BUSINESS REORGANIZATION Meaning of business reorganisation

 Reorganisation or business restructuring is a process where a company does an overhaul of its current strategy, setup and operations. Generally businesses choose for this strategy when they have financial troubles, new owners or a structural change. Why business reorganisation...

1. Changed nature of business: Businesses experiment with new products, explore new markets, and reach out to new groups of customers on a continuous basis. Businesses seek to diversify into new areas to increase sales, optimize their capacity, and conversely shed off divisions that do not add much value, to concentrate on core competencies instead. WHY BUSINESS REORGANISATION...

For instance, expansion to an overseas market may require changes in the staff profile to better connect with the international market, and changes in work policies and routines to ensure compliance with export regulations. WHY BUSINESS REORGANISATION.. 2. Downsizing: The changing nature of economy may force the business to adopt new strategies or alter their product mix, making staff redundant. Cutthroat competition and pressure on margins from competitors who adopt a low price strategy may force the company to adopt lean techniques, just in time inventory, and other measures to cut input costs and achieve process efficiency. 3. New work methods: Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory based work. Newer methods of work, especially outsourcing, telecommuting, and flex time require new systems, policies, and structures in place, besides a change in culture, and such requirements may trigger organizational restructuring. 4. New management methods: Traditional management science recommends highly centralized operations, and the top management adopting a command and control style. The new behavioral approach to management considers human resources a key driver of strategic advantage, and focuses on empowering the workforce and providing considerate leeway to line managers in conducting day-to-day operations. The top management intervenes only to set strategy and ensure compliance; strategic business units receive autonomy in functioning.

Why business reorganisation... Why business reorganisation...

5. Technology: Innovations in technology, work processes, materials and other factors that influence the business, may require restructuring to keep up with the times. Such technology-centric change may be part of a business process engineering exercise that involves redesigning the business processes to maximize potential and value added, while minimizing everything else. Failure to do so may result in the company systems and procedures turning obsolete and discordant with the times. WHY BUSINESS REORGANISATION...

6. Finance related issues When small and medium scale companies grow and want to raise fresh funds, venture capitalists and regulations might demand a more professional set up, with formal written-down structures and policies. A listed company may undertake a restructuring exercise to improve its efficiency and unlock hidden value, and thereby show more profits to attract fresh investors. Why business reorganisation...

 Bankruptcy may force the business to shed excess flab such as workforce, land, or other resources, sell some business lines to raise cash, and become lean and mean, to attract bail-outs or some other rescue package. Companies may try to restructure out of court to avoid the high costs of a formal bankruptcy. WHY BUSINESS REORGANISATION...

7. Buy outs At times, the restructuring exercise may be the result of the whims and fancies of the owners. For instance, the company may have a new owner who wants to stamp his or her personal authority and style onto the business. 8. Statutory and legal compliance: At times, restructuring may be a forced exercise, to conform to some legal or statutory requirements. For instance, the government may mandate financial and healthcare institutions that deal with sensitive personal data to monitor their computer networks.

Why business reorganisation... Pros of business reorganisation Boosted profits Increased efficiency Business life extension Improved strategy Better financial arrangements Cons of business reorganisation

Chances of failure Decreased employee morale Investment in terms of time and money resources Setbacks in cash flow Types of corporate reorganisations

1. Mergers and consolidations 2. Acquisition- Target corporation subsidiary 3. Acquisition- Target corporation liquidation 4. Transfers, spinoffs and split offs 5. Recapitalisation and reconfiguration 6. Identity change Mergers and consolidations

 It is a combination of two or more business enterprises into a single enterprise.  Horizontal Mergers: A horizontal merger is when two companies competing in the same market merge or join together.  Vertical Mergers: A merger between two companies producing different goods or services for one specific finished product  Conglomerate Merger: This type of merger involves mergers of corporates in related as well as unrelated businesses ACQUISITION- TARGET CORPORATION SUBSIDIARY

✓ This means acquisition of one company’s by another corporation, with the acquired company becoming a subsidiary of the acquiring corporation.The transaction also must be made solely for the purpose of acquiring voting stock.

