M&A Critique

Separation of NON-Core Assets a faster way for Divestment of Core Business

“Government has no business to be in business” those words said by Hon’ble Prime Minister Shri. Narendra Modi clears the intention of Indian government of creating enabling environment for the smooth running of businesses and enterprises rather than having ownership in them. In pursuance of this, the government has set a target of raising ₹1.75 Trillion (~US $24 Billion) from divesting the government stake in PSU’s.

Divestment programmed which is looked after by the Department of Investment and Public Asset Management (DIPAM) comprises of selling part/complete stake in state-owned businesses to the private sector or listing them on the stock exchange or diluting stake in already listed entities through “Offer for Sale.”

Over a period, the government expanded into multiple capital-heavy businesses. Despite having ample resources, most of the PSU’s failed to compete with a private player or create value by working efficiently due to lack of pro-business approach. The PSU’s acquired properties for the business expansion/staffs, which are not getting utilised due to change in business plan or otherwise. Many of the properties are still lying idle with those entities and have now become surplus assets. Similarly, there are some liabilities attached to a company which dilute its fair value substantially and prospective buyers may not be willing to take over.

Divestment of PSU’s is not new for Indian government. Post-liberalization, the government did a couple of divestments but later, it realized that the value fetched is far subdued as in most of the cases, professional approach was lacking. Significant value of those surplus assets creates a hurdle to generate enough interest from private players as they are interested only in core business and not the baggage of unrelated assets and huge contingent liabilities.

To maximize value, the government evaluated the model of selling core business separately. One of the first precedence of this was the divestment of VSNL where the government had an agreement with Tata’s (Acquirer of VSNL) to handover those surplus assets back to the government. However, it took ~18 years of long struggle to demerge the surplus land of VSNL (now Tata Communications Limited) into a government company, Hemisphere Properties India Limited which resulted in significant value erosion for all the stakeholders and Government

BEML Limited (“BEML” or the “Company”) is a Miniratna Category-1 public sector undertaking, under the administrative control of the Ministry of Defence (“MoD”). The Company operates under 3 major business segments – viz. (a) Mining & Construction, (b) Defence & Aerospace and (c) Rail & Metro.

“Taking lessons from the earlier deal, the government created professional team at DIPAM. It invites consultants to create an appropriate structure and increase value for all the stakeholders. The entire process is online and done in a transparent manner”

Its three major business verticals are serviced by its nine manufacturing units located at Bengaluru (Karnataka, India), Kolar Gold Fields(“KGF”) (Karnataka, India), Mysuru (Karnataka, India), Palakkad (Kerala, India) and Subsidiary – Vignyan Industries Limited.

Apart from this, the Company has land/property parcels (“Surplus Assets”) spread across its various manufacturing facilities, corporate office, marketing and regional offices.

The President of India through the MoD holds 54.03% of the equity share capital of the Company. The Government of India (“GoI”) has ‘in-principle’ decided to disinvest 26.00% of the equity share capital of BEML Limited through strategic disinvestment with the transfer of management control (“Strategic Disinvestment” or “Transaction”).

The Transaction

To make the deal more lucrative for strategic investors as well as to maximize the value for the government, the government has decided to hive off non-core assets.

BEML post-Identification of Surplus Assets, In March 2021, appointed consultant to start the process of hiving-off those assets and advice on the structure, regulatory, valuation and execution in a transparent manner. Meanwhile, Bids were invited to acquire 26% equity stake along with management control in the core business of the company. To facilitate the process, the company incorporated a wholly-owned subsidiary BEML Land Assets Limited. To create substantial value for the government, it will continue to hold slightly more than 26% stake in the company but without management control.

“The proposed BEML demerger is the very first transaction of achieving separation of Non-Core Assets & Divestment of Core Business simultaneously”

Through a recently proposed Scheme of Arrangement, the identified surplus assets of BEML will be transferred to BEML Land Assets Limited in the form of a demerger. The Appointed Date for the transaction will be the Effective Date. Post-Demerger, Resulting Company will have mirror-image shareholding and its shares will be listed on bourses.

