business restructuring - wirc-icai.org · finvest ltd. unlisted ... lock-in provisionsapply:...

Business Restructuring:Stock Brokers

- Anup P. Shah13th March, 2011

2 Days Conference @ Hotel Sea Princess

Scope of Discussion

� Corporatisation of Firms

� Slump / Asset Sale

� Part IX Conversion / LLP

Conversion

� Stamp Duty issues

� Demerger

� Takeover of Cos.

� FDI

� Sectoral Caps for NBF

Sector

© PRAVIN P. SHAH & CO. 2

� Mergers

� Key issues

� Reverse Merger

� Cross-border M&A

� Stamp Duty

Corporatisation of Firms


Corporatisation – Alternatives

� Firms can be converted into Company / LLP:

� Slump / Asset Sale by Firm to Co.

� Slump / Asset Sale by Firm to LLP

� Conversion of Firm into Co. under Part IX


� Conversion of Firm into LLP under LLP Act

Corporatisation by Sale

Shareholders / Partners


Firm Co. / LLPSlump / Asset Sale of Bus.

Corporatisation by Sale

� Slump Sales or Asset Sales

� No Court process

� Quick

� Factors to be considered


� Factors to be considered

� Capital Gains

� Stamp Duty

� VAT

Tax Consequences

� Slump Sale to Co. / LLP

� Lump sum consideration – No itemised break-up

� Excess of SC over Networth = LTCG / STCG

� Gains Taxable u/s. 45 r.w. s.50B


� Itemised Sale to Co. / LLP

� Itemised Break-up over A&L

� Gains Taxable:

�

Tax Exemption

� Exemption for Slump / Itemised Sale to Co.:

� S.47(xiii) Conditions

� All A / L of Firm / AOP become that of Co.

� All Partners become SHs in same proportion


� Partners do not receive any other consideration

� SH of all Partners is at least 50% of Voting Power

� 50% SH of Partners continues for 5 years

� Exemption N.A. if Sale to LLP

Tax Exemption

� Analysis of s. 47(xiii):

� Can it be a New Co.?

� Firm can trf 2 Businesses to 2 Cos.?

� Only Business A/L to be trd?

Can RPS be issued to partners?


� Can RPS be issued to partners?

� Shares can be issued at a Premium?

� Transfer inter se Partners permissible in 5 years?

� If conditions violated

Transfer of Actionable Claims

� Actionable Claims :

� Claim to any debt which is not secured or

� Beneficial Interest in movable property

� E.g., : Loans, Right under a Contract


� E.g., : Loans, Right under a Contract

� S.130 of TP Act : Actionable Claims can be

transferred only by written document

� Stamp Duty?

Stamp Duty

� Slump Sale / Assets Sale

� Conveyance under BSA & ISA

� Bifurcate assets into Immovable & Movable

Bifurcation for SD purposes negates IT


� Bifurcation for SD purposes negates IT

Benefit?

� Under BSA - SD on Movables

� Under BSA - SD on Immovables

Stamp Duty

� Slump Sale

� Sale of Undertaking as a Going Concern

� SD on:

Net Market Value of Undertaking; OR


� Net Market Value of Undertaking; OR

� Gross Value of Assets

Stamp Duty

� Slump Sale / Asset Sale

� Under ISA : No SD if transfer:

� between Transferor Co. owning at least 90% of

Transferee Co. or


Transferee Co. or

� between Parent Co. & min. 90% Subsidiary or

� Two 90% Subsidiaries of one Parent Co.

� Applicable in Mumbai?

Indirect Taxes – Slump Sale

� VAT – Applicable?

� Sale of Bus. Undertaking = Movable Goods?

� Lump sum consideration

� Is it a sale in course of Business?


� Service Tax / CENVAT

� Trf. of CENVAT Credit available to Buyer Co?

