Business consolidation is a practice of combining several business units into the larger organization in order to achieve synergy of the business. One of the modes of achieving the business consolidation is via demerger route, where interest of demerging entity is also intact with the demerging business unit. Recently, management of Raymond group has filed a scheme of arrangement for consolidation of Apparel Business undertaking through a demerger route.
Facts of the case:
Raymond Apparel Limited (‘the Demerged Company’ or ‘RAL’) is an unlisted public company incorporated under Companies Act, 1956 and has its registered office at Jekegram, Pokhran Road No. 1, Thane 400606, Maharashtra and is carrying on the business of branded B2C business. The Demerged Company is a wholly owned subsidiary of the Resulting Company.
Raymond Limited (‘the Resulting Company’ or ‘RL’) is a public listed company incorporated under Companies Act, 1913 and has its registered office at Plot No 156/H No. 2, Village Zadgaon, Ratnagiri – 415612. Over the span of years, the Resulting Company has transformed from an Indian textile player to a large diversified group having a leading position in textile and apparel business and a formidable position across varied other businesses such as FMCG, auto components, tools and hardware and denim manufacturing in Indian and global markets. It also has a real estate division. The equity shares of the Resulting Company are listed on the BSE Limited (‘BSE and National Stock Exchange of India Limited (‘NSE’) and GDRs are listed on the Luxembourg Stock Exchange.
Current structure of the Company is as under:
Management of the Demerged Company and the Resulting Company have decided to restructure business undertaking of the group by demerging Apparel Business undertaking of Demerged Company into the Resulting Company.
Restructuring of the group can be depicted as under:
Key features of the above transactions:
Key features | Transaction 1: Demerger |
Appointed Date | April 1, 2021 |
Effective Date | Date of filling of certified copy of approving authority being NCLT with ROC |
Jurisdictional Authority(ies) | Securities and Exchange Board of India; BSE and NSE; National Company Law Tribunal, Mumbai Bench Registrar of Companies, Mumbai Regional Director, Mumbai |
Consideration | No consideration to be issued since all the shares of the Demerged Company is held by the Resulting Company |
Accounting Treatment | In the books of the Demerged Company – Pooling of interest method; In the books of the Resulting Company – Pooling of interest method |
Taxation | Tax neutral transaction |
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 | |
Resulting Company | 49.12% | 50.88% | 49.12% | 50.88% |
Demerged Company | 100% | – | 100% | – |
Resultant structure post approval of the Scheme is as under:
Purpose of group restructuring:
Proposed consolidation of business undertaking with the business of Resulting Company facilitates,
- The consolidation will result in earning predictability, stronger revenue and improved competitiveness, with diversification in product portfolio thereby reducing business risks for mutual benefit of the This will result in strong presence across market segments, provide access to new markets and product offerings. Further, the operations of the Business Undertaking could have access to the Resulting Company’s marketing capabilities;
- Synergy benefits in design & innovation, sourcing and retail network expansion;
- Reduction in overheads, administrative, managerial and other expenditure;
- Operational rationalization and increase in operating efficiency;
- Create enhanced value for the shareholders of the Resulting Company;
- Enabling the Resulting. Company to have a focused strategy and specialization for sustained growth and profitability; and
- Clear strategic roadmap towards improved performance outlook and increased investor.
Tax, Regulatory and Commercial considerations:
- The Scheme is designed to provide consolidation of the business undertakings without any change in the shareholding or entity structure of the Raymond Group.
- As per Circular No. CFD/DIL3/CIR/2017/21 dated March 10, 2017, provides that listed company shall submit the documents with the recognized stock exchange(s) such as valuation report, fairness opinion, report from audit committee, pre and post scheme shareholding, auditors certificate, detailed compliance report etc. However, such clause is not applicable if the Scheme filed is in relation to merger of a wholly owned subsidiary with its holding company, being listed company. In the instant case, scheme provides for demerger of business undertaking of the Demerged Company, being wholly owned subsidiary of the listed Resulting Company. Also, Resulting Company has not filed appropriate documents as mentioned above. A possible view that the Resulting Company would have adopted, could be that it is merger of Business undertaking of the Demerged Company with the Resulting Company.
- As per section 2(19AA) of the Income Tax Act, 1961 (‘the Act’), one of the essential conditions for a demerger is that resulting Company issues shares to the shareholders of the demerged company. Considering that since under the current scenario, Resulting Company cannot issue shares to itself, the above condition is impossible to fulfil. Unlike section 2(1B) of the Act, whereby a specific exception has been given to the amalgamated company for not issuing shares where the merger of wholly owned subsidiary takes place with its holding company, specific exception has not been given under tax neutral demergers. Such an instance could pose tax litigation risk on the Demerged Company whereby tax officer can conclude that the transfer of business undertaking to the Resulting Company, without any consideration has been carried out to avoid dividend tax. However, one can still defend the objection, if raised, by showing appropriate facts to the case in relation to the composition of the business undertaking. Also, a possible view that the Demerged Company and Resulting Company would have adopted could be that it is merger of Business undertaking with and into the Holding Company, without the subsidiary getting liquidated.
- Further, Demerged Company only possesses one business undertaking i.e. branded B2C business, which it is proposing to demerge. This again poses a risk on the Demerged Company since going concern principle for the Demerged Company gets defeated. Thus, unless the Demerged Company enters into another business or already possesses other business undertakings, could be required to be voluntarily liquidated.
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