Tata Steel shareholders are in for a long haul
How big is the Corus deal compared to Tata’s size?
Rekha Sam
Tata Steel is to fork out $3.88 billion, which is almost twice its foreign exchange earnings by way of exports for the year 2005-2006. The amount will be by way of equity contribution to Tata Steel, UK, the Special Purpose Vehicle (SPV) created by the Tatas to insulate Tata Steel’s Indian balance-sheet from the deal except for this investment, which translates into a whopping Rs 18,000 crore. This is more than its capital employed of Rs 14,364 crore, as disclosed in its financial highlights for the year ended 2005-2006, and more than its net worth of Rs 9,502 crore.
Financing route
What are the formalities involved in the financing of the Tata-Corus deal?
Manoj Desai, Kanpur
The present automatic route regime allows foreign investment up to 100 per cent of the net worth. Tatas obviously must have sought special permission from the Reserve Bank of India so as to make this mammoth investment, not possible under the automatic route because its net worth as on March 31, 2006, was only Rs 9,502 crore.
In addition, Tata Steel UK has gone for a $5.63 billion non-recourse loan to finance the deal. Such massive use of borrowed funds for acquisition was called `bootstrap acquisition’ during the initial stages of inorganic growth path chartered by companies in the US. Soon the term, with implications of trauma for the acquirer, was replaced by a more agreeable `leveraged buyout’.
ADR/GDR option
Could the money for buying Corus have been raised through ADR/GDR?
Kripa John, Kottayam
Tatas had also the option of going for issue of ADR/GDR, which in simple terms means raising of equity from foreigners and foreign entities in hard currency, to bankroll its acquisition of Corus. But Tatas seem to have made a policy decision — no acquisition should impact the balance-sheet of its Indian outfit. An ADR/GDR issue would have swelled Tata Steel India’s capital to uncomfortable levels
When, the payoff?
When will shareholders of Tata Steel see the fruits of Corus takeover?
Rakesh Modi, Kolkatta
The dividend received from Corus by the Special Purpose Vehicle obviously cannot be distributed in turn as dividend by it to Tata Steel till such time the huge loans are not liquidated. This then is the main plank of a leveraged buyout strategy — use yields from the investment themselves to pay off the loan, which incidentally is secured by the assets of the company taken over.
Tata Steel shareholders, therefore, are in a for a long haul. The sizeable investment while not yielding any return till the SPV has paid off the loans would evidently entail a huge interest outgo as its own internal accruals obviously would not have been sufficient to bankroll it. Ironically then, a transaction touted as off-balance-sheet would after all at the end of the day leave its mark on it.
Section 54 benefit
Can I get the benefit under Section 54 when the gap between sale and purchase of a new flat is one year and five months? The flat, which I sold, was rented out and the rental income was shown in my income. Since the flat belonged jointly to my mother, and me, can I show the proceeds in my mother’s income and claim exemption?
Ashok, email
The exemption can be claimed by purchasing a flat or any residential house within two years from the date of transfer. Pending this, you must open an account under the Capital Gains Accounts Scheme 1988 with an authorised bank and deposit the capital gains therein which can be withdrawn only for purchase of a house within the prescribed period. The property is presumably registered with your respective shares specified, in which case both of you are separately assessable only on the respective share. The same applies to exemption under Section 54 also. In other words, both of you must comply with its requirement to get exemption thereunder.
Takeover regulation
As a student of CA, I’d like to know how the Companies Act regulates mega takeovers such as of Corus.
Jithu Jeet, Mumbai
Section 372A of the Companies Act requires a special resolution of the members in case the aggregate inter-corporate investments, loans and guarantees exceed 60 per cent of its net worth or 100 per cent of its free reserves, whichever is greater. Needless to say, such a resolution would have been passed beforehand.
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