� No Service Tax on Sale

Issue of Shares

� Articles of Association

� 0.2% of Share Capital – Max. Rs. 50 lakhs

� At every increase in Authorised Capital

� Issue of Share Certificate:


� Issue of Share Certificate:

� 0.1% of the Value of the Share

�

Corporatisation by Conversion

Shareholders / Partners


Firm Co. / LLPConverted by Statute

Part IX Conversion

� Firm⇒⇒⇒⇒ Co. u/s. 565 of Cos. Act (“Part IX”)

� Transfer of Undertaking from Firm to Co.?

� Sale of Property?

� Statutory provision – ROC must Incorporate Co?


� Conveyance reqd.?

� Statutory vesting of property

� Capital gains?

� Is it a Transfer u/s. 45(4)?

� Stamp Duty?

Part IX Conversion

� Conditions

� Registered Firm

� 7 or more Members of Co.

� On Conversion Co. only has Partners as Members


� On Conversion Co. only has Partners as Members

� Do conditions of s.47(xiii) need to be satisfied?

LLP Act Conversion

� Firm⇒⇒⇒⇒ LLP u/s. 55 of LLP Act

� No Transfer of Undertaking from Firm to LLP

� Statutory provision – ROC must Incorporate LLP

� Conveyance reqd.?


� Statutory vesting of property

� Capital gains?

� Is it a Transfer u/s. 45(4)?

� Stamp Duty?

Mergers


Mergers – Key Issues

� Appointed Date – Retrospective?

� Rationale? Tax Planning only?

� Share Exchange Ratio

� Fairness Ratio in case of Listed Cos.


� Accounting Treatment

� Auditor’s Certificate for Listed Cos.

� Reduction of Capital of Transferee Co.

� St. Ex. Permission

� 3/4th SH Majority + Court

Mergers – Key Issues

� Tax Losses & MAT Credit

� Stamp Duty

� ICDR Regs for Listed Cos.

� Listing Requirements


� FEMA in case of Cross-Border Mergers / Foreign

SH

Reverse Merger

Finvest Ltd.UNLISTED

Ace BrokingLISTEDMERGER


• Unlisted Co.

• Loss Making

• Low activity

• Listed Brokerage Co.

• Profitable

• In Business

Q. Listing of Finvest Ltd. possible?

Reverse Merger

� Listing possible?

� SEBI’s approval required

�

� Justification


� Justification

� Under a Court Scheme of Merger / Demerger

� Procedural matters

Forward v. Reverse Merger - Comparison

Available?Available?C/f Unabs. Dep

Available?Available?C/f Bus. Loss

Reverse MergerForward Merger


Advisable?Required?Capital Reduction

Unlisted can be

listed?

Continues?Listing

Remains with itAvailable?MAT Credit of

Loss making Co.

Merger & S.47A

Holding Co.

Transfer of Broking Biz

Subsidiary merged

into Holding Co.

Year 1 Year 4

S.47A(1):


Wholly-ownedSub

Broking Biz

No CGT –s.47(iv)

S.47A(1):

• Parent should own 100% of Sub for 8 years:

• Is it possible to apply this section?

• Provision is frustrated?

Preferential Issue G/L

� Ch. VII of SEBI (ICDR) Regs. deal with

Preferential Issue G/L

� Do Not apply to an issue of Shares made

pursuant to a Scheme u/s. 391-394


� However, Lock-in provisions apply:

� 20% of PC: 3 years

� Balance PC: 1 year

� All other Shares: 1 year

� Strange provision

Merger

� SD on Merger is an evergreen issue

� BSA Conveyance defn. – s.2(g) Includes

� Every Instrument,


� Every Decree / Order of Civil Court

� Every HC Order u/s. 394 of Cos Act or RBI

Order under Banking Act for the

amalgamation or reconstruction of Cos.

