Apohan is in the simple business of providing consultancy services for making available adequate equity capital to small and medium enterprises in India for business growth & financial turnaround. It fills in all the gaps in terms of availability of time & expertise in the SME businesses in terms of: Identification of exact problem, formulation of strategy, analysis of the business model, analysis of its funding requirements, identification of an appropriate investor, negotiation with the investor, documentation, deal structuring, investment contracts, hand-holding and allied services.
The activities or transactions that companies undertake to generate revenue (sales of goods, purchase of raw materials, etc) are called operational transactions. The transactions that are not operational or routine are called strategic transactions. Typically, they are of very high value; they require intensive engagement of the top management, board of directors, shareholders and other important key stakeholders. They have very long-term implications; their process is complex; they require a lot of approvals; they are costly to carry out; they are rare or rather once-only events in the life of SMEs, if at all. The strategic transactions include capital transactions, ownership related transactions, control related transactions, financing transactions, business restructuring transactions, business transfers, important decisions, etc. For that matter, any transactions with high stakes and long-term implications are called strategic transactions. The term mergers and acquisitions (M&A) is more popular phrase for many types of strategic business transactions of this nature and is used only for convenience (technically it does not cover all such strategic transactions).
In Apohan, in nutshell, carries out mergers and acquisitions and the allied activities for the SMEs in India to solve their long-term and critical funding problems in case of the the ailing organisations and fulfills the ambitions & aspirations of growth of the companies in good condition but lacking growth capital.
Typically, the small and medium enterprises are owned, managed & led by technocrats, engineers, technology and market experts. They know how to produce the best product and how to sell it with an attractive profit. But, they are very less exposed to and experienced in the world of financing, even the traditional way such as banking, let alone advanced ways such as mergers and acquisitions or equity funding!
1. Indian companies with revenue between INR 25 crore ti INR 500 crore looking for equity for growth
2. Indian small-cap listed companies seeking growth or turnaround equity funding
3. Indian mid-cap listed companies seeking growth or turnaround equity funding
4. Companies seeking financial turnaround through equity funding that had past peak revenue of at leats INR 25 crore.
5. Start-up that can afford pay retention fees & also have potential to grow to revenue of INR 25 Crore in one year.
6. Private limited or public limited companies, other legal forms, holding companies.
7. Large companies seeking equity funding for financial turnaround or growth.
See: How Apohan selects and screens the companies for equity funding? (link)
Apohan provides all the services in the entire spectrum of mergers and acquisitions, strategic transactions, equity funding, business restructuring, capital restructuring and also those strategic business activities that should be undertaken to take maximum advantage from mergers and acquisitions. We provide end-to-end, customized consultancy for all the strategic transactions that a business should explore from time to time to secure adequate capital, to prevent or manage or overcome the situation of financial distress, to turnaround business from financial defaults, to undertake new projects and initiatives, to ensure stability and sustainability of the business, to substitute the existing sources of capital with better ones, etc.
First of all, a small and medium enterprise business person not having any educational background in finance should not get discomforted and nervous with the idea of knowing the advanced topics such as merger and acquisitions. On this website of Apohan, we have made an attempt that every businessperson with basic exposure to running a company can understand all the necessary aspects of M&A. Following is the list of topics that a businessperson should go through to understand the world of mergers and acquisitions in layman’s language:
What are mergers and acquisitions?
What is the difference between “unavailability of capital” and “financial viability” of a business?
Why should companies undertake mergers and acquisitions?
What are the different types of mergers and acquisitions?
Why mergers and acquisitions are not popular among SMEs in India?
What is the process of mergers and acquisitions?
What are the advantages of mergers and acquisitions?
What are the disadvantages of bank finance?
What makes a business eligible for equity funding from private investors?
When to carry out mergers and acquisitions?
What is the cost and time frame of mergers and acquisitions?
What are the allied services for a successful merger and acquisition activity?
What are the misconceptions of businesses about mergers and acquisitions?
How can we compare equity funding and bank loans based on various criteria?
What are the different variants in mergers and acquisitions deals?
Just in the same way a company comes with a wide and complex array of products and services, the merger and acquisition world also has a very wide portfolio of solutions. The need for a specific solution depends upon the circumstances of the business, nature of the investor, their preferences and many other internal and external parameters. Below, Apohan has made an attempt to classify them in a systematic way.
The broadest classification of mergers and acquisitions (the term used in the broadest sense) is based on what is being transacted, sold or transferred and between whom.
What is transacted? Shares of company!
