Tata Communications Ltd (formerly known as Videsh Sanchar Nigam Limited) is a $2.9 billion company listed on the Bombay Stock Exchange and the National Stock Exchange of India and is the flagship telecom arm of the $103.3-billion Tata Group.

Hemisphere Properties India Ltd (HPIL) is a public company in which 51.12% is held by Government of India (GOI) and balance share is held by Panatone Finvest Limited (a Tata group company). Presently, shares of the company are not listed on any stock exchange and the company do not have any revenue from operations.

Transaction

Tata-Communications-Panatone-Hemispehere-Properties-Land-Demerger-1

  • In 2002, GOI carried out disinvestment exercise of 25% of its equity holding in the Tata Communications (erstwhile VSNL) and terms of the bid required that bidder will take into account value of land which would remain with the VSNL and exclude surplus lands of approx. 740 acres excluding 95 acres which is in control of defence ministry.
  • Panatone Finvest Limited (PFL) was successful bidder in this process. Subsequently, a share purchase agreement (SPA) and Shareholders Agreement (SHA) is entered into, and to give effect to terms and condition of SPA and SHA it was required that such surplus land to be hived off or demerged into a separate company.
  • Further, Panatone is required to gift, sell or transfer, as the case may be, without further consideration, the shares of transferee company (i.e. now identified as HPIL) as allotted to Panatone under this scheme to
  1. The GOI to the extent of 25% of the HPIL’s issued shares, and
  2. The shareholders of the company (Tata communication) who tendered equity shares to Panatone to the extent their tender was accepted but not exceeding the maximum of 20% of the total issued capital of the transferee company.
  • Hence this scheme of reconstruction and arrangement is entered into by the Tata Communications (transferor/demerger company) and HPIL (transferee company) for transfer of the said surplus land. Swap Ratio will be 1:1 and appointed date is March 30, 2018.
  • Post scheme approval shares of HPIL will be listed on stock exchanges in which majority control by GOI

Tata-Communications-Panatone-Hemispehere-Properties-Land-Demerger-2Surplus Land Details

Total surplus land which is transferred as a part of demerger is 740 acres (approx.). Book value of total surplus land is Rs 0.16 crore.

Unusual appointed date

Appointed date is kept as 30th March, 2018 and not the 31st March/1st April as normally followed practise, it seems company does not wants to keep surplus land in its  March-18 financials.

Shareholding Pattern

At present, in Tata communication, GOI holds 26.12% and Panatone & group companies (consist of Panatone, Tata Sons and Tata Power) holding is 48.88% and balance around 25% is with the Non-Promoter/Public.

Table 1: Pre-Transaction Shareholding Pattern of Tata Communications

Particular No of Shares % Holding
Promoter & Promoter Group
Govt of India 7,44,46,885 26.12%
Panatone Finvest Limited 8,57,76,654 30.10%
Tata Sons Ltd 4,00,87,639 14.07%
The Tata Power Company Ltd 1,34,22,037 4.71%
Sub-total (A) 21,37,33,215 74.99%
Public
Central/ State Govt/President of India 5,25,000 0.18%
Institutions 5,29,92,585 18.59%
Others 1,77,49,200 6.23%
Sub-Total (B) 7,12,66,785 25.01%
Total (A +B) 28,50,00,000 100%

Note: Pantone acquired 25% stake from GOI and then additional 20% from public through an open offer in 2002, thereafter the TATA group has been increasing and decreasing its stake with final stake as above which is in SEBI regulations compliance.

Table 2: Pre-Transaction Shareholding Pattern of Hemisphere Properties

Particular No of Shares % Holding
Government of India 25,560 51.12%
Panatone Finvest Ltd 24,440 48.88%
Total 50,000 100.00%

Table 3: Post-Transaction Shareholding Pattern of Hemisphere Properties

Particular On demerger* On transfer Total % Holding
Government of India 7,44,46,885 7,12,50,000** 14,56,96,885 51.12%
Non-Promoter
Public – Others 7,12,66,785 5,70,00,000** 12,82,66,785 45.01%
Panatone Group Companies (Panatone, Tata Sons and Tata Power) 13,92,86,330 (12,82,50,000) 1,10,36,330 3.87%
Total 28,50,00,000 28,50,00,000 100.00%

*Existing sharecapital of HPIL will stand cancelled.

