Sundaram – Clayton Limited (“Transferee Company” or “Demerged Company” or “SCL”) is a public company incorporated under the provisions of the Companies Act, 1956. SCL is engaged, inter alia, in the business of manufacturing non-ferrous gravity and pressure die castings and has four manufacturing plants located in Tamil Nadu, group management services’ business and business of manufacturing and distributing two & three-wheeler vehicles through TVS Motor Company Limited. The equity shares of SCL are listed on BSE Limited and the National Stock Exchange of India Limited. SCL is a subsidiary of the Transferor Company 1. The non-convertible debentures of SCL are listed on the National Stock Exchange of India Limited.
TVS Holdings Private Limited (“Transferor Company 1”) is a private company incorporated under the provisions of the Act. The Transferor Company 1 is engaged in the business of making and holding investments and trading in automobile spare parts.
VS Investments Private Limited (“Transferor Company 2”) is a newly incorporated private company incorporated under the provisions of the Act. The Transferor Company 2 is engaged in the business inter alia of making and holding investments and trading in raw materials and components relating to automobiles.
Sundaram – Clayton DCD Limited (“Resulting Company”) is a public company incorporated under the provisions of the Act. The Resulting Company is incorporated to carry on the business of manufacturing non-ferrous gravity and pressure die castings. The Resulting Company is a wholly owned subsidiary of SCL.
Current structure of the Company is as under:
Management of the Companies involved in this scheme has decided to restructure business and shareholding of the group as under:
Transaction 1: Issue of Bonus Preference Shares by SCL to the Shareholders out of general reserve / retailed earnings of SCL;
Transaction 2: Merger of the Transferor Company 1 with and into the Transferee Company;
Transaction 3: Merger of the Transferor Company 2 with and into the Transferee Company;
Transaction 4: Demerger of Manufacturing Business unit of the 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: Issue of Bonus Preference Shares to the equity shareholders of SCL | Transaction 2: Merger of the Transferor Company 1 with SCL | Transaction 3: Merger of the Transferor Company 2 with the Transferee Company | Transaction 4: Demerger of Manufacturing Business Division of SCL into the Resulting Company |
Appointed Date and Effective Date | Date of filling of certified copy of approving authority being NCLT with ROC | 1st Business Day after receipt of approval of the Stock Exchanges for the listing and trading Preference Shares of SCL issued | 5th Business Day after receipt of approval of the Stock Exchanges for the listing and trading Preference Shares of SCL issued | 5th Business Day after the effective date of Transaction 3 |
Jurisdictional Authority(ies) | For SCL, the Transferor Company 1, the Transferor Company 2, the Resulting Company: Securities and Exchange Board of India Limited; National Stock Exchange of India Limited; BSE Ltd Jurisdictional National Company Law Tribunal, Jurisdictional Registrar of Companies Jurisdictional Regional director; For Transferor Company 2 and the Transferor Company 3: NCLT appointed Official Liquidator | |||
Consideration | The Company to issue 116 bonus preference shares of face value INR 10/- each to its shareholders, for every 1 equity share of face value INR 5/- each held in SCL;
| SCL shall issue equity shares and preference shares in proportion to the shareholding of the Transferor Company 1 into SCL. Shares held by the Transferor Company 1 into SCL shall get cancelled | SCL shall issue equity shares in proportion to the shareholding of the Transferor Company 2 into SCL. Shares held by the Transferor Company 2 into SCL shall get cancelled | Resulting Company shall issue equity shares and preference shares in proportion to the shareholding of the shareholders of the SCL in SCL as per ratio mentioned in the valuation report issued by registered valuer. Shares held by the SCL into the Resulting Company shall get cancelled |
Accounting Treatment | In the books of the SCL – Debit of general reserve / retained earnings and credit of face value of bonus preference shares issued by SCL. | In the books of the SCL – Pooling of interest method | In the books of the SCL – Pooling of interest method | In the books of the SCL and the resulting Company – Pooling of interest method |
Taxation | No Adverse tax implications as issue of bonus preference shares to the equity shareholders is not specifically covered under section 2(22) of the Income Tax Act, 1961 (‘the ITA’). | Tax neutral transaction as amalgamation is exempt under the provisions of the ITA subject to compliance with all the conditionalities as mentioned therein | Tax neutral transaction as amalgamation is exempt under the provisions of the ITA subject to compliance with all the conditionalities as mentioned therein | Tax neutral transaction as demerger is exempt under the provisions of the ITA subject to compliance with all the conditionalities as mentioned therein |
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 | |
Sundaram – Clayton Limited | ||||
‘- Equity Shares | 74.46% | 25.54% | 50.68% | 49.32% |
‘- Preference Shares | 27.59% | 72.41% | ||
TVS Holdings Private Limited | 100% | – | NA (Since Amalgamated) | NA (Since Amalgamated) |
VS Investments Private Limited | 100% | NA (Since Amalgamated) | NA (Since Amalgamated) | |
Sundaram – Clayton DCD Limited | ||||
‘- Equity Shares | 100% | – | 74.46% | 25.54% |
‘- Preference Shares | – | – | 27.64% | 72.36% |
Resultant structure post approval of the Scheme is as under:
Purpose of group restructuring:
- SCL has built up substantial surplus reserves, over the years from its retained profits. The surplus reserves are well above SCL’s current and likely future business needs. Further, barring unforeseen circumstances, SCL is confident of generating incremental cash over the next few years. Overall reserves position is expected to improve further even after considering cash requirements for SCL’s capex programme and working capital requirements.
