Haresh ShahMagnum Ventures Limited (“Demerged Company”) proposes a demerger of its Paper Business into its wholly owned subsidiary Magnum Paperz Limited (“Resulting Company”) and proposes to list the new company post demerger.
The hotel business will remain with Magnum Ventures. As part of the same scheme, it is going to restructure the paid-up capital by reduction of both equity and preference paid up capital without any payment being made because of the reduction.
What is Being Demerged?
The entire Paper Business is being demerged including:
- Manufacturing facilities at Sahibabad
- All assets (movable/immovable, tangible/intangible) whether recorded in the books or not.
- Employees
- Contracts, licenses, permits.
- Tax attributes, receivables, liabilities.
- NCDs related to the Paper Business
- Proportionate common liabilities
will get transferred to Magnum Paperz Ltd as a going concern.
Consideration
For Equity Shareholders of Magnum Ventures
As the scheme is a composite scheme of demerger with reduction of capital, share swap ratio and adjustment to present paid up capital equity and Preference shares, both are as follows –
- For every 10 existing equity shares → 2 new equity shares in Magnum Paperz
- Post demerger, Magnum Ventures will reduce its equity capital by 70%, leaving shareholders with:
- 3 equity shares retained in Magnum Ventures
- 7 shares cancelled
So effectively, 50% of the paid-up equity capital is reduced. A shareholder holding 100 shares of Magnum Ventures before the Effective Date of the scheme will hold 30 equity shares of Magnum Ventures Ltd and 20 equity shares of Magnum Paperz Ltd. No doubt the shareholder’s percentage holding in Magnum Ventures and Magnum Paperz will be identical hence no loss of any beneficial interest.
For Preference Shareholders of Magnum Ventures Ltd
- For every 10 CRPS one holds in Magnum Ventures Ltd will get → 9 new CRPS in Magnum Paperz Ltd
- Magnum Ventures Ltd cancels 90% of its existing CRPS (retaining 1 out of 10).
- So, after the transaction, in total a shareholder will continue to hold 10 CRPS.
Impact on NCD Holders
NCDs relating to the Paper Business will get transferred to Magnum Paperz, Ltd. There will be No change in coupon, tenure, redemption, security, listing status or investor rights post transfer. NCDs will remain listed and tradable after transfer. In addition, Promoters will support servicing obligations if needed. Thus, repayment of NCDs and interest thereon is backed by personal guarantees of the promoters.
Rationale for the Demerger
The board/Audit Committee gives several reasons which are summarised as follows:
- The company has two unrelated businesses (paper & hotel). Post demerger dedicated management team will lead to operational efficiency. It will also lead to better risk segregation.
- Both businesses will have strategic flexibility.
- The scheme will lead to better capital structuring by dividing the present paid up capital based on each business needs and servicing capabilities and the reduction of excess capital. This will enable both businesses to raise funds independently. It will be easier to attract investors relevant to each business.
Tax implications
The Scheme explicitly states that it is structured to meet all conditions of a tax-neutral demerger under Section 2(19AA) of the Income Tax Act, 1961. All tax ‑related attributes specifically relating to the Paper Business transfer to the Resulting Company, including:
- GST input credits
- Income Tax refunds
- Unabsorbed depreciation
- Accumulated losses (subject to Section 72A & 2(19AA))
- MAT credit this ensures Magnum Paperz continues with the same tax history of the Paper Division.
Under GST, a transfer of a division on a going concern basis is treated as:
- A non-taxable supply and attracts 0% GST (exempt under Notification 12/2017). The Scheme confirms this classification.
- All GST credits attached to the Paper Business shift to Magnum Paperz.
- All ongoing GST assessments, investigations or litigation relating to the Paper Business shift to Magnum Paperz Ltd.
Tax Treatment for Shareholders
Non-Convertible Debentures (NCD) Tax Position
- There is no tax impact NCD holders because NCD terms do not change.
- Transfer to Magnum Paperz occurs without modification to coupon, tenure, redemption, or security. even it continues to remain listed on the stock exchange.
Accounting Impact
[su_pullquote align=”right”]“By hiving off the paper division, the scheme creates strategic flexibility for both entities to raise capital independently and attract industry-specific investors”[/su_pullquote]All assets and liabilities of the Paper Business will be transferred at book values, ignoring any past revaluation. This maintains tax neutrality. Equity capital is reduced by 70% and CRPS is reduced by 90% and the net worth and balance sheet is recast as per Ind AS (Pooling of Interest method).
Sequence of Implementation
- First demerger of the paper division takes effect.
- As a result, Magnum Paperz will issue new shares to shareholders of Magnum Ventures Ltd.
- Magnum Paperz shall cancel its existing paid-up capital.
- Magnum Ventures reduces its share capital.
Conclusion
Magnum Ventures is hiving off its Paper Business into Magnum Paperz, issuing shares to its shareholders in a mirror shareholding structure, reducing its own capital, and transferring all paper-related assets, liabilities and NCDs to the new entity — with no impact on creditor or NCD rights.
[su_note note_color=”#83ff7d” radius=”5″]Please feel free to share/retweet the article and as always you can write down in the comment box below for anything related to the article. We would love to answer.[/su_note]