Specific Entry for SD

� Entries for Merger / Demerger under Sch. I

� Maharashtra M / D

� Gujarat M / D

� Karnataka M / D


� Rajasthan M

� No Entries for either under ISA

Merger – BSA Rates

� Art. 25 Conveyance

� 10% of Market Value of shs issued + consideration

� But not exceeding higher of:

� 5% of Market Value of Immovable Property of Transferor


located in Maharashtra; or

� 0.7% of Market Value of shares issued

� Upper limit if 5% of MV of IP > 10% of MV of shs

� For Market Value of Imm. Property –

� Refer to Ready Reckoner Value


Details Scenarios

1 2 3

FMV of Shares 1000 1500 1700

FMV of Imm. Prop. In Mah. 3000 500 120


FMV of Imm. Prop. In Mah. 3000 500 120

10% of FMV of Shares 100 150 170

5% of Imm. Prop. 150 25 6

0.7% of FMV of Shares 7 10.5 11.9

Stamp Duty 100 25 11.9


� Art. 25 Conveyance

� For Market Value of Shares :

� If Transferee listed & quoted for Trading on a St. Exch. :


FMV as on Appointed Date in Scheme or

Date of Court Order

� Transferee Not listed &/or listed Not quoted for Trading:

FMV of Transferor’s Shares or

FMV as determined by Collector

Merger – ISA

� Gemini Silk (Cal)

� ISA – West Bengal

� Merger u/s. 394 is a sale

� Sale by a Court Order

� Consideration is shares

� Order is an instrument – SD as

� Madhu Intra Ltd. (Cal)

� Under ISA – WB – 2 Member

� Overrules Gemini Silk

� HLL (SC) not cited or considered

� No SD on Order unless express

provision like under BSA


� Order is an instrument – SD as

on Conveyance

� Hindustan Lever (SC)

� Under BSA – did not deal with

ISA expressly

� SD payable even if no amdt to

BSA

provision like under BSA

� Delhi Towers (Del)� Decision under ISA ~ Delhi

� Considered all decisions

� Order u/s.394 is a conveyance

� Liable to stamp duty

� Hero Motors (All)� Order u/s.394 a conveyance

� Liable to stamp duty

Demerger


Demerger – Key issues

� Vertical Split

� Tax Neutral

� Transfer at Book Values

� Trf. of Bus. Undertaking on Going Concern Basis


Trf. of Bus. Undertaking on Going Concern Basis

� At least 3/4th SH should become SH

� A/c : Whether Capital & reserves to be split?

� Stamp Duty

Demerger for Value Creation

INDIABULLS FINANCIAL SERVICES

NBFC

SHAREHOLDERS


NBFC

INDIABULLS SECURITIESStock Broking Company

INDIABULLS REAL ESTATE Real Estate Developer

Demerger for Value Creation

INDIABULLS FINANCIAL

SERVICES

INDIABULLS REAL

ESTATE

INDIABULLS

SECURITIES

SHAREHOLDERS


SERVICES

NBFC

ESTATE

Real Estate Developer

SECURITIES

Stock Broker

Demerged

Demerger- Sale of Business

PromotersIssue of Shares


Axis Securities

Left with PMS & MF Distribution

Demerger of IB, Broking

No Cash Consideration

100%

Company Takeover


Company Takeover

� Key Considerations:

� Takeover Regulations for Listed Cos.

� FEMA Provisions if one party is a PROI

� Capital Gains on Seller


� Capital Gains on Seller

� Exempt if LTCG through St. Ex.

� MAT if Corporate Seller even if gain exempt

� Indexation or 10% in case of Listed LTCG

� Tax Clearance Certificate / TDS if Foreign Seller

Acquisition in Listed Cos.

Acquirer’s SH Acquisition possible

0-14.99% Any % any time till 14.99% ~ Excess PA

15-55% 5% in any FY ~ Excess PA


55-75% Up to 5% in tranches / via buyback

55-75% Over 1st 5% - by making a PA

Over 75% Follow Delisting Regulations, 2009

� S. 79 - Sale of Shares of Unlisted Co.

� X P. Ltd. – Stock Broking Co.

� Unabsorbed Depn. & B/f Business Loss

� Existing SHs want to sell 100% stake

Sale of Unlisted Cos.