When the owners or shareholders of the company sell shares or securities through share sale purchase agreement between themselves or between third parties, these transactions are called share sale-purchase transactions. The money exchanged in this transactions does not accrue to the company’s account but goes to the personal account of the shareholder. In the manner the shares are exchanged, the other capital instruments of a company also can be exchanged between the members of the company or third parties. When the shares are transferred from one person to another or to another company insubstantial chunk, the proportionate financial benefits and the control of the company passes on to that party. Again, note that this doesn’t result in raising funds for the company for any company purpose as the money doesn’t come to the company.
If the shares of the company are bought by another company from the existing shareholders more than 51%, then the company continues its legal existence but it is called the subsidiary of the the acquiring company. If the shares are bought by individuals or entities that also own other companies, then the company is said to have become the associate company of the group.
One also should note that, typically, in the private limited companies the transfer of shares in this fashion is not permitted by default; and the approval of the board has to be obtained or the articles of association have to be amended.
When are shares transferred? When the shareholders want liquidity for personal purposes or want to invest in some other opportunities, they will transfer their shares.
What is transacted? The long-term producing assets (not the usual products) of the company!
In asset transactions, the very producing fixed assets are sold to the third parties.
There are two types of asset transactions:
In asset sale, every asset is sold individually. That is, if many assets are sold, individual prices are attached to each of the assets. The selling company has to collect the indirect tax (GST) on the sales from the buyer. The proceeds of sale from asset sale are shown as other income in the profit and loss statement; and corporate income tax is paid on it. Sometimes the intangible assets of the company such as goodwill, network, guarantee, brand, network also can be transacted.
When is asset sale carried out? An asset sale can be carried out to raise emergency funds or to replace old technology, machines with new ones.
Slump sale means selling the complete set of assets of a business which can produce a product in independent way as if it is an assembly, without assigning any individual price to any machine tool or any equipment. This should also include transferring (making available) the human resources. But the name of the selling company or the legal entity is retained by the original owner. Sometimes, a production line for a product vertical can be separated and sold under slump sale. No GST has to be paid on slump sale. Instead of income tax, capital gains tax has to be paid on slump sale.
When is slump sale considered? Slump sale is carried out to spin off a vertical, or to get rid of a product, or to get rid of a geographical production centre, etc.
What is being sold, purchased, transacted, transferred, combined or divided in M&A? The companies or the body corporates or the legal entities called companies! Mergers and acquisitions (this is the correct use of the term) is the business of buying and selling companies themselves!
In mergers and acquisitions, the registered and incorporated legal entities are purchased, sold, transferred, combined into a few or divided into many. There are several variants of mergers and acquisitions. The type is decided depending upon the relative size of the companies, which legal entity remains and which legal entity gets dissolved, whether a altogether new entity is created or not, and whether the post-deal on-ground integration is carried out or not, whether the legal entities are divided into more or combined into a few, whether any shareholders are exiting from business permanently, what is the mode of compensation, whether the purchase is full or partial, etc. Broadly, these activities are divided into combinations and divisions.
When two or more companies are combined, the term used is mergers and acquisitions. The other terms used are amalgamation, combination, absorption, acquisition, takeover, etc. The usage of these terms changes with the perspective and the context. Many a time terms are used alternatively.
What happens in mergers and amalgamations? Two companies are combined to form a single company. The shares of the resulting company are given to the shareholders of the the original companies in a certain proportion of the mutually agreed share valuations. Typically, it is expected that all the shareholders from the old companies remain in the new company or occasionally some are partially compensated in cash & may exit in full or part.
When is merger carried out? One can see that mergers do not bring liquid cash to a business account. But they bring lot of mutual synergies and fulfill the gap of deficits. It is not required to expand anything to make these economical gains. There are numerous advantages of mergers.
Mergers generally take place between two companies of approximately equal size. The existing two companies lose their legal existence to form a new company. This is also called consolidation. This can be represented in the following way:
A + B = C; A approximately equal to B
A + B = C;
A >>>>>> B
In case of amalgamation, the acquiring company is very very large than the acquired company. It is also called absorption.
When are mergers undertaken? Mergers are undertaken to create a very big market force by joining together major players of nearly equal size.