ACQUISITION- TARGET CORPORATION LIQUIDATION

✓ Herein the targeted corporation must liquidate and target-corporation shareholders become shareholders in the acquiring company. Split off and spin offs

 Spin-Off refers to the process where a division or a product line of a company is separately reorganized into a different entity. The entity so formed may either be in the form of a subsidiary company or altogether a separate company.  A spin-off requires creation of a new, separate, corporate firm; the shares of the newly created legal entity are distributed on a pro rata basis to existing shareholders of the parent company; such a distribution enables the existing shareholders to maintain the same proportion of ownership in the newly created firm as they had in the original firm. Split off and spin offs •Split-up involves the breaking up of the entire firm in a series of spin-offs (in terms of newly created separate legal entities) so that the parent firm no longer exists and only the new offspring survive. Recapitalisation and reconfiguration

 A transaction involves the exchange of and securities for new stocks, securities or both by a corporation's shareholders. The move concerns just one company and the reconfiguration of the company’s .  Possible scenarios include a stock-for-stock recapitalization plan, a bonds-for-bonds move and a stocks-for-bonds transaction. • A corporation that changes its name, the state where it does business or if it makes changes in the company’s corporate charter, in which case a transfer is deemed to occur from the prior corporation to the new company. Identity change Case Study Questions • In October 2012, Kraft Foods Inc. spun off its North American grocery business, Kraft Foods Group in a corporate action that entailed the distribution of the ratio of 1 share of Kraft Foods Group common stock for every 3 shares of the parent company’s common stock. Kraft Foods then renamed its snacks division as Mondelez International which houses brands such as Oreos, Cadbury, Wheat Thins, Ritz, and Trident. The grocery company was renamed Kraft Foods Group which focusses on grocery brands like Oscar Meyer, Nabisco, and Planters in North America. Solution: Spin off The snacks and confectionery business had a wider exposure to high-growth emerging markets while the grocery business was more North America oriented and stagnating. Therefore to exploit the best of both worlds and to manage two different segments in a focused way, this Spin-off was undertaken. In October 1998, Du Pont generated $4.4 billion from an initial of 30% of the shares of its Conoco unit. DuPont, through this proposed stock swap, planned to divest itself of its remaining stake of 70% in Conoco. In 1999, the former then designed plans for a final split from its Conoco Inc. oil unit, offering to swap Conoco’s stock worth $11.65 billion for about 13% of DuPont’s shares outstanding. • Solution: Split off Conoco was a strong and steady contributor to DuPont’s revenue and cash flow but Dupont felt it was in the best interests of both the companies to operate as separate entities and scale new heights. DuPont wanted to concentrate on its materials and life sciences business, while Conoco wanted to explore the imminent growth in energy markets. O Vodafone Idea became a major player in the Indian telecom sector with Vodafone acquiring a major stake of around 45% and Idea grouo having 26%stake. The deal took place in 2018.

Solution : Horizontal merger. The aim was a wider market share and larger capacities to fight with uncertainties surrounding the JIO disruption.  Finance Minister Nirmala Sitharaman has announced a slew of measures to nurse the ailing Indian economy to health, including an immediate release of Rs 70,000 crore to public sector banks.

 Solution: Recapitalisation  Amazon acquired whole foods for a total of $13.7 billion deal. This made the e-commerce giant move into many physical stores. This will make Amazon continue on its long goal of selling more groceries.  Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world.  Solution: Acquisition (Subsidiary) *Compaq will Digital Equipment Corporation (DEC) for $9.6 billion. After which the acquired company will cease to exist. Digital shareholders will receive $30 in cash and an estimated 0.945 shares of Compaq stock for each share of Digital stock. Compaq will issue about 150 million shares of its stock and pay $4.8 billion in cash for Digital.

Compaq has been the world leader in PCs for some time, but it has not had the high-end corporate "enterprise“ technology necessary to take on IBM and HP. Solution: Acquisition leading to liquidation  Microsoft acquired LinkedIn for $196 per share to a $26 billion deal and fought with its competitor Salesforce.com to do so. The shares of LinkedIn rose 64% after the announcement was made.

Solution : Acquisition The reason for this deal is mainly the 433 million LinkedIn subscribers and professional clouds. The core idea was mainly to boost data productivity. SLUMP SALE ?? WHAT IS SLUMP SALE??

As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. ❑The subject matter of slump sale shall be an undertaking of an assessee.

❑An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm. An ‘undertaking’ shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole

❑Slump sale may be of a single undertaking or even more than one undertaking.

❑The undertaking has to be transferred as a result of sale. The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. The consideration may be discharged in cash or by issuing shares of Transferor Company.

❑Transfer of assets without transfer of liabilities is not a slump sale Taxability of gains arising on slump sale section- 50 B

❖ It provides the mechanism for computation of capital gains arising on slump sale.

❖ Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement.

❖ As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.

❖ In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking. Net worth is the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’.

