reverse merger pptx

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Demerger & Reverse Merger



GROUP MEMBERS

NAMES ROLL NO.

TANVI BIRJE 04

TARKESH CHAVAN 10

PRIYAM GAEKWAD 15

SAGAR GARDAS 19

ROHIT YADAV 60



What is Demerger

The expression ‘Demerger’ is not expressly defined in theCompanies Act, 1956. However, it is covered under the

expression arrangement, as defined in clause (b) of Section

390 of Companies Act.

Part of its undertaking is transferred to a newly formedcompany or an existing company and the remainder of the

first company’s division/undertaking continues to be vested in

it; and

Shares are allotted to certain of the first company’s

shareholders.



Why has Govt. Introduced the

concept of “Demerger”? Government of India has brought out the concept of

demerger to tax to neutralise demerger, if it takes place

by fulfilling the prescribed conditions. Perhaps, the govt.

has been pressed by these investors to bring out such

thing so that the Indian partner may get demerged fromhis foreign partner and the foreign partner may take back

his investment.

In other words, it is the main cause for tax neutralisation

of demerger.



Reasons for Demerger

Corporate attempt to adjust to changing economic and political environment of the country.

Strategy to enable others to exploit opportunity effectively tooptimise returns when the parent company is unable to do so.

To correct the previous investment decisions where the

company moved into the operational field having no expertiseor experience to run the show on a profitable basis.

To help finance an acquisition.

To realise capital gains from the assets acquired at the timewhen they were under performing and now no better

performance, capital gain can be realised.

To make financial and managerial resources available for developing other more profitable opportunities.



Procedure For Demerger

Demerger forms part of the scheme of arrangement or compromise within the ambit of Section 390, 391, 392, 393,

394 besides Sec 394A

Demerger is most likely to attract the other provisions of the

companies Act, envisaging reduction of Share capital

comprising Sec. 100 to 105

The company is required to pass a special resolution which is

subject to the confirmation by the court by making an

application.

The notice to the shareholders convening the meeting for theapproval will usually consist of the following detail:

(a) Full Details of the scheme

(b) Effect of the scheme on shareholders, creditors employee

(c) Details of the valuation Report



An application has to be made for approval of the High Courtfor the scheme of arrangement

It is necessary that the Articles of Association should have the

provision of reduction of it’s Share Capital in any way, and

its MOA should provide for demerger, Division or split of theCompany in any way. Demerger thus, resulting into reduction

of Companies share capital would also require the Co. to

amend its MOA.



Tax Aspect

Definition of demerger U/s Section 2(19AA) of the Income TaxAct:

The definition of 'demerger' as given under Section 2(19AA) of the

Income Tax Act is unduly restrictive, and subject to various

conditions. Some of the conditions mentioned are:

1. The first condition is that all the property of the undertakingshould become the property of the resulting company.

2. Conditions of Sec 391 to Sec.394 should be satisfied.

3. Similarly, all the liabilities relating to the undertaking

immediately before the demerger should become the liabilities of

the resulting company.4. Explanation 2 provides that not only identified liabilities should

be transferred to the resulting company, but also general borrowings

in the ratio of the value of the assets transferred to the total value of

the assets of the demerged company.

5. Assets and liabilities have to be transferred at book value.



Compliance With

SEBI Regulations

The SEBI (Disclosure and Investor Protection) Guidelines do

provide certain disclosures needed for protecting the

investors. No specific guidelines are presently there.

However, in SEBI Press Release 311-2003 dated December 17, 2003, it has been proposed by SEBI to enforce

appropriate disclosures in case of demerger as in the case of

amalgamation.



CASE STUDY

Demerger of Bajaj Auto. Mr. Bajaj announced in New Delhi that there was a proposal for

demerging Bajaj Auto into two companies, by spinning off a part of the investment portfolio.

While one will be a pure automobile manufacturer, the other will bean investment company.

The main objective of such a move is to prop up the depressed P-E(price to earnings) multiple and increasing share-holder value.

The return on capital employed (ROCE) in fiscal year ended 2003for Bajaj Auto was around 20 per cent, compared to 99.5 per cent of

its rival, Hero Honda. In 2000-01, Bajaj Auto’s operating margin declined to 9.8 per cent,

but powered by a growth in motorcycles bounced back to 16.8 per cent next fiscal, and closed fiscal year 2002-03 at 19 per cent.



CONT…

A majority of the investments (75 per cent) — Rs 2173.5 crores arefixed income investments, while the balance, Rs 735 crores are

invested in equity shares and equity share based mutual funds. Of

the fixed income investments, Rs 865 crores (about 30 per cent of

total) investments are locked in government securities and bank

deposits, and Rs 869 crores in debentures and bonds.

