Part one of this
article explained the various parts of the restructuring of the TVS holding companies, specifically in the context of TVS-E.
The unfinished agenda was for the promoters to hold 59.84% of the shares in TVS-E directly.
To avoid stuffing too many facts into one article, part one skirted the emergence of TVS Investments Pvt Ltd (TVSIPL) itself as the holding company of TVS-E.
TVS-E was initially set up as a subsidiary of Sundaram Clayton Ltd (SCL) sometime in the 1980s. SCL, a listed entity, is a joint venture (JV) between the TVS group and the foreign collaborator, Clayton Dewandre Holdings Ltd.
In November 2002, TVS-E and a few other companies were reverse merged into a shell company, TVS e Technology Ltd, that had Rs200 share capital. TVS e Tech was duly renamed TVS-E, and listed afresh in the exchanges!
In the above process, the holding structure of TVS-E itself changed to move out of SCL and to one of SCL’s subsidiaries, TVS Investments Ltd.
Sometime in 2011-12, the foreign shareholder exited SCL and the TVS group became an 80% shareholder.
Even before the promoter’s shareholding was regularised to 75%, as per the SEBI (Securities and Exchange Board of India) norms, SCL came up with a demerger of its ‘non-automotive business’.
The shares held directly and indirectly by SCL in a clutch of companies were bunched up as an undertaking, representing the non-automotive segment, and demerged into Sundaram Investments Ltd (SIL).
All the shareholders of SCL were allotted shares in SIL. But, in an unprecedented way, the resulting company was not listed, which is normally mandated by the regulator when a demerger takes place out of a listed entity. Later, the Wipro group adopted this approach.
Thus, TVS-E’s umbilical cord with SCL was cut, though its ultimate parent, the TVS holding companies, did not change.
In due course, SIL managed to evict all the public shareholders through buyouts and a compulsory squeeze-out, merged with TVSIPL, and the structure as shown in part one, came to be!
In the process, the TVS family managed to keep its holding in TVS-E around 59% which would have been diluted if the public had continued to hold their portion of the shares in SIL (later TVSIPL). They bypassed the reverse book-building process that would have been necessary if SIL was listed in the first instance.
TVS-E has now come up with a proposal to merge TVSIPL with itself to help the promoters hold the shares directly. The public shareholders will vote on this scheme on 4 April 2025.
This part of the article makes some points relevant to the public shareholders concerning the proposed scheme.
TVSIPL, admittedly, has no assets or liabilities except the 59.84% shareholding in TVS-E. In some sense, it is a shell holding a solitary asset.
It holds no intellectual property (IP) like a brand or trade name or any technical know-how that could be seen as being relevant to the operations of TVS-E for the merger to have a business case.
In fact, when the family settlement took place in 2020, the companies in the TVS group affirmed that there was no royalty or charges payable for the use of the TVS brand name. This is to assure the external investors that the listed entities would suffer no dent due to the family settlement.
The communication that was provided by the promoter to TVS-E is exhibited below. The full letter is not reproduced; only the portion relevant to the brand usage is given here.
Though this issue does not directly arise out of the proposed scheme of merger, to complete the discussion on the brand usage, the relevant part of the report of the board of directors of TVS-E for the FY23-24 is extracted below that sounds quite contrary to the above-stated position-
“Board of Directors of the Company at its meeting held on May 06, 2024, based on the recommendation of the Audit Committee, recognised the need to formalise the right to use the Mark “TVS” by the Company with its current owner viz; Gopal Srinivasan Family Group and approved the payment of brand usage fee by the Company to M/s. Sundaram Investment Consultants LLP (Licensor), an entity nominated by Gopal Srinivasan Family Group, being related party, at the rate not exceeding 1% of consolidated net sales of the Company with effect from April 01, 2023 (“Commencement Date”), subject to the condition that in the event of absence of profit or inadequacy of profit in a financial year, the Company shall pay a fixed brand usage fee of 5,00,000 (Rupees Five Lakhs) to the Licensor for that particular financial year.”
Based on what is available in the public domain, none of the other branches of the TVS family appear to have come up with a similar proposal. The other listed entities that use the TVS brand are far bigger than TVS-E in terms of turnover and profits.