- Further, upon taking into consideration SCL’s capability to generate strong cash flow and the surplus reserves being more than what is needed to fund SCL’s future growth, SCL is of the view that these excess funds can be optimally utilised to reward its shareholders in such difficult and unprecedented times by way of distribution.
- At the same time, in keeping with SCL’s tradition of conventional cash management and being mindful of the challenging business environment, SCL is of the view that it would be prudent to retain liquidity as well. Accordingly, SCL has proposed, inter alia, to distribute such funds amongst its shareholders by issuing fully paid up non-convertible redeemable preference shares by way of bonus in terms of this Scheme.
- Non-convertible redeemable preference shares, while giving near-cash_ (traded, encashable} instrument in the hands of shareholders, give increased flexibility to SCL in managing its liquidity through options like buy back, redemptions, etc.
- In view of the aforesaid factors, SCL has concluded that it can optimally utilize its surplus reserves by distributing a considerable portion of the same to the equity shareholders. In order to maintain high level of corporate governance and transparency, SCL proposes issuance of preference shares by way of bonus under Section 230 of the Act which will be subject to necessary statutory, regulatory and corporate approvals.
- As part of the restructuring exercise, it is proposed to consolidate all the resources of the Transferor Companies with the Transferee Company. The said amalgamation will result in the following benefits:
- Streamline the promoter holding structure;
- Optimum utilization of resources and better corporate governance;
- Reduction of administrative responsibilities, multiplicity of records and legal and regulatory compliances.
- The Scheme proposes to reorganise, segregate and demerge the Demerged Undertaking comprising of manufacturing non-ferrous gravity and pressure die castings from Demerged Company into the Resulting Company and the Demerged Company will be left with group management services’ business, trading business and manufacturing of two & three-wheeler vehicles through TVS Motor Company Limited.
- Given its diversified business, it has become imperative for the Demerged Company to reorient and reorganize itselt in a manner that allows imparting greater focus on each of its business. With this repositioning, the Demerged Company is desirous of enhancing its operational efficiency.
- The proposed demerger pursuant to this Scheme is expected, inter alia, to result in following benefits:
- segregation and unbundling of the businesses of the Demerged Company into the Resulting Company, which will enable enhanced focus on the Demerged Company and Resulting Company for exploiting opportunities of each of the said companies;
- unlocking of value for the shareholders of the Demerged Company, attracting investors and providing better flexibility in accessing capital, focused strategy and specialisation for sustained growth;
- logistics alignment leading to economies of scale for the Resulting Company and creation of sectoral efficiencies and benefitting stakeholders as well as optimization of operation and capital expenditure; and
- enhancing competitive strength, achieving cost optimisation, ensuring benefits through focused management of the financial, managerial and technical resources, personnel capabilities, skills, expertise and technologies of the Resulting Company and the Demerged Company thereby significantly contributing to future growth and maximizing shareholders’ value.
Commercial considerations:
- The Scheme designed to provide rewards for the shareholders of SCL thereby creating a monetizable asset for its shareholders and increasing intrinsic value of holdings for its shareholders;
- The Scheme is designed to provide elimination of multi-tier holding structure, thereby reducing any adverse compliance burden under the Companies Act, 2013, as it eliminates the need of undertaking voluntary liquidation of such multi layered company structure which is time consuming.
- Further, scheme enables back-door listing without requirement of following IPO procedures which are lengthy, time consuming and costlier.
- Additionally, amalgamation and demerger are tax neutral thereby eliminates any adverse tax liability in the hands of companies involved under the Scheme as well as in the hands of shareholders of such companies.
- Scheme facilitates monetization of Manufacturing Business undertaking and segregation of management for both the business undertaking, thereby providing greater flexibility to each of the business units and growth potential by attracting right talent pool and investors funding.
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