A business value chain consists of raw material suppliers, Tier 1, Tier 2, tier 3 vendors, suppliers of utilities, suppliers of technology, suppliers of machine tools, users of byproducts, various players in the distribution channel such as wholesalers, retails, warehouses, logistics companies, retail chains, etc. Value chain also consists of replacement products, substitution product, competing products, niche products and their value chains. Depending upon the role of the two companies involved in merger and acquisition in the supply chain or value chain, mergers and acquisitions are classified in the following manner:
Vertical merger means either acquisition of the direct suppliers or the acquisition of the other key players in the distribution channel. Following are the two types of vertical mergers:
Forward integration means acquisition of a company belonging to the distribution channel the product of a company. Using forward integration, the company participates in the next stage of value addition to the final product. It is a general observation that as we move forward in the value chain the profitability increases. Ownership of the distribution channel also reduces the risk by competition and substitution. Example: Company in manufacturing of paper acquires a company in two newspapers, magazines, publications, notebooks, etc.
Backward merger means acquiring the key suppliers of a company. This saves the company from the supply chain shocks of availability of raw material, prices, etc. Example: If a famous retail brand of clothes acquires a textile mill, it is called backward integration.
Horizontal merger means that the merging companies are in the production of the same products with different name or brand. Example: Acquisition of a cold rolled steel company by another company producing cold rolled steel.
Lateral merger means a merger with a accompany in a different but similar product including at a different stage of production. But the companies being in overall the same sector or industry. Example: A company in in school education acquire another company in professional corporate training.
It is a merger between two or more entities which are related to each through the same set of customers, experts or technology, suppliers, skills, business environment, etc. Example: Merger of a allopathic medicine company with Ayurvedic medicine company.
It is special variety of cogeneric mergers in which two businesses have the same customers, but merging companies offer different products and services to these clients. For example: Merger of a steel company and cement company both of which supply to the real estate and infrastructure sector.
Forward Merger, the company gets acquired by its client company. The concept is not any different than forward integration except with the difference of the perspective which legal entity remains.
In a reverse merger, a company gets acquired by its supplier. The concept is not any different than a backward integration except with the difference of the perspective and which entity remains.
It is a merger between entities operating in an entirely different products, sectors, industries and maybe even markets. It is a merger between entities totally unrelated to each other in terms of what they do and how they generate revenue. Conglomerate merger results in creation of a diversified businesses.
In a triangular merger, the acquirer creates a wholly-owned subsidiary, which in turn merges with the selling entity. The selling entity then liquidates. The acquirer is the sole remaining shareholder of the subsidiary.
Apohan very well understands the role of a SME company in the value chain. Apohan helps its clients in understanding the impact on the value chain of the business. Apohan carries out professional, end-to-end, customized consultancy services through value chain analysis of M&A deals. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
It is a type of merger in which all the assets/control of the smaller company is acquired by the bigger company as a result of which the smaller company loses its legal existence.
In this type of merger the target company becomes the subsidiary of the acquiring company. The existence of both companies continues.
It is the type of merger when both the entities i.e. the acquiring legal entity and the acquired legal entity lose their existences and a new legal entity is formed. This type of merger takes place when both the entities are of the same size.
The word acquisition could be acquisition of control by purchase of the “existing” shares of the company from the existing shareholder or it could be issue of additional equity resulting in the dilution of the control of the existing shareholder and gain of control for the new shareholders. In simple terms, acquisition means buying a company. What happens in an acquisition? All the assets, liabilities, rights and obligations of the target company are transferred to the acquiring company and the target company loses its legal existence. Acquisitions are also called takeovers.
Acquisition is the perspective of the buyer of a business. The seller would look at it as absorption by means of merger. This can be represented in the following way:
A + B = A
In acquisition by controlling shareholding, the target company continues its legal existence, but its management is now replaced or controlled by a new set of people, all the directors nominated by the new shareholders. The degree or extent of acquisition is very important in the acquisition transactions. The percentage of shareholding decides the power of the shareholders in the General Meeting and by implication in the board of directors. An acquisition of share holding can be represented in the following manner:
A + B = A + B
Critical stages of ownership in an Indian company:
25% Plus : When you have more than 25% equity, you can nominate at least one director on the board.
25% plus to 50% minus: When you have equity more than 25% time less than 50%, all the decisions that require special majority cannot be taken without your consent.
50% : When you have 50% equity, you have half the control of the company aur nominal size more control on the company than you.
50% plus 75% minus: When you have holding more than 50% and less than 75%, you have simple majority and you can carry out all the activities that need only simple majority.
75% plus to 90%: When you have 75% or more shareholding, you can pass on all the decisions that require special majority in the board and among the shareholders.
90%: When you have 90% stake in a company, it is called absolute majority, and the number of of government approvals or corporate formalities, board approvals and procedural steps are less and easy.
