dividend. Thus, balance in the General Reserve primarily consisted of such transferred balance from retained earnings. Also, considering that section 123 of the Companies Act 2013 do not require such transfer, now, condition of maintaining general reserve is no longer required.
As the utilisation of such balance in the general reserve could be made for various investment purposes as well as for declaration of dividend to shareholders, the proposed reclassification of general reserve to retained earnings is in the interest of the shareholders.
For detailed discussion on the above case study, please feel free to connect at contact@devadhaantu.in
