This article is written by Sudhanshu Kathuria, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.
The trend of emerging business units was fast picking up in India with a great number of companies announcing the demerger of their businesses, citing sharper focus for each of the entities and unlocking of shareholder’s value. One such company was Omkar Specialty Chemicals Limited. On March 28th, 2016 the Board of Directors of the company approved the composite scheme of arrangement which provided for the merger of its four wholly-owned subsidiaries and a demerger of the veterinary API undertaking of the merged Omkar Speciality Chemicals.
The company was initially incorporated as Omkar Specialty Chemicals Private Limited on February 24th, 2005 in the business of specialty chemicals and Active Pharmaceutical Ingredients (API). It was later converted into a public limited company as Omkar Specialty Chemicals Limited on March 18, 2010. The business was carried out by Omkar Chemicals independently and through its 4 subsidiary companies whereas API business was carried out in Lasa Laboratory Pvt Ltd.
On March 28th, 2016 the Composite Scheme of Arrangement was approved by the Board of Directors of Omkar Specialty Chemicals Limited which provided for:
- The merger of Lasa Laboratory Private Limited, Urdhwa Chemicals, Rishichem Research, and Desh Chemicals with Omkar Specialty Chemicals Limited (OSCL).
- Demerger of Veterinary API Undertaking of Merged OSCL into Lasa Supergenerics Limited as a going concern.
The scheme of arrangement stated that with effect from the Appointment date and upon the scheme being effective, All the assets, liabilities, permits, licenses, and business including rights, real estate, title, etc acquired by Lasa, Urdhwa, Rishichem, and Desh shall stand transferred to and vested with OSCL in order to become undertakings of OSCL in the manner provided in the scheme.
Pursuant to the scheme of arrangement becoming effective, OSCL would not issue and allot any equity shares to the shareholders of the respective transferor companies because all four of these companies were wholly-owned subsidiaries of OSCL and the complete share capital of the four subsidiaries were canceled and extinguished.
Rationale for merger
The scheme of arrangement provided four major grounds for merger:
- Simplification of the corporate structure by reducing the number of legal entities and restructuring the group structure.
- Reduction in the abundance of legal and regulatory compliances carried out by the subsidiaries.
- Elimination of duplication in administrative costs and multiple record-keeping and hence resulting in cost saving.
- Undivided effort and focus by senior management towards business growth by eliminating duplicative communication and burdensome coordination efforts.
Alteration to MOA/AOA of OSCL
The authorized capital of the four companies aggregating to Rs. 9,70,00,000/- consisting of 33,50,000 equity shares of Rs. 10/- each, 3,60,000 equity shares of Rs. 100/- each and 27,50,000 preference shares of Rs. 10/- each was considered transferred to and combined with the authorized capital of OSCL.
Since the filing fees and stamp duty was already paid by the merging companies on their authorized share capital, it was deemed to have been paid by OSCL on the combined authorized share capital and hence OSCL was not to be required to pay any fees/stamp duty on the authorized share capital so increased.
After the merger, the whole Veterinary API undertaking of OSDC including all taxes, refunds, properties, and claims was considered transferred to and vested with Lasa Supergenerics Limited (Resulting Company). Moreover, the residual undertaking and all the assets and liabilities pertaining to the Demerged company continued to be vested and managed by the Demerged Company.
Rationale for demerger
OSCL had two different businesses. These two businesses had divergent profiles, different risk-rewards, product lines, regulatory and capital requirements. To achieve operational efficiency and having a dedicated management team for each segregated business, the decision of Demerger Veterinary API undertaking of OSCL into Lasa Supergenerics Limited was taken.
Demerger share entitlement
Lasa Supergenerics Limited issued and allotted shares, credited as fully paid-up, to the shareholders of the demerged company in the proportion of one equity share having face value of Rs. 10 each of Lasa Supergenerics Limited for every One Equity Share having a face value of Rs. 10 each of the Demerged Company. Since shareholding of OSCL in the Resulting Company was reduced to 10% post demerger, Lasa Supergenerics Limited ceased to be a wholly-owned subsidiary of OSCL.
Accounting treatment in the books of the demerged company
The demerged company reduced the book value of assets and liabilities relating to the Veterinary API Undertaking, transferred to Lasa Supergenerics Limited. The excess of the book value of assets transferred over the book value of liabilities of the Veterinary API Undertaking transferred to Lasa Supergeneric Limited was debited proportionately to all reserves and surpluses to the Demerged Company.
The application and consequential reduction of the securities premium account were affected as an integral part and the order of the NCLT sanctioning the scheme was deemed to be an order confirming the reduction in the securities premium account of the Demerged Company. The approval granted by the shareholders and creditors of the Demerged Company to the Scheme was deemed to be approved for sanctioning the reduction of securities premium account.
Accounting treatment in the books of Lasa Supergenerics Limited
Lasa Supergenerics Limited recorded the assets and liabilities vested in it at the respective book values as appearing in the books of Veterinary API Undertaking of the demerged company. The company credited the aggregate face value of the new equity shares issued by it to the members of the Demerged Company to its share capital in its books of account. The excess of the Net Assets over the face value of new equity shares allotted was credited to the respective reserves and surpluses in the same proportion as debited in the books of the Demerged Company.
Deal impact on shareholders
Demergers are usually expected to unlock shareholder value, but this merger did not work in favor of shareholders. After the demerger, the company had borrowed loans from various banks for both long-term and working capital purposes and defaulted in repayment of loans in March 2018 and March 2019 and therefore was declared an NPA by the banks. Investors were spooked when promoters pledged their shareholding to a great extent to raise personal loans.
Omkar Specialty Chemicals (OSCL) after restructuring, not only simplified its corporate structure but also created two listed entities focusing on their own business. It is not clear whether the transaction was meant to unlock any value to stakeholders of Omkar Chemicals or Lasa Supergenerics or it was just a restructuring exercise to create two separate entities each to focus on its own business independently.
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