In the past few quarters, a slowing economy has kindled some fresh noise on improving the ease of doing business. Just yesterday, the new chief of Securities and Exchange Board of India (SEBI) talked of an optimal level of regulations.
A few days back, there was news that the procedures for corporate mergers may be eased. The claim that the new tax bill would make the law simpler to understand and ease compliance may still be under probation; nevertheless, it holds the government to account, if the experts find it otherwise.
Given so much consciousness around this topic, there is reason to be optimistic that at least some changes may be on the anvil. In this background, this article discusses an avoidable hassle for corporate promoters by discussing a live case study.
A major feature of the Indian corporate landscape is the dominance of family-owned companies and conglomerates. These have evolved in a particular trajectory due to the nature of the laws prevalent at different points in time and how the financial system dealt with the corporate sector from a funding perspective.
However, the family enterprises that are in the second and third generation of ownership have come to countenance the challenge of the siblings and cousins who wish to pursue an independent course. Family settlements and family disputes have been on the rise in recent months.
When a generational shift happens in the families and the need arises to separate, the process is fraught with complications and cost.
A typical family conglomerate may have one or more of the characteristics shown in the picture here.
In this illustration, family A seeks to split from the common holding structure and take direct shareholding control of A Ltd.
If no laws and rules existed, it should be possible to hand over the shares of A Ltd, held currently by A Pvt Ltd, to family A. In turn, family A would relinquish their interest in the group holding company.
At best, a one-page agreement is entered into, so that there is no dispute in the future!
However, that is not possible due to how the taxation law operates, even if the corporate law can be flexed to make it possible in some manner.
Unless a share is swapped in the course of a merger or a demerger, a tax liability would arise. Thus, the preference in the tax law for a particular methodology, believing it to have some sanctity, is the reason for a convoluted process to be adopted to get to the same result.
If the tax law recognised the simple fact that no superior economic value is gained in the process of family A surrendering its interest in the group holding company for obtaining a direct interest in A Ltd, and deferred the applicability of any tax to the time when the shares are actually monetised or some other distinct benefit is obtained, there would be actual ease in accomplishing family settlements.
Does it all sound too bookish and hypothetical? No! A real-life example would substantiate this aspect.
The first part of the story told here may be known to many. The middle part, not so much and the tailpiece is yet to play out fully!
The TVS group, predominantly based in the south, had a structure similar to the picture earlier seen.
The family, with many distinct branches, commonly held a clutch of three holding companies: TV Sundaram Iyengar & Sons P Ltd (TVSS), Southern Roadways P Ltd (SRPL) and Sundaram Industries P Ltd (SIPL).
These three entities owned shares in most of the TVS group entities that used the common brand. Many of these are listed entities with significant public shareholding.
The family set about to separate the ownership of the companies across its different branches.
The actual layers involved with regard to one of the branches is shown here. In this case, at the tail end of the ladder is a public listed entity, TVS Electronics Ltd.
The reason for picking this strand as an example for this article will be uncovered as the reader travels further.
The composite scheme of arrangement that the family initiated is not in the public domain as the entities that are publicly listed were not part of the arrangement put through. However, some information has become available over time and it is used to illustrate the process.
The actual process must have been not too different from what is explained here. The picture shown below needs to be seen closely to understand how the investments were segregated.
The three holding companies are shown together as they merged into one, as TVSS.
TVS Investments P Ltd (TVSIPL) was the vehicle holding TVS-E and some private entities, earmarked to one branch.
After the merger of the three holding companies, the investments in specific entities were demerged after classifying them as undertakings.
One such was the shareholding in TVSIPL.
Geeyes Family Holding P Ltd (GFHPL) was the SPV designated as the resulting company. The demerger is marked in the dotted red line
The shares in GFHIPL are issued to the family members (green dotted line), removing the layer of TVSS.
As an additional step, maybe unique to this case, the structure was further simplified by merging TVSIPL into GFHIPL (violet dotted line). GFHIPL’s name was changed to TVSIPL.
The final structure achieved at this point in time is shown here on the right.
Since each vertical was demerged, in every instance all the shareholders of the erstwhile holding company were allotted shares in each such resulting company (SPVs).
It is to be assumed that the family agreement addressed the inter-se exchange among all the members so that the respective family branch got full control of the specific companies.