**As per the terms, Panatone will transfer 25% of issued shares capital to GOI and 20% to public shareholders of erstwhile VSNL who tender their shares through offer letter to Panatone.

Compliance of SEBI Norms

As HPIL will be applying for listing on stock exchange, shareholding pattern of HPIL post scheme will be compliant of SEBI requirement where promoter holding is not more than 75%.

Increase in Authorised Share capital

As part of scheme, authorised share capital of HPIL will be increased massively from exiting 25 lakhs to Rs 10,000 crore. Possible reason to do so is government expecting to raise further capital for carrying out development of surplus land.

Authorised Share capital of HPIL(Post Scheme) No of Shares Amount. (In Rs. Crores)
Equity Shares 900 9,000
Preference Shares 100 1,000
Total 1,000 10,000

Concern with respect to development of land

  • There are litigations/disputes for some part of surplus lands are going on in various courts, till the time matters are resolved any kind of development on the said litigation properties may be hampered.
  • Almost 70% of the land viz is 524 acres is in Pune and adjacent to defence establishment, developing this property may require defence ministry clearance which may delay the execution work.
  • Some part of parcel of land approx. 95 acres is in control of defence ministry which was handed over to them during the period of war in 1940 and was in there possession and lease rent was paid until March 2006. Subsequently, Ministry of Defence stopped paying rent and informed company that land was transferred to them by GOI under a Pune Package deal and no compensation is payable to them. The company continues to pursue the matter for compensation for the unpaid rent and the value of the land. Due to this, quantum of surplus land available for demerger has reduced

Taxation

  • With the objective to give effect to the terms of the SHA and to facilitate the demerger of Surplus Land in a tax neutral manner for the Company, the GOI has inserted an Explanation 5 to clause (19AA) of section 2 of the Income Tax Act, 1961 (Explanation 5) with effect from April 1, 2017 by a recent Taxation Laws (Amendment)Act, 2016.
  • Terms of the provisions of Act specified that reconstruction or splitting up of a company which ceased to be public sector company as a result of transfer of its shares by the central government, into separate companies, shall be deemed to be a demerger, if the following conditions are fulfilled, namely
    • That such reconstruction or splitting up has been made by way of transfer of any assets of the demerged company to the resulting company to give effect to the conditions mentioned in the SPA/SHA; and
    • That the resulting company is a public sector company on the appointed date indicated in the scheme approved by the Appellate Tribunal constituted under Sec 410 of the Companies Act, 2013 (18 of 20134 in this behalf.
  • Accordingly, the reconstruction and splitting up of the transferor company into separate companies, by way of transfer of the surplus land to the transferee company, is to be undertaken in terms of Explanation 5 to section 2(19AA) of the Income Tax Act, 1961 and shall be in compliance with the conditions notified in this respect by the Central government.
  • Stamp duty on market value of said surplus land is to be paid by the transferee company. It will need surplus cash and which will have to be financed by loan or dilution in equity.

Demerger effect

  • GOI will majority control of HPIL with 51% Stake, estimate market value of the said surplus land at Pune only can be around 7000 crores. Having such big land pool will give govt various options to explore for revenue generation.
  • Based on the media reports, GOI may engage NBCC India Ltd for development of said surplus land.
  • Tata group companies will just have 3.87% stake in HPIL and relived them from their obligation under SPA/SHA.
  • There will not be any impact on Public shareholders, they may get valuation benefit. If any happens during listing of shares of HPIL.

Conclusion

It seems that finally with insertion of new clause and explanation for tax neutral demerger specific for the said transaction in the Income Tax Act 1961, the long pending issue of demerger is taking its shape. The public shareholders who exited on open offer will have some relief due to listing of HPIL. Now going forward the growth in HPIL will depend on how government explores various option for its development and intention to do so is also reflected from the increased authorised share capital limit. Further GOI can also look for disinvestment from HPIL to cash in.

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