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Friday, June 23, 2017

Delhi HC allows Singh brothers to sell Fortis stake with a rider

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New Delhi: The Delhi high court on Wednesday cleared the way for former Ranbaxy promoters Malvinder and Shivinder Singh to potentially sell a stake in Fortis Healthcare Ltd on the condition that the disclosed value of their unencumbered assets will remain unaffected.

The order was passed to afford protection to Japanese drugmaker Daiichi Sankyo Ltd in terms of ready realizable value of assets at a later stage. As a result, value of stake in holding companies, namely RHC Holding Pvt. Ltd and Oscar Investments Ltd, would not change.

The value of unencumbered assets held by the Singh brothers in both these companies amounts roughly to the arbitration award of Rs2,500 crore handed down by a Singapore tribunal in 2016 in favour of Daiichi in relation to its 2008 purchase of a majority stake in Ranbaxy.

“Corporate transactions cannot be stalled at the behest of a decree holder, Daiichi in this case,” Justice Sanjeev Sachdeva said, adding that irrespective of any transaction by the Singh brothers, the value of unencumbered assets could not be diminished.

ALSO READ: IHH Healthcare set to seal deal for Fortis, SRL stake

RHC Holdings has an 80.67% in Fortis Healthcare Holding Pvt. Ltd while Oscar Investment holds the remaining 19.33%. Fortis Healthcare Holdings in turn has a 52.5% stake in Fortis Healthcare.

Daiichi had moved the court earlier in the day in a contempt plea against the Singh brothers, alleging that the proposed stake sale by them in Fortis Healthcare was in contravention of earlier orders and would adversely affect recovery under the arbitral award.

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Sandeep Sethi, counsel for the Singh brothers, while not confirming the deal, told the court that there was a likelihood of infusion of fresh capital due to which the valuation of assets could increase.

In April, the Japanese company had similarly opposed the sale of an 80% stake in Religare Health Insurance Co. Ltd to a group of investors led by private equity firm True North and submitted that the Singh brothers had violated a previous order requiring them to take court permission to part with unencumbered assets.

The arbitral award came after Daiichi alleged that the Singh brothers had concealed crucial information while selling Ranbaxy to it for $4.6 billion in 2008. The Singh brothers are contesting the award.

Sun Pharmaceutical Industries Ltd purchased Ranbaxy from Daiichi in a $3.2 billion acquisition it completed in 2015.

Mint reported on 20 June that IHH Healthcare Bhd, Asia’s largest private hospital operator, is set to buy a controlling stake in Fortis Healthcare and SRL Diagnostics Ltd from the Singh brothers in a deal that values the two companies at close to $2.9 billion.

GST: why profit may become collateral in war on profiteering

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Since the time the first set of goods and services tax (GST) rates were announced, the S&P BSE Fast Moving Consumer Goods (FMCG) Index is up by 8.6%. Some of that is due to the broad market rising by 2.8% in this period and the monsoon’s onset has brought cheer too.

The FMCG sector is expected to benefit in the long term from a more efficient business structure. Even in the near term, moderation in tax rates on some goods was positive for the industry, but the government’s anti-profiteering rules may be a dampener.

A Credit Suisse note said the rules do not augur well for FMCG companies, according to a report on Moneycontrol.com. This is especially true for Colgate-Palmolive (India) Ltd, whose share has gained by 12.7% since 18 May, as margins on toothpaste were expected to increase due to lower tax outgo under GST. That view may no longer hold good.

Also Read: Are half-baked anti-profiteering rules a nightmare in the making?

The new anti-profiteering rules imply that all savings must be passed on, including the benefit earned from input tax credit. What does this mean? At present, if a company was selling a product for Rs100 and it included indirect tax of Rs30, the net realization was Rs70. Under GST, if the tax comes to Rs30 and input tax credit is Rs10 then the net tax payable is Rs20. The government wants the new price of the product at Rs90 (Rs70 plus tax Rs20), implying a 10% reduction from the earlier price. Even a retention of Rs5 as savings will fall foul of this law, as it stands.

