Aniruddha JainApart from its operating business, a lot of old Indian listed companies also house investments in the form of equity shares of other group entities. Over the years, these investments reach a sizable size and peculiarly the returns on investment does not commensurate with the returns generated by the operating businesses. To streamline corporate structure & returns, these companies finally evaluating an option to separate these investments from the core businesses. After GFL Limited & National Peroxide Limited, Hercules Hoists Limited decided to join the que.
Hercules Hoists Limited (“HHL” or “Demerged Company”), a Shekhar Bajaj Group entity, is preliminary engaged in business of manufacturing mechanical hoists, electric chain hoists, wire rope hoist and other material handling equipment. Along with this it also has investments mainly in the nature of equity shares of other Bajaj group companies. The equity shares of the company are listed on nationwide exchanges.
Indef Manufacturing Limited (“IML” or “Resulting Company”) is newly incorporated company for facilitation of the proposed demerger. Currently, IML is a wholly owned subsidiary of HHL.
The Transaction
The proposed Scheme of Arrangement inter-alia provides for demerger of “Manufacturing Business” of HHL to IML. The “Manufacturing Business” includes manufacturing and sales of diverse types of hoists. Post-demerger, HHL shall house only Investments mainly in the nature of equity shares of other Bajaj Group entities.
Apart from this, there are also good amount of investment circa more than INR 100 crore in mutual funds.
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The turnover of the demerged undertaking as percentage of total turnover for the Financial Year 2022 was 99%.
Some of the key rationale as provided in the Scheme:
- Drawing attention of new investors, JV partners, M&A.
- Increased flexibility for both companies
- Focused management attention
The Appointed Date for the proposed demerged is 1st October 2022.
The Resulting Company shall issue 1 equity share of Face Value INR 1 each for every 1 share of Face Value INR 1 each held in the demerged company. Upon implementation of the scheme, the existing shares held by the demerged company in the resulting company shall get cancelled and the resulting company shall have mirror shareholding of the demerged company and will be listed on bourses separately.
Paid-up Capital of the Companies:
| Particulars | HHL | IML (Post-demerger) |
| No. of Equity Shares of INR 1 each | 3,20,00,000 | 3,20,00,000 |
| Paid-up equity capital | 3,20,00,000 | 3,20,00,000 |
Financials
Financials of HHL for FY 2022
INR in Crore
Please note that some of the above calculations are tentative and may vary significantly from the actual numbers.
Significant part of net worth of HHL pertains to the investment in other group companies. Post-demerger, IML will present the true financials of the core operating business and return ratios will improve. HHL shall be purely investment company and main income will be through dividends from the investment it will continue to house.
Taxation
The transaction is a tax-neutral transaction as per section 2(19AA) and 2(1B) read with Section 47(vib) and 47(vi) of the Income Tax Act, 1961. Instead of demerger of “Manufacturing Business,” HHL had demerged only “Investments,” it could have amounted to some tax challenges as one of the requirements under section 2(19AA) is that demerger business shall constitute an “Undertaking” which Investment on standalone basis could be difficult to termed.
Conclusion
The proposed demerger is outcome of investments in group companies have becoming larger than the operating business. After demerger, group may decide to invite some strategic partner or may exit the operating business.
At some point in future, the remaining HHL including Maharashtra Scooters Limited, Bajaj Group other listed investment companies shall get consolidated with Bajaj Holdings Investment Limited, ultimate listed group holding company.
No doubt HHL will be required to register as NBFC (Non-Banking Finance Company) as it will have only financial assets and financial income. It is to be seen whether the demerger will be able to create shareholders value like most demergers.