Land and Properties of BEML as mentioned in the Information memorandum released by the government:

Particulars Medium of measurement Operational Non-Operational/Surplus Total
BEML Land Acres 1213 1733 2945
Flat / Offices / Guest House at various locations Sq. Ft 10,62,614 36,591 10,99,205

In the approved Scheme, the surplus land of 973 acres with EM Division of BEML and 148 acres at Palakkad Division doesn’t form part of assets getting transferred to BEML Land Assets Limited.

Other Salient Features of the Scheme

The Scheme also provides that in the event of sale of any of the surplus assets prior to the appointed date by the demerged company, sale consideration/proceeds thereof shall be retained by Demerged Entity in Escrow Account and shall not be transferred to the Resulting Company.

Divestment Status of BEML

In March 2021, the Government floated Expression of Interest (EOI) for the acquisition of 26% equity stake along with management control in the core business. The Government has shortlisted few bidders and the transaction is moving towards stage II where bidders are required to submit various transaction-related documents and pricing.

The Surplus Assets will not form a part of the transaction. If the process of the demerger is not completed before the completion of the strategic disinvestment process, then a suitable mechanism shall be formulated to ensure that the proposed acquirer shall not get any stake in BEML Land Assets Limited. This is likely to be executed through an immediate transfer of shares allotted to the proposed acquirer in the resulting company to the government. Appropriate exemptions are required to be given under the Income Tax Act, 1961 to safeguard the acquirer from any tax liability.

Since BEML is a listed entity, acquisition of 26% of stake by any investor(s) would trigger a mandatory open offer (obligation for open offer triggers at 25%). Under Regulation 3 of SEBI Substantial Acquisition of Shares and Takeovers Regulations 2011, as amended (“SAST”) the investor(s) will be required to make an offer to acquire an additional 26% from the public shareholders the moment its shareholding in the Company becomes 25% or more.

Creating a win-win transaction for all stakeholder

“Maybe, the government intends to consolidate all such surplus assets entities like Hemisphere Properties India Limited, BEML Land Assets Limited and future entities which will emerge due to divestment under the recently announced SPV”

Clearly, the separation of surplus properties indicates thorough professionalism of the government. The move will not only provide the government to achieve divestment but also maximise the value for it. This move will fetch a lot of interest from private players to acquire core business which indeed results in the best price discovery. The surplus assets can be later monetised by strategic selling to a real estate player.

To accelerated efforts to hive off surplus lands, the government recently announced setting of a Special Purpose Vehicle (SPV). The SPV will handle all land/property related transactions.

Modification in Income Tax Act, 1961

To facilitate splitting up of public sector companies, the Central Government vide Finance Act 2021, has inserted Explanation 6 to Section 2(19AA) of the Income Tax Act, 1961. Explanation 6 provides that if any public sector companies transfer any asset to a resulting company, then it treats as a compliant demerger provided that the resulting company is a public sector company on the appointed date. Thus, if any assets which are not an undertaking is transferred by public sector companies to another public sector companies, then it is termed as compliant demerger as per section 2(19AA).

Effectively for compliant demerger as per section 2(19AA) of Income Tax Act, 1961, unlike any other companies, there is no requirement of transferred assets and liabilities to be “Undertaking” amongst others. Even a separation of assets/liabilities of a public sector company not constituting “Undertaking” is deemed to be a compliant demerger.

Why the Demerger Structure?

The government intention of de-linking the surplus assets from core business without having any identified acquirer and to share value of those assets transparently to all the stakeholders including public shareholders the option of hiving-off assets through demerger with mirror shareholding is the best option. The proposed demerger will effectively be achieved:

  • Seamless separation
  • Protecting the interest of public shareholders as they remain invested in both entities
  • Tax Neutral

BEML is one of the first transactions of achieving separation of Non-Core Assets & Divestment of Core Business simultaneously. This transaction is likely to set precedence for many other divestments in the coming future. The professional approach of the government is likely to create a substantial value for all the stakeholders including itself. It will be interesting to see how government further monetises surplus assets in the future.

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Aniruddha Jain