Now, companies never said they will retain all tax savings. For instance, a Hindustan Unilever Ltd investor presentation mentions that GST on soaps, toothpaste and detergent is lower than the current level. But the management said it intended to use savings in one category to offset increases elsewhere. That is, at the company level it would pass on net benefits due to GST.

The current anti-profiteering rules don’t offer that flexibility, simply saying any tax reduction in supply of goods and services must be passed on by a commensurate reduction in prices. More clarity will emerge when the National Anti-Profiteering Authority determines the methodology and procedure for taking up cases, said the finance head of an FMCG company who did not want to be identified. He said the spirit of the rules indicates that tax benefits have to be passed on and the government’s intention is to take on profiteering and not profit, which is essential for a business.

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Also, anybody can file a complaint but will have to show evidence that tax savings have not been passed on. This requirement will ensure a system of checks and balances, according to the official quoted above. However, that information may be available with the government or competitors.

The National Anti-Profiteering Authority’s tenure is for two years, which Abneesh Roy, analyst and vice-president at Edelweiss Securities Ltd, believes is too long and one year should have sufficed. Being a competitive market, the need for this sort of a mechanism was also not strong, at least for the FMCG sector, he said. Companies cannot afford a situation where their products are not priced competitively.

The anti-profiteering clauses can be a dampener in the near term. While any immediate benefit to margins from GST seems unlikely, there is a risk of rivals filing cases and companies getting stuck in litigation. Investors should move their sights beyond a near-term boost to margins from tax savings, to the longer run when the structural benefits of GST should set in.

The flip side of GST: its impact on the informal economy

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The markets are gung-ho about the shift to the goods and services tax (GST). One factor driving this optimism is the anticipated shift of business from small, unorganized firms in some sectors to organized ones. Since the latter are already in the formal economy, comply with regulations, are generally larger in size and pay taxes, the switch will be much easier for them, which will ultimately translate into increased market share.

Analysts have been preparing lists of companies that will benefit in sectors such as apparel, tiles and sanitaryware, plywood, textile, footwear, electrical equipment and appliances, and plastics and packaging. All these sectors have a high composition of unorganized firms (see chart).

For example, analysts expect the share of the informal segment in the tiles industry to decline from 40% currently to 20%. Similarly, nearly 60% of the ready-mixed concrete market is unorganized. In the light electrical segment, more than 35% of the businesses are in the informal sector. Certainly, this augurs well for larger companies in the organized sector. This also comes at a time when volume growth has just recovered from the effects of demonetisation and corporate India is desperate for a much-awaited earnings recovery.

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But the gain in market share of listed companies means a corresponding fall in the share of units operating in the informal economy. GST is sure to take a toll on the financial health of small- and medium-sized enterprises (SMEs) operating in these sectors. Economists say that the informal or unorganized sector accounts for nearly 50% of India’s gross domestic product and is responsible for more than 80% of total job creation in the country.

Many of the firms operating in this part of the economy make profits largely due to tax evasion and non-compliance with regulatory norms, which allows them to offer products at comparatively lower prices. However, in the GST-era, it will be a struggle for survival for such firms because they will be faced with taxes, lower margins and a sharp spike in the cost of compliance. Some firms in the unorganized sector may go under, while others could find their profits curtailed. To be sure, in some instances the two sets of companies cater to different customers, but there is always some overlap. And it is not just the manufacturers in the informal economy who will suffer but also the smaller dealers and wholesalers.

The economics of logistics under the GST regime also favour large companies in the organized sector.

A final decision on e-way bills, which will have a significant impact on the logistics sector and logistics cost of manufacturers, is pending. When implemented, this should result in a decline in transit time due to elimination of multiple checkpoints and consolidation of warehouses. This will aid large companies that operate across India and offset some of the cost advantages that regional and small firms, usually those in the unorganized sector, enjoy.

