Aniruddha JainThe Investment Trust of India Limited (“TITIL” or “Demerged Company”) is principally engaged in the business of offering a range of financial products and services. These various businesses are grouped under two broad segments namely:
- Lending Business activities which involve providing loans or financial facilities to customers through Non-Banking Finance Company (NBFC)
- Non-Lending Business activities which involve securities & commodity broking, fund management services, merchant banking services and distribution of various financial products and services.
The equity shares of the company are listed on nationwide bourses. The key businesses of TITIL i.e., Financing & Broking businesses are being carried through different subsidiaries.
Distress Asset Specialist Limited “DASL” or “Resulting Company”) is a wholly owned subsidiary of TITIL and is engaged in the business of providing advisory and financial services.
Growth in last decade:
TITIL was then started as Fortune Financial Services (India) Limited had two major businesses namely broking & lending business. In the end of 2013, the Company witnessed a change of promoters for the company whereby existing promoters acquired controlling stake from the erstwhile promoters and also gave open offer. Immediately after change, new promoters decided to expand the business.
In 2014, they strengthen their broking business by acquiring 100% equity shares of Antique Stock Broking Limited. Further, it also strengthens its merchant banking business by acquiring 68.2% stake of Inga Capital Private Limited. In FY 2015, new promoters also infused INR 116 crore in the company through preferential allotment.
In FY 2016, the company raised INR 205 crore through right issue. The company also acquired remaining interest in Inga Capital Private Limited making it wholly-owned subsidiary of the Company. The company also acquired a 25% stake in United Petro Finance Limited, a NBFC making it associate company. The company also announced merger of The Investment Trust of India Limited (TITIL) with the company.
In FY 2017, the Company also announced demerger of Lending business from associate company United Petro Finance Limited to its wholly owned subsidiary Fortune Credit Capital Limited. Consideration for the demerger was issued by the Company. The Company also incorporated couple of subsidiaries to start certain financial activities like mutual fund trusteeship, IFSC unit etc. During the year, the Company received in-principle approval from SEBI for setting up Mutual Fund. The Company in capacity of Sponsor and Investment Manager along with Trustee formed an Alternative Investment Fund i.e., ITI Infrastructure Fund a Category I Infrastructure Fund.
In order to diversify, the Company also obtained members approval for commencement of new line of business for trading in goods and commenced the business in trading of textile items.
In FY 2018, pursuant to the merger of The Investment Trust of India Limited (TITIL) with the company, name of the company got changed to TITIL. The company also approved merger of Fortune Integrated Assets Finance Limited with the Company
Meanwhile, the holding company supported subsidiaries/associates companies to grow through inter-corporate deposits, equity subscription, infusion of funds through subscribing other securities etc.
*All figs in ₹ Crores
The growth in revenue’s pertains to its trading business and some of the acquired businesses in broking. It also scaled up financing business significantly during last decade However, despite revenue growth, TITIL is not generating sustainable profits.
The Transaction
The board of directors of both TITIL & DASL approved a Scheme of Arrangement which inter-alia provides for demerger of “Non-Lending Business” activities of TITIL into DASL.
The Appointed Date for the demerger is 1st April 2022. The name of DASL shall change to “The Investment Trust of India Financial Services Limited. The Company has not provided for any change/transfer of directors/Key managerial persons to the Resulting Company.
Though TITIL have not provided with assets & liabilities which will get transferred pursuant to the demerger, from the consolidated segmental financials of TITIL, significant part will pertain to “non-lending business”.
Share capital of the companies involved & Swap Ratio:
| Particulars | TITIL | DASL | DASL (Post-Demerger |
| Equity Shares | 5,15,20,767 equity shares of INR 10 each | 1,00,000 equity shares of INR 10 each | 20,60,83,068 equity shares of INR 10 each. |
| Preference Shares | 2,25,000 1% Redeemable Preference Shares of INR 100 each | - | - |
| Optionally Convertible Preference Shares | 7,32,000 0% Optionally Convertible Preference Shares of INR 325 each | - | 29,28,000 0% Optionally Convertible Preference Shares of INR 10 each |
The paid-up capital of broking businesses (after demerger) will be 4 times i.e., INR 206 crore, the existing paid-up capital of TITIL. This increase will be without infusion of cash.
DASL shall issue 4 fully paid-up equity shares of INR 10 each for every 1 fully paid-up equity share of INR 10 each of TITIL. Post-demerger, DASL shareholding pattern will be mirror image of TITL (except for number of shares). The equity shares issued by DASL pursuant to the demerger, shall be listed on nationwide bourses.
Optionally Convertible Preference Shares:
At the time of demerger of Lending business from associate company United Petro Finance Limited, TITIL issued part consideration in the form of OCPS. DASL shall issue 4 fully paid-up OCPS of INR 10 each for every 1 fully paid-up OCPS of TITIL of INR 325 each. The OCPS issued by DASL (DASL OCPS) shall have the same terms as OCPS issued by TITIL. As TITIL OCPS, DASL OCPS will also not be listed on exchanges.
Reduction of Existing TITIL OCPS
Exiting OCPS issued by TITIL shall stand reduced by INR 160 per share by reducing the existing face value from INR 325 to INR 165 each in lieu of issued of DASL OCPS to each of the TITIL OCPS holders. Equivalent amount (INR 160) of OCPS will be issued by DASL.
Accounting Treatment:
Accounting for the demerger shall be in accordance with Appendix C of Indian Accounting Standard - 103 on Business Combinations and other Indian Accounting Standards as applicable.
The demerged company:
Shall derecognize carrying value of assets & liabilities transferred. The equity investment in DASL shall get cancelled and face value of OCPS shall get proportionately reduced (to the extent of OCPS issued by DASL).
The difference between amount of assets and liabilities pertaining to the demerged undertaking transferred after giving effect of cancellation of equity investment & proportionate capital reduction of OCPS in the following chronology:
- Capital Reserve Account
- Capital Redemption Account
- Securities Premium Account
- Retained Earning
The Resulting Company:
shall record all the assets & liabilities transferred to it at its carrying value. The difference between assets & liabilities as reduced by the face value of shares issued shall be adjusted against capital reserve.
Financials of the TITIL
INR in Crore
For FY 2022
Both lending & non-lending businesses are distinct. Non-lending business which mainly includes broking business has good margins and return on capital employed (circa `24%) while finance is cyclical and to have good profitability require to scale up substantially.
Conclusion
Post change of management in 2015, TITIL went on an expansion spree to become full service financial service providers to its clients. They acquired broking & merchant banking business coupled with others while expanded into other financial products on its own. Meanwhile, they started non-financials activity such as treading in cotton yarn which bolstered its revenue but failed to create value for shareholders.
The current restructuring is aimed at separating the broking & merchant banking business from lending business. DASL (post-demerger) will have substantial capital than requisite for the size of the operations. One may require evaluating Whether such substantial capital (created without infusion of cash) will be considered by regulators while calculating the minimum capital requirement. Time will tell whether this restructuring will create any value for stakeholders.