Despite so much of action around this scheme (mother scheme), it did not cover the last mile. Though the common holding structure was dismantled in the above steps, the shareholding structure was not fully optimised as TVSIPL ended as the holding company for TVS-E, rather than the concerned family members receiving the TVS-E shares directly in their hands.
This is the feature in the other cases as well, with similar family investment companies holding the downstream listed entity. For example, TVS Sundram Fasteners P Ltd, a SPV created under the above process holds Sundram Fasteners Ltd, a listed entity. Trichur Sundaram Santhanam & Family Private Limited became the SPV for Wheels India and so on.
The family that took control of Sundaram Clayton and TVS Motors executed another scheme independently to get rid of the SPV, VS Investments P Ltd. This has been covered in articles published in this column.
The exercise of the TVS family split did not concern any public shareholders and, should any tax or regulatory costs arise later, they have no bearing on the public entities.
The story moves to stage two. Delayering the SPV structure under TVSIPL.
The structure relevant to TVSIPL is zoomed in to exhibit the entities involved.
Besides holdings 59.84% in TVS-E, it also held 98.77% in TVS Capital Funds P Ltd (TVSCFPL), which, in turn, held 100% in TVS Wealth P Ltd (TVSWPL).
For the individual promoters to hold the shares of TVS-E directly, there are further steps to be undertaken which are in no way less complicated than what the main holding company did in stage one.
Therefore, a scheme was initiated to remove the two private companies from the above cluster and move their shares directly to the individuals.
This scheme was initiated with 1 April 2023 as the appointed date. The first part of the scheme involved merging both TVSCFPL and TVSWPL into TVSIPL. At that point in time, the two subsidiaries disappeared from the scene.
In the same instance, under the next part of the scheme, with no change in the appointed date, the businesses that were carried on respectively by TVSCFPL and TVSWPL (that were merged), were demerged as two separate undertakings into two resulting companies set up as SPVs.
After this, the names of the two entities are changed to TVSCFPL and TVSWPL, with their original capital structure. This scheme has been fully implemented by July 2024.
The steps are represented pictorially, above. The two entities, TVSCFPL and TVSWPL merged (blue dotted lines) into TVSIPL.
Once the merger is imagined in the mind, the business undertakings of the two merged companies are demerged (green dotted lines) into the two entities shown in violet colour! Their shares are issued to the ultimate shareholders.
The disappearance of the two entities and their fresh appearance, all at the same moment, is like an illusion that anyone who has watched Jadugar Sarkar perform in the olden days would be nostalgic about!
After this exercise, TVSIPL has only 59.84% shareholding in TVS-E.
Those readers whose credulity has been overly stretched by the idea of companies disappearing for a moment and reappearing afresh as shown in this case may find peace in the short story here. One of its many versions is available in our rich lore!
Kakudmi, a king in one of the earliest yugas, wanted to locate an ideal consort for his daughter, Revati, of unearthly beauty.
Together with his daughter, the king went in his inter-galactic shuttle to consult Brahma. On their arrival at Brahmalok, since the creator was in a short conference, the two were retained in the visitor’s area.
Admitted to the presence of Brahma, the King laid out his problem. The creator thought for a split second and said there was an eligible groom on earth, but the problem was that in the few minutes the pair spent in Brahmalok, many yugas passed on earth due to the time difference. The girl’s physical features wouldn’t be compatible with a person born in a later yuga.
The non-plussed king and the distressed maiden were comforted by Brahma to return to earth, where a celestial creature would solve their problem.
As the craft landed on earth, a dazzling damsel in a pregnant state received them. She told the princess to enter her womb which she obeyed. And, in a split second, there emerged from her womb, the same Revati with her original beauty but with the physical appearance in tune with the
yuga then in operation.
Along came a man of other worldly looks, with a plough dangling from his shoulder, seeking the hand of Revati.
Balarama and Revati were happily married!
The woman who helped Revati disappear and reappear vanished once the task was accomplished. Exactly like what would happen to TVSIPL, if the readers wait for the second part of this article soon to be published!
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
But I always read the articles by this writer who tries valiantly to explain the intricacies to the reader with diagrams etc and as in this article with an entertaining folklore.
Thank you Mr Ranganathan. I am sure other readers, who are more savvy than I, appreciate you even more.