The point is that the squeeze on the informal economy may well lead to job losses, which could then start hurting demand. So while companies in the organized sector could benefit, there could be distress in the informal economy. Indeed, the situation could be a repeat of what happened during demonetization, when the informal sector was the hardest hit.

The move to the new tax regime has the potential to cause immense disruption to the shadow economy that is the source of livelihood for many, although it is nobody’s case that firms that survive by flouting regulations and evade taxes continue to do so.

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With the 1 July deadline around the corner, there are many SMEs who are ill-prepared for the transition. Those of them who fail to make it on time will be out of business, thus leading to increase in unemployment, at least initially, caution analysts.

The switch to GST will increase the size of the formal part of the economy and increase productivity, but it will also extract a cost from the most vulnerable firms and workers.

Three reasons why Tata may buy Air India stake with Singapore Airlines

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New Delhi: The Tata group, which founded India’s first commercial airline, Air India, which was later nationalized, is considering buying a stake in the debt-laden national carrier in partnership with Singapore Airlines Ltd, a person familiar with the matter said.

“It’s a possibility,” the person said, requesting anonymity. “You sign the cheque and from the very next day imagine the clout you have in the subcontinent, deep into Europe and the US.”

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Three reasons why Tata may buy Air India stake with Singapore Airlines
Finance minister Arun Jaitley said on 1 June that he favoured selling the loss-making Air India, although a formal decision on the sale has not been taken. Jaitley added that he had asked the aviation ministry to look at possible ways of privatizing Air India.

Spokespersons for the Tata group and Singapore Airlines declined comment.

A second person familiar with the thinking in Bombay House, the corporate headquarters of the Tata group, claimed that the conglomerate’s former chairman Ratan Tata and current chairman N. Chandrasekaran have informally (and separately) discussed their interest in Air India with various government officials. Mint couldn’t independently verify this.

The Tata group and Singapore Airlines launched Vistara in 2015. The joint-venture airline will start plying international routes next year.

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To be sure, it is not certain the government will go ahead with the “privatization process” or that Tatas will take over the airline.

Still, it can’t be denied that the groundwork for a possible divestment is being put in place.

A committee of top bureaucrats, which includes civil aviation secretary R.N. Choubey, has sent its views on Air India’s divestment to the Department of Investment and Public Asset Management (Dipam), said an aviation ministry official who did not want to be named.

In the next step, a note prepared by Dipam will have to be approved by the Union cabinet. Once the cabinet gives its approval, specifics related to how much stake should be sold and how, will be decided.

“We are far from that stage,” the ministry official added, referring to the sale process.

The Union cabinet is expected to meet on Thursday but it is unclear if the national airline’s privatization plan will be part of the agenda. Finance minister Jaitley is currently on a three-day visit to Russia to boost defence ties.

Choubey, who has been part of the deliberations including those related to Air India’s asset valuation, is also in Paris this week for the ongoing air show.

Three reasons

The first person cited above highlighted three reasons for Tata’s interest in the national airline.

First, chairman emeritus Ratan Tata is passionate about aviation (just as he is about cars). Air India was launched in 1932 by J.R.D. Tata as Tata Airlines. Its name was changed to the current one in 1946. The government decided to take it over in 1953.

Second, Vistara is on the lookout for bigger planes to fly international next year. Air India has enough (its fleet strength is 118). Vistara has still not announced its proposed wide body fleet order.

Third, Air India will provide an unmatched network depth to Singapore Airlines, which itself is under pressure from rivals such as Thai Airways, Cathay Pacific and Emirates.

“Singapore Airlines will become a very strong carrier if this happens,” the person said, adding that the Tata group would probably want a majority stake, a write-off of the airline’s accumulated losses and a reduction in the airline’s considerable debt of around Rs50,000 crore.

In 2000, the Tata group and Singapore Airlines had expressed their interest in acquiring up to 40% of Air India. In 2013, after a meeting with the then aviation minister, Ratan Tata said the Tata group would be interested in buying a stake in Air India if the government were to privatize the airline.