A snapshot of the performance of TVS-E for the last decade is shown here, which is quite modest to necessitate a brand payment all out of the blue!
This also gives some build-up to the role of the independent directors (IDs), especially of the audit committee that approved the brand fee, even in the context of the merger which is the main focus of this article.
Are the IDs batting for the public investors or seeming to side with the promoter?
The proposal for the merger was cleared by the audit committee (AC) and the committee of IDs of the company in the meetings held on 10th and 11 November 2023.
The details of those present at the two meetings can be seen here.
Though quite trivial, the two meetings did not specifically elect any chair. This is unusual at least in the context of the audit committee. Even if the nominated chair of AC was absent, someone else should have officiated as the chair to conduct the proceedings.
(There is another aspect in the list shown under the AC which may attract the eyes of a discerning company secretary in terms of attention to detail. If you don’t find it, don’t feel bad, you are not alone!)
TVS-E’s board is a formidable one for its diminutive size. That also raises the expectation of the standard of governance.
The justification for the merger that the two committees provided in identical language is given here.
Since TVSIPL is a mere shell and the merger has the sole purpose of enabling the promoter to hold directly the listed entity, it is difficult, nay, impossible, to present any advantage to the non-promoter shareholders.
Yet, the charade of listing out some illusory value of the merger to the public shareholders plays out.
This sand castle is easily demolished when more specifically the cost benefit has to be quantified.
See below the predicament of the AC and the inadequacy of the English language to come to their rescue!
In the cut-throat world of commerce, it is difficult to come to terms with any action that has no quantifiable benefit. A corporate action cannot be like Alice’s trip to Wonderland! Live in wishful thinking!
Does this mean that a merger like the one on the anvil should be prohibited?
The answer is a clear no!
In one of the known instances, when the promoters of Ajanta Pharma Ltd sought to merge the family holding company, Gabs Investments Pvt Ltd, the income tax (I-T) authorities butted in and said the merger would lead to tax avoidance.
It is submitted, with due respect, that the national company law tribunal (NCLT) erroneously stopped the merger. If tax is an issue, the authorities can always apply the law when the time comes or disregard the merger as a sham and pursue their interest. The case is an example of how NCLT should not deal with the matter.
NCLT should allow the merger but protect the interest of the public shareholders, at least on two counts.
To the credit of TVS-E, they have addressed one already in the scheme document.
This pertains to any future liability arising to the transferor for its past actions that may devolve on the transferee company. Since the merger results in the liquidation of the transferor entity, the transferee alone stands liable for the past acts of the former.
It is necessary for the promoters, who are the sole beneficiaries of the scheme, to indemnify the transferee. This has been taken care of in the current scheme, an aspect not quite common. Possibly, exceptional.
The other part is the expenses for the merger. For the same reason that the scheme is solely for the benefit of the promoter, it should be borne by them.
Perversely, the audit committee has failed to safeguard the interest of the public shareholders on this count.
The shareholders who attend the meeting on video facility will be failing in their duty should they not highlight this point and ask for a suitable change to the scheme. In the event the board is not addressing the point, the same can be agitated before NCLT in the course of the proceedings.
The most deplorable part of the lengthy and bureaucratic process is the role played by the two stock exchanges in granting their approval.
One of the exchanges in the letter of observations dated 11 December 2023 has raised numerous questions that seem to have no relevance to the present scheme which is a simple merger of an entity that has the sole asset being investments in the transferee entity.
The sole objective is for the promoter to hold the shares directly. There is no detriment to the public shareholders as their percentage of holding is fully protected and even a valuation exercise is not called for as there is no share swap in the commercial sense. The promoters who hold the shares through an intermediate entity get the same number of shares directly. It is virtually an exchange but cannot be termed so for tax reasons.
The stock exchanges asked two dozen irrelevant questions, but not the only relevant one: Why are the expenses not directly borne by the promoters?
To end the discussion, a teaser to the tax buffs!
In the present scheme, the transferor has a single asset, 59.84% holding in TVS-E. Upon merger, that sole asset also gets extinguished. Fresh shares are issued to the promoter.
The tax law defines an eligible amalgamation to be one in which,
Does the definition pose any problem?
Both parts end. Yet, the journey in the Wonderland of restructuring does not!
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(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.)
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