Net worth = aggregate value of total assets – the value of liabilities

Capital gain = sale consideration – net worth

The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: ▪ WDV(written down value) as in case of depreciable assets. ▪ The book value in case of other assets. ▪ In case of assets on which 100% deduction has been allowed u/s 35AD (specified business), the value of such assets will not be considered. The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act. The computation has been prescribed as follows:

Full value of consideration xxx

(-) Expenses in relation to transfer xxx

Net consideration xxx

(-) Cost of acquisition/ Net worth xxx

Capital Gain or (Loss) XXX • The capital gain or loss as computed above will be either long term or short term depending upon the period for which the undertaking is held. Capital gain

• If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term(20%) and if it is held for less than 36 Short or months, the resulting capital gain or loss shall be short term(normal rate). long term

• Reporting Formality: • The Company has to furnish a report by a Chartered Accountant as per Form Reporting 3CEA. formality Taxation under GST:

The basis of taxation under the Goods and Services Tax Act revolves around ‘supply’.

A slump sale would also be a supply and hence fall under the purview of GST. The supply would be in the nature of ‘transfer as a going concern’ and such a transfer attracts nil rate of GST.

Transfer as a going concern would roughly mean that the current business as a whole will be carried on by a different person or that there is a change in the ownership of the business.

Particulars Amount (In rupees lakhs) Aggregate value of total assets 410+250+80 +30= 280

Net worth of defense 280-80-60= 140 component = Aggregate value of assets- liabilities Capital Gain as per Section 50 255-140= 115 B = Sale consideration- net worth SLUMP SALE OF DEFENSE BUSINESS BY TATA MOTORS…

 Tata group is one of the oldest and biggest group in the country. The group sees restructuring happening in various subsidiaries year after year. In a similar restructuring, we see Tata Motors shall be giving its Defense Business to TATA Advanced systems via a Slump sale transaction.

 TATA Motors Ltd. (TML), the Transferor Company has recently on 11th September 2018 filed a draft scheme of Arrangement with the Bombay Stock Exchange proposing to sale the Company’s Defense Undertaking to Tata Advanced Systems Limited (TASL), Transferee Company, a wholly-owned subsidiary of Tata Sons Limited, to be entered into between the Transferor Company, Transferee Company and their respective members and/or creditors, as the case may be, pursuant to the provisions of Sections 230 to 232 of the Companies Act, 2013.

 The Scheme provided for transfer of the Company’s Defense Undertaking to the Transferee Company at an upfront consideration of minimum 100 Crores (to be adjusted for capex incurred and changes in working capital) plus a deferred consideration of 3% on future revenue share from identified set of projects for a period of 15 years from April 1, 2019. However, the deferred consideration will be maximum upto 1750 Crores.

DEFENSE UNDERTAKING…

 TATA Group is trying to consolidate defense related business in one entity to derive synergies and create capabilities to execute large projects.  The ”Defense Undertaking” of the TML is the business as a going concern as on the Appointed Date, pertaining to the manufacture and/or sale of products and/or services that are designed, used, developed or modified for the Ministry of Defense, the Ministry of Home Affairs, United Nations peacekeeping agencies and equivalent entities outside India engaged in internal and external of those countries and including its assets and liabilities as mentioned in the Scheme. RATIONALE OF THE SCHEME:

•Tata Motors is not able to expand as no focused management for the defense business considering that its core business is struggling with concentrated market of automobile in India.

•Hence, TML thinks it will be able to monetize the value of its investments made in the design and development of the various products for defense.

•On top of that, TML will be able to participate in the future growth opportunities in defense business through earn out consideration.

•There are future growth opportunities for defense business. Since TASL is in the business of production and assembly of systems, sub-systems and solutions used in the aerospace and defense industry, similar to that of Defense Undertaking, this slump sale will facilitate the TASL for focused investments, better capital allocation and scaling up of operations, execution of larger and more complex projects across air systems, land systems and control weapon systems and will also help in achieving cost synergies. References

 Taxability of slump sale from https://taxguru.in/income-tax/slump- sale-taxability.html

 https://www.bcasonline.org/Referencer2015- 16/Other%20Laws/Company%20Law/slump%20_sale.htm

❑ Slump sale by TATA from : https://mnacritique.mergersindia.com/tata-motors-defence-slump- sale/ References

 Reasons for restructuring a company from https://www.brighthub.com/office/human-resources/articles/122660.aspx

 Types of restructuring from http://www.universalteacherpublications.com/mba/free-project/p3/page4.htm

from https://www.wallstreetmojo.com/mergers-and- acquisitions/

 Slump sale from https://cleartax.in/s/slump-sale