� Existing SHs want to sell 100% stake

� Buyer wants benefit of Depn. & Loss

� PROBLEM

� S.79 - Can’t Transfer > 49% stake till b/f loss

set off

Share Sale by Resident to PROI

� Auto Route of FIPB, except:

� Sectors with caps, incl’d ARC, banks, Com. Ex,

Credit Info, insurance, etc.

� Auto Route of RBI, except:


� Sectors not eligible for FDI under Auto Route

� Cases where Takeover Regs. attracted

� More than 15% stake acquired

� Sectoral Caps breached due to acquisition

� Banks, Insurances, NBFCs, ARCs, etc.

Share Sale by Resident to PROI

� Pricing Guidelines

� Listed Cos. – as per Market value

� Unlisted Cos. – Fair Value as per CCI Guidelines

� Same Guidelines should apply even for

transfer under Approval Route


transfer under Approval Route

� Transfer of shares in tranches

� Pricing fixed on Milestones achieved by Co.

� Permitted by FIPB/RBI?

Takeovers stalled by FDI Policy

� Sometimes Acquisitions of Indian Cos. are

stalled by the FDI policy

� Ultimately deal is dropped; or

� Deal has to be substantially altered; or


� Deal has to be substantially altered; or

� Investor has to invest further funds

� E.g., RBI does not allow Foreign Banks to

invest in Commodity Broking Companies

HSBC-ILFS Investmart Deal

� IL & FS Investmart Deal:

� IL &FS is a Stock Broker & Commodity Broker

� HSBC Bank’s Associate Co. wanted to acquire 73%

from IL&FS and E-trade

Open offer for 20% from Public


� Open offer for 20% from Public

� RBI G/L: Banks not allowed to invest in

Commodity Brokers

∴∴∴∴IL&FS surrendered Commodity Membership to

MCX & NCDEX

BNP Paribas-Geojit Deal

� BNP Paribas invested in Geojit, a Stockbroker + open offer

� Geojit’s subsidiary was a Commodity broker

� RBI G/L: Banks not allowed to invest in


� RBI G/L: Banks not allowed to invest inCommodity Brokers

∴∴∴∴ SEBI held up permit Open Offer

� Sub. Surrendered Commodity Membership

� BNP Paribas paid additional Rs. 40 cr.compensation for surrender of membership

Takeover by FDI in a Listed Co.

� If FDI of 15% or more in a Listed Co.

by Preferential Issue

� Additional Factors to be Considered :

� Special Resolution - s. 81(1A) of Cos. Act


� Special Resolution - s. 81(1A) of Cos. Act

� Pricing as per SEBI Preferential Issue G/L

� 1 year lock-in from allotment

� Open Offer under Takeover Regs.

up to 20% of total post-issue shares

� Pricing of Offer as per SEBI Takeover Regs.

Share Subscription Agr

� SSA / SHA-cum-SSA

� Executed by PEs / VCFs / for FDI

� Investor agrees to invest an amount for a

certain % stake


certain % stake

� CPs / Covenants / R&Ws

� Stamp Duty in Mumbai?

Stamp Duty

� Transfer of Shares

� SD covered by ISA and not BSA

� SD under ISA @ 0.25% of consideration

No SD if shares in Demat form


� No SD if shares in Demat form

� Is Demat possible for Unlisted / Private Cos.?

Takeover of Foreign Companies

� Indian Cos. acquiring Foreign Cos.

� FEMA Regulations

� Upto 400% of Networth

� FCo. must be in bona fide business activity


� FCo. must be in bona fide business activity

� ECBs can be used for acquisition

� Cos. Act

� S.372A applies?

� Up to 100% of Free reserves;

� Up to 60% of Paid-up Capital + Reserves

Takeover of Foreign Companies

� Foreign St. Ex requirements

� Takeover Code of foreign Target Co.

