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 Chande

Gagan Pareek
Parvez Rangwalla
Sainatth 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 Snapshot
Acquirer XYZ Healthcare Private Limited, Karnataka India
Seller ABC Healthcare , Karnataka India
Domestic Formulation Business (including mass
Assets market) which manufactures, markets and sells
acquired 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

USA

India
ABC Group
(Promoter Group)

100%
52.1%
Cash USD
3.72 Bio. 47.9%
XYZ Healthcare Pvt. ABC Healthcare
Ltd. Ltd.

Business Transfer

Formulation
Business
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 billion

The 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 billion
Future 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).
 Option 2: Demerger as an Alternative

XYZ, USA

USA

India
ABC Group
(Promoter Group)
Issuance of New
Equity shares as
consideration for
demerger

100%

XYZ Healthcare Pvt. ABC Healthcare

Business Transfer
Ltd. Ltd.

Demerger
Demerger- Legal Requirements:
 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.
 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

USA

India
ABC Group
(Promoter Group)

100%
52.1%

47.9%
XYZ Healthcare Pvt. ABC Healthcare
Ltd. Ltd.

Selling Itemized Sale

Assets
individually
Formulation
Business
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)
 Comparison
Tax and Regulatory
Demerger Slump Sale Itemized sale
Implications
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
Yes – on movable
VAT - - assets
Yes – can, however, be Yes – may not
Stamp duty claimed deductible for be tax Yes – may not be
Income-tax purposes deductible (6 %) tax deductible
Board of
Approval requirements Board of Directors 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 Yes Yes
 Comparison
Tax and Regulatory
Demerger Slump Sale Itemized sale
Implications
CONSIDERATION 1) Cash - USD 0.8 BL Cash - USD 3.72 bl CASH – 3.92
22.14% * USD 3.57
CAPITAL GAIN 2) Share - NA
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
No USD 3.72 bl USD 3.92 bl
level
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