Sebi eases M&A norms for distressed firms

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Mumbai: The Securities and Exchange Board of India (Sebi) relaxed some rules on Wednesday to hasten the resolution of stressed assets in bank balance sheets.

The regulator has exempted buyers of shares in distressed companies from the requirement of making an open offer even if the purchase triggers such an event under the takeover code, Sebi announced after its board meeting on Wednesday.

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Under Sebi’s takeover norms, one of the triggers for an open offer is when an entity acquires 25% or more in a listed company. The entity then has to make an offer to buy an additional 26% stake in the company from the public shareholders.

Sebi said it has come across cases where lenders acquired shares in a distressed company but could not sell the stake to a new investor because the takeover norms proved restrictive and reduced the funds available for investment in the stressed firm.

This has triggered the need for additional relaxation, which is at present available only to financial creditors under the Reserve Bank of India’s (RBI’s) strategic debt restructuring (SDR) scheme. Indian banks are currently sitting on stressed assets of Rs10 trillion and last week, RBI identified 12 large accounts where it directed banks to initiate bankruptcy proceedings.

These exemptions, however, will need to be approved by a special resolution (at least 75% shareholders voting in favour). Secondly, the shares bought by the new investor will also be locked in for at least three years, Sebi said.

The regulator said it will grant similar exemptions for those firms which have got their resolution plans approved by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code.

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“The new insolvency law allows insolvency professionals a lot of latitude to try different permutations and combinations to unlock the maximum value of a stressed company,” said Sandeep Parekh, founder of law firm Finsec Law Advisors. These would range “from a wipeout of existing equity and issue of new equity to banks to sale of a substantial stake to a strategic investor to a listed spin-off. If each stage of a multi-stage action plan triggers open offers and other Sebi regulatory costs, the unlocking of value to banks of their already distressed assets would come down”.

Secondly, the regulator also relaxed laws which will make it easier for private equity-backed firms to raise funds through new share sales. It has exempted category II alternative investment funds (AIFs) such as private equity and real estate funds from the mandatory one-year lock-in of shares when a company they have invested in goes for an initial public offering. Currently, category I AIFs such as venture capital and infrastructure funds are granted that exemption.

“This would bring about uniformity, ease of doing business and expand the investor base available for capital raising,” the regulator said in a statement.

A third set of announcements were related to proposals that will allow foreign portfolio investors (FPIs) easier access. The regulator said it was planning to allow more regions to grant FPI registration by including countries that have a diplomatic tie-up with India, simplify so-called broad-based requirements and relax ‘fit and proper’ rules.

An FPI is considered to be broad-based if it has at least 20 investors, with none of them holding more than 49%. However, if the broad-based fund has institutional investors, it is not necessary for the fund to have 20 investors, according to existing Sebi norms.

Sebi will soon float a discussion paper to introduce the new FPI norms, said chairman Ajay Tyagi.

However, the regulator continued to be tough on investments through participatory notes (P-notes). On Wednesday, it formalized its proposal (made in a discussion paper in May) to levy a fee of $1,000 on subscribers of offshore derivative investments (which typically involve P-notes).

The regulator said it is also in the process of reviewing norms for the equity derivatives market and plans to release a discussion paper.

“Retail investors are not fully aware of the risks involved in derivatives investment,” said Tyagi.

In the ongoing case of alleged violation of algorithmic trading norms by the National Stock Exchange of India Ltd, the markets regulator said it has issued show-cause notices to 14 key managerial persons of the bourse and will do its own investigation with the help of forensic auditors.

“We have also started an investigation to look into issues of possible connivance between NSE employees and brokers and unfair gains for brokers,” said Tyagi.

EY, which was appointed as the forensic auditor to prepare a report on NSE, will submit its report to Sebi in two weeks, said Tyagi.

Separately, in a circular, Sebi said it has allowed hedge funds to trade in the commodity derivatives market, subject to certain safeguards.

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