� Requirements of NYSE / AIM/ Nasdaq

� In USA – Williams Act of 1968 + SEC Disclosures


� In UK- City Code on Takeovers & Mergers

� Anti-trust Laws of FCo

� USA: Hart-Scott-Rodino Antitrust Act

Filings with FTC or DOJ

Min. Waiting Period of 30 days

Acquisition in Financial Sector

� Indian Broking Co. wants to acquire a Broking

Co. in London

� Religare acquiring Hitchens Harrison of UK

� R.7(1) & 6(1) of FEMA:


� R.7(1) & 6(1) of FEMA:

� Upto 400% of Networth OF ICO

� 3 FYs track record of Net Profit from FS Activities

� Capital Adequacy Norms complied with in India

� Regd. in India with authorities, e.g., RBI, SEBI,

IRDA

Acquisition in Financial Sector

� R.7(1) & 6(1) of FEMA 120/2004:

� Approval for Acquisition from SEBI

� Manner of Approval Letter issued by SEBI

� Approval for venturing into activity from Regulator


� Approval for venturing into activity from Regulator

abroad

� Q. Is permission from FSA of London required in

advance or would post-facto approval suffice?

� Draft Guidelines issued by RBI for ODI by NBFCs

FDI & Instruments


Relevant Regulations

Consolidated FDI Policy – DIPP, Ministry of Commerce


FEMA Regulations –Mode of Investments

+ Reporting

AP Dir Circulars –RBI’s changes

from time to time

Relevant Regulators

FIPB –Cases requiring Govt.

Approval

DIPP –Formulates FDI Policy

Part of FinanceMinistry

Part of Commerce Ministry


Approval

RBI –Nodal

Regulatory Authority

Key Types of Foreign Invst.

Foreign Investment

Primary - FDI Secondary

Invst by PROI in Capital of an Indian Co.

Purchase by PROI of Shs. Of Indian Co.


Direct Downstream Portfolio Off-Market

FIIs

NRIs / PIOs

Repatriable

Non-repatriable

Types of FDI

Foreign Direct Investment


Automatic Approval

No PermissionMoF/FIPB – Inflows up to Rs.1200 cr.

CCEA – Inflows above Rs. 1200 cr.

Instruments

Foreign Direct Investment

Equity


EquityHybrid

Voting Non-Voting CCDs CCPS

Warrants

Equity Shares

� Consideration must be for Cash

� All other cases – FIPB approval

� Issue Price of FDI Shares


� Issue Price of FDI Shares

� Listed Cos.

� Unlisted Cos.

� Must be issued within 180 days of funds

Equity Shares

� DCF Valuation

� No Guidelines specified

� Discretion to Valuer in selection of:

� No. of Years’ Forecast

Discount Rate / WACC


� Discount Rate / WACC

� Growth Rate

� Method of Calculation of Terminal Value / Perpetuity

� Q. Cos. where DCF is difficult?

CCDs

� Quasi-equity Instruments

� Subject to ECB restrictions?

� Cap on Rate of Interest?

� All-in-cost ceilings like ECBs?


� All-in-cost ceilings like ECBs?

� Tax Deduction benefits to Investee Co.

� Can be redeemed / bought back by Co.?

� Time limit for conversion into Equity?

�

Preference Shares

� Part of Sectoral Caps Only if CCPS

� If RPS / OCPS – treated as ECBs

� Must be converted within a reasonable

timeframe


� Plain redemption / buyback possible?

�

� Max. Dividend Rate

�

NVR Shares

� Issue of NVR Shares possible?

� When Useful?

�

� If Public Company?


� If Public Company?

� Examples

Others

� Issue of

� Warrants?

� Partly Paid-up Shares

� Flip-flop in Policy


� Flip-flop in Policy

� Recent Reports - Proposal

� Paid-up portion - a part of Capital

� 25% paid-up upfront

� Balance within 12 months

FDI in NBFCs


Specified Activities

� FDI Prohibited in:

� Chit Fund

� Nidhi Company

� 100% FDI permissible in 18 specified


� 100% FDI permissible in 18 specified

Activities under Automatic Route

� Minimum capitalisation norms ?