Competitive Realities

-Equity analysts have never found the company’s cash surplus

attractive. Mr. Bajaj wanted to keep a war chest for fighting out the

cut-throat competition in the motorcycle market, with its scooter

business being in the doldrums.

• In fact, it will need some funds to work on the scooter project to takeon the fairly new entrant Honda Motorcycle and Scooter India’s

products which have overtaken the staid ‘Hamara Bajaj’ metal

scooters”.



REVERSE MERGER



What is Reverse Merger?

Reverse merger is an alternative method for small and medium

size private companies to become public without going through the

long and complicated process of traditional Initial Public Offering

(IPO)

In private company shareholders may gain control of a public

company by merging it in with their private company



In a reverse merger, a private company acquires a public

entity by owning the majority shares of the public entity

(usually 90% or more)

At the close of merger, the private company takes on

corporate structure of the public entity with its own company

name, assets, officers, directors, management team and

becomes public

P i f R



Preparation for a Reverse

Merger

Locate a Suitable Public Shell

Comprehensive Business Plan

Strong Management Team.

Convincing Marketing Plan

Product or Service

Financial Audits

Experienced Securities Counsel

Have Public Company Experience



Advantages of

Reverse Merger Increased Valuation

Capital Formation

Acquisitions

Incentives

Financial Planning Reduced Costs

Reduced Time

Reduced Risk

Reduced Management Time Reduced Business Requirements

Reduced Dilution

Reduced Underwriter Requirements

Tax shelter to the private company



Disadvantages of

Reverse Merger Some reverse mergers come with unseen circumstances.

Reverse stock splits are very common with reverse mergers

and can significantly reduce the number of shares owned by

stockholders.

Many chief executive officers (CEOs) of privately tradedcompanies have little or no experience running a publicly

traded company.

Many reverse mergers do little of what is promised and the

company ends up trading on the OTC bulletin board and

providing shareholders with little to no additional value or liquidity.



The Four Key Steps to a

Successful Reverse Merger

STEP-1:REVIEW CLIENT GOALS AND CAPITAL

STRUCTURE

• Stag Financials professionals will work with the client

company's management to identify their short-term andlong-term objectives and how they relate to the client's

desire to "go public.“

• In this step Stag Financial will help the client identify

and resolve individual issues that may have an impact onhow the reverse merger will be accepted in the financial

marketplace.



Stag Financial will also help develop a proper capital

structure engineered to facilitate the client's goals, including

future fund raising activities, acquisition prospects, stock

options and warrants, employee stock ownership programs

(ESOPs), stock management issues, and so forth.

STEP 2- IDENTIFY A SUITABLE PUBLIC SHELL

• Depending on the client's goals, strategies and budget, Stag

Financial will help select an appropriate public shell vehicle.

• There are numerous types of public shells available. Some

are trading, some are not trading.

• Some report to the Securities and Exchange Commissionwhile others remain non-reporting. Some even have cash on

hand and are looking for just the right private operating

company to conduct a reverse merger.



STEP 3 - PREPARE AND FILE ALL

REQUIRED DOCUMENTS

• Unless the client wishes to reverse merge into a non-reporting

public shell such as a NQB Pink Sheet shell company, then

the client will need to obtain a proper audit conducted by a

licensed public accounting firm.

• Aside from the mandated public audit, conducting a reverse

merger requires a number of legal documents, Board of

Director resolutions, and state and federal corporate and

securities filings. Stag Financial and its affiliated legal firms

will help the client prepare and file all of the necessary

paperwork to complete the reverse merger process.



STEP 4 - BECOME A PUBLIC ENTITY

Once all of the required legal documents have been executed,

filed and seen through to completion, the client will

successfully have taken over the public shell vehicle and

transitioned itself into a publicly traded corporation.



EXAMPLES OF SUCCESSFUL REVERSE MERGERS

In 1970, Ted Turner acquired control of Rice Broadcasting (WJRJ-

TV) in Atlanta, Georgia. Eventually this company became Turner Broadcasting and was acquired by Time/Warner and later merged

with America Online. Ted Turner is now one of the wealthiest men

in the world.

In 1996, Muriel Siebert, the first woman to purchase a seat on the New York Stock Exchange (NYSE), reverse merged her discount

brokerage house, Muriel Siebert & Co., into J. Michaels, Inc., a

defunct, but publicly traded Brooklyn furniture company. The stock

has since traded over $70 a share.

In 1999, Tony Robbins, best selling author of "Awakening the

Giant Within", conducted a reverse merger with GHS, Inc.

whose stock soared from $0.75 to over $12 a share.



Conclusion

To be successful in identifying reverse mergers, you must

stay alert. By paying attention to the financial media, it is

possible to find opportunities in potential reverse mergers. It

is also wise to participate in opportunities that are trying toraise at least $500,000 and are expected to do sales of at least

$20 million during the first year as a public company.



THANK YOU

reverse merger pptx

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