� Subsidiaries for specific NBFC activities

are permitted subject to specific norms


• Merchant Banking

• Underwriting

• Portfolio Management

Services

• Venture Capital

• Custodian Services

• Factoring

• Credit Rating Agencies

18 Activities under 100% Automatic Route


Services

• Investment Advisory

Services

• Financial Consultancy

• Stock Broking

• Asset Management

• Money Changing Business

• Credit Rating Agencies

• Leasing and Finance

• Housing Finance

• Forex broking

• Credit Card Business

• Micro Credit

• Rural Credit


� FDI in Commodity Broking

� Permissible?

� Is it an NBFC activity?

�

FDI by Banks in Com. Broking?


� FDI by Banks in Com. Broking?

�


� FDI in Investment Companies prohibited

� RBI Act – NBFC definition

� FEMA Regulations – 18 Activities


� FEMA Regulations – 18 Activities

�

� Dual stance?


� FIPB has several times disallowed FDI in Invst

Cos.

� Does not fall within 18 activities

� Several FDI Proposals rejected:


�


� Nomura Financial’s Case

� FDI for proprietary trading by a NBFC

� Distinct from FDI for Investment Activities?

�


�


� Barclays Investments’ Case

� FDI for direct marketing of financial products

~ IT enabled services and back office

processing


processing

� Collection and recovery, Direct marketing, IT

enabled services, Back-office processing, Advisory

and financial solutions & IT services, advisory

service

�

Other Financial Cos.

Activity FDI Cap Remarks

Infrastructure Cos. In

Securities Mkt.:

� St. Ex. (BSE)

� Depositories (CDSL)

Composite Cap 49%

• FDI 26%

• FII 23%

• FDI by Approval Route

only

• SEBI Regs. for St Ex

• Single For. Investor


� Depositories (CDSL)

� Clearing Corp.

(NSECCL)

• Single For. Investor

can hold only 5%

• FII through secondary

markets

Credit Information

Cos. (CIBIL)

Composite Cap 49%

• FDI 25%

• FII 24%

• FDI by Approval Route

only + RBI clearance

• FII through secondary

markets

Capitalisation Norms

NBFC


Fund- Based Activities

Non- fund based activities

Capitalisation Norms-Fund Based

� 3 Tiers for Fund based Activities� Up to 51% of Capital: US $0.5 M upfront

� More than 51% - 75% of Capital: US$5Mupfront


More than 51% - 75% of Capital: US$5Mupfront

� More than 75% of Capital: US $50M out ofwhich US $7.5M. upfront immediately andbalance US$42.5 M within 24 months

Capitalisation Norms:Non-Fund Based

� Activities classified as Non- fund based are

1. Investment Advisory Service

2. Financial Consultancy

3. Forex Broking


3. Forex Broking

4. Money changing business

5. Credit rating agencies

Capitalisation Norms:Non-Fund Based

� US $ 0.5 M upfront for any amount of investment

� Prohibition on:

� Setting up Subsidiary for Activity other than in which

Holding Company is engaged


� Participation in any equity of NBFC holding /

Operating Company


� Requests to FIPB for relaxation of Cap

Norms:� Turned down in a host of cases

� Waiver of norms tantamounts to dilution of

Press Notes


Press Notes

� Despite recession, requests for dilution of

capitalisation norms have been rejected


� What constitutes Capital

� Only Equity

� CCPS / CCDs?

�


�

� Share Premium?

�

Subsidiaries

� Can an NBFC with 100% FDI set up aSubsidiary?

� Yes. Holding Co. must be an NBFC with 100% FDI with

minimum capitalisation of US$ 50 M.


� Subsidiaries must be for Specific NBFC activities

� No restriction of number of operating subsidiaries

� No additional Capital is required to be brought in.

� NBFC in Non- fund based activities can not set up

subsidiary for any other activity.

Subsidiaries

� Can other NBFC set up Subsidiaries?� Yes. The NBFC must have FDI equal to 75% or less

than 75% of its capital.

� Subsidiaries should also comply with the Min. Cap.


Norms applicable to Holdco. if they are in Fund Based

Activities

� NBFC in Non- fund based activities can not set up

subsidiary for any other activity.

Downstream Invst. by NBFCs

Fund- based Joint Venture-NBFC

Type of NBFCwhich would be

Holdco

Non- fund based


84

activities NBFC

• 100% FDI• Min. Cap. US $ 50M• No Min. Cap. for

Subsidiaries

• 75% or less FDI• Min Cap. for Holdco

& Sub. both

• Sub in sameactivity as Holdco

Non- fund based

Contrary Provisions

� Circular 1/2010 & FEMA Regulations

� FEMA Regs. & Para 5 of Cir.

�

� Para 4.6.4 of Cir. (Press Note 4)


� Para 4.6.4 of Cir. (Press Note 4)

�

� Current Position?

Calculation of FDI

� Cal. of FDI in NBFCs for Min. Cap. norms:

� Both Direct and Indirect FDI to be considered?

�

Indirect FDI ~ ascertain whether Investor is a


� Indirect FDI ~ ascertain whether Investor is a

Company owned & controlled by Non-residents?

� If no, then it is domestic investment and not Indirect FDI.

� Ascertain Min. Cap. Requirement based on Total FDI

or only Direct FDI in NBFC?

PE Firms – Exit Options

Exit Options for PE Firms

� Some popular Exit Options for PEs:

� IPO

� Buyback by Co.


� Buyback by Co.

� Buyout by Promoters

IPO - SEBI DIP G/L

� SEBI ICDR Regs:

� In case of IPO/ Offer for Sale

� All Convertibles – CCD / CCP should be

converted or they lapse on DRHP


converted or they lapse on DRHP

� Pre-IPO capital locked in for 1 year

� N.A. to a VCF holding shs. for 1 yr. as on DRHP

� N.A. to pre-IPO shs. held for 1 year as on DRHP

and Offered For Sale

�

Buyback by Co.

� Limits under Cos. Act

� 25% of Eq. + Free Reserves

� 25% of Eq. Capital per FY

� Can use Free Reserves, Sh. Premium


Can use Free Reserves, Sh. Premium

� Auto. Route of RBI (for Foreign PE) if:

� Not in Financial services’ sector

� Pricing G/L – 2 Valuation reports

� Form FC-TRS

� Tax treatment for Co & SH?�

Buyout of PE by Promoters

� FIPB permission needed?

� Automatic Route of RBI?

� Pricing Guidelines

� Capital Gains Tax in hands of PE


� Capital Gains Tax in hands of PE

Special Laws


RBI Act & NBFC Directions

� Stock Brokers / Sub-Brokers Exempt from

� Registration as NBFC

� Net Owned Funds Requirements

� Prudential Norms


� Prudential Norms

� Must Not accept / Hold Public Deposits

� Exemption available even if only business is

Prop Trading

NBFC Prudential Norms

� Most Large Brokerages have an NBFC

� NBFCs fund Margin Requirements / IPO

Financing

� Consider Non-Deposit Accepting Cos.


� Consider Non-Deposit Accepting Cos.

Prudential Norms Directions 2007

� Is NBFC a SIND NBFC?

�No Public Deposits

� Total Assets > Rs. 100 cr. as per last Audited

B/S

Prudential Norms for SINDs

Activity % of Owned

Funds

Lending to one borrower 15%

Lending to a single group of borrowers 25%


Lending & Invst in one party 25%

Lending & Invst to one group 40%

• Above limits even apply to loans to Group Cos. of NBFC

• No such limits if NBFC is not a SIND

Exchange Approval

No. Situations where Approval reqd.

1. Change in Designated / Whole-time Directors

2. Change in Control ~ as defined by Takeover Regulations, 1997


3. Corporatisation of Firms, Sole Proprietors

4. Transfer by way of Sale, etc.

5. Mergers / Amalgamations

6. Surrender of Certificate of Registration

No Exchange Approval

No. Situations where Approval NOT REQUIRED

1. Inter se transfers amongst DPGs

2. Addition of another SH to DPG


3. Cessation of Joint Control to Sole Control

4. Change which is such that SH of DPG does not fall below 51%

5. Acquisition of stake by New Group equal to or less than stake

of present DPG

Merger of Membership - Approval

� DPG to comprise only of DPG of merging Members

� Merged Entity to consist of:

� DPG of Tor Member with at least 51% / 40% for Listed /

Unlisted Cos. /Firms in Tee Member

Scheme should provide for trf. Of Deposits to Tee


� Scheme should provide for trf. Of Deposits to Tee

� Lock-in for Deposits applicable to Tee

� Tee to honour all financial commitments of Tor

� Approach St. Ex after filing High Court Petition

� Tee Member can trade for 45 days till SEBI Order

Value Creation

Group Restructuring

� Multiple biz. In Financial Sector

� Q. Merge all biz. or keep separate entities?

� Umbrella Holding Co.

� Purely Investment Co. – JMF


� Purely Investment Co. – JMF

� Operating-cum-Investment – Kotak Bank

� Advantages of Umbrella Holding?

� One of the Factors to be considered is the

Risk

Risk Assessment

CompetitionRisk

Liquidity Risk

Credit Risk


ReputationRisk

Regulatory Risk

Operational Risk

Market Risk

RISKS

Invst Bank NBFC MF AMC Pvt Equity

Investment Holding Co.

ARC


Invst Bank

Inst. Broking

NBFC MF AMC Pvt Equity

Retail Broking

Commodity

ARC

Invst Advisory

Invst Bank Broking Insurance

NBFC

PE Commodity


Invst Bank Broking InsurancePE Commodity

Securities

AMC & PMS

Invst Banking

Commodity


Commodity

Private Equity

VC Fund

Insurance

NBFC Holding Co.

Structures of Listed Brokerages

No. Listed

Company

Business of

Listed Company

Business

of Subsidiaries/Associates

1. Reliance

Capital

Depository /

Investments

AMC

Life Insurance

General Insurance


General Insurance

Trustee

2. IDFC Infrastructure

Finance

Financial Services

Asset Management

Investment Advisory Services

Trusteeship Services

Broking

Advisory Services

Investment Banking

No. Listed

Company

Business of

Listed Company

Business


3. Edelweiss

Capital

Merchant Banking

PMS

Securities Broking

Commodity Broking

Insurance Broking



NBFC

4. Geojit Financial

Services

Securities Brokers Commodity Broking

Middle East based financial

advisory, broking

No. Listed Company Business of

Listed Company

Business


5. IL&FS

Investmart

IB/ Broking /

NBFC

Retail Business

Project Syndication

Division



Division

6. Cholamandalam

DBS Finance

NBFC Mutual Fund AMC

Brokerage

Distributors of Financial

Products

Trustee Company

No. Listed

Company

Business of

Listed Company

Business


7. JRG Securities Securities Broking Commodity Broking

Insurance

8. Joindre Capital Securities Broking Commodities Broking



8. Joindre Capital Securities Broking Commodities Broking

9. Emkay Shares Securities Broking NBFC

Commodity Broking

10. Pioneer

Investcorp

Merchant Banking Securities Broking

Restructured Brokerages

BEFORE AFTER REMARKS

Fortune Financial Services

Holding Co. � Merchant

Banking

� Merchant

BankingSlump Sale of

Broking Biz.


Banking

� Broking

Banking Broking Biz.

from Listed

Holding Co. to

WOS

Subsidiary � NBFC

� Commodity

� Broking

� NBFC

� Commodity

Restructured Brokerages

BEFORE AFTER REMARKS

India Infoline Ltd

Holding Co. � Merchant � Merchant Merger of WOS


Holding Co. � Merchant

Banking

� Eq. Research

� Merchant

Banking

� Broking

Merger of WOS

in Broking with

Listed Holding

Co.Subsidiary � Broking

� NBFC

� Commodity

� NBFC

� Commodity

� Insurance

Thank You!!

[email protected]

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