Among the acquisition by acquisition of controlling shareholding in the target company, there are various types of based on what was the the nature of relationship (friendliness or resistance) between the companies that were undergoing acquisition.
Friendly acquisitions are those in which the required company give easy concurrence and co-operates with the acquiring company.
In hostile acquisition, the target company openly refuses its acquisition by the acquirer. Hence, the acquiring company approaches dissenting or fence-sitting shareholders (or public if the company is listed) directly. Of course, the acquiring company needs to break people, shareholders, etc. till it reaches the desired shareholding in the company. In a hostile acquisition, the acquiring company may purchase a good quantum of shares in a clandestine way.
These are the companies that are always looking for easy and vulnerable target and have expert skills in acquisitions.
When a company faces liquidation, insolvency, or very unattractive hostile acquisition, or operational debt, and if such company is purchased by an investor to save it, it is called bailout acquisition.
The process of acquisition, depending upon whether the company is private limited or public limited, depending upon whether the company is listed or unlisted, depending upon what is the market size of the company, depending upon the financial size of the company, depending upon existence of international transactions, depending upon whether the company is into financial services or not (like NBFCs), depending upon whether it is government owned or private, the applicable laws and regulations for acquisition differ.
When are are acquisitions undertaken? Acquisitions are carried out for rapid, inorganic growth of the company when it becomes too cumbersome to grow brick by brick.
The way companies can be combined, a company can also be divided into more than one legal entities. The divisions of the company are referred to with different terms such as demerger, spin off, split off, split-up, carve out, divestment, divestiture, etc.
When to undertake business divisions? A company should undertake strategic division of business to focus on its core core activities, to get rid of non-strategic assets, to get rid of an attractive markets, to get rid of an attractive products, to get rid of an unattractive geographic locations, or even to raise money in difficult times for the rest of the business.
It is creating subsidiary with same proportion of shares as the main company. In a spin off, a company creates a subsidiary. The holding in the subsidiary and the main company have the same proportion. When is spin-off of carried out? When the company wants to take different decisions, different payment structure, different strategy; wants to give a different degree of push to a product, it creates a subsidiary through spin off.
In a split-up, a holding parent and a few subsidiaries are created from the original company. In the process of splitting up of a company, the company creates a holding company ( which has only financial assets and no physical production operations) and this holding company in turn holds the shares of the subsidiary companies. The shareholding could be different in each company.
When is split up carried out? When a company is into diversified businesses, and the management competencies to run these different activities cannot be managed centrally by the same management, a company is split-up into many subsidiaries. There is no interference from the people not belonging to a product or market in the operations making management of each subsidiary efficient. This is a convenient tool to divide the family wealth in corporate form among the heirs.
It means to separate a business vertical & sell to the outsiders. The division in the form of a split off is a a business transfer in true sense. In the process of split off, a certain vertical of a company is separated into a new, different company; and then it is sold to a third party.
When is split off carried out? When the company wants to exit a certain product, practical, market, or geographical location, it can create a new company, sell it and get rid of that.
In an equity carve out, the holding company reduces its holding in a subsidiary company to very small fraction and instead of showing it as a subsidiary it is shown as just another investment. All the income from such new investment is treated as investment income.
When is equity carve-out undertaken? When a holding company has a substantial shareholding in a subsidiary, it has to report the consolidated income and also fulfill a lot of compliance activity. By becoming marginal or minority shareholder, statutory and regulatory as well as business risk of subsidiary is done away with. However, the financial benefits in the proportion of leftover ownership continues.
When a government sells its stake in the public sector undertakings, it is called divestment. It is typically undertaken through a tender. The process of divestment requires to be fair, equitable and transparent in compliance with principles of natural justice for all the bidders.
When is divestment undertaken? Instrument is undertaken by the government to exit from unrelated business activity and to raise funds to meet the fiscal deficit. It possess a very good opportunity for private businesses to acquire strategic assets in the country.
It is same as divestment but the term is used for the process of dilution of shareholding in the private or public limited companies through a process that is similar to that of divestment. Unlike divestment, divestitures are led by pure commercial motive.
When does divestiture to take place? The dynamics in the shareholding of many companies have many undercurrents. If an investor, or an investor group, or a business house changes its investment strategy, sectors of interest, alliances, etc., it disposes of its existing holding in one company and looks out for new business.
Apohan carries out professional, end-to-end, customised consultancy services under above classification of merger and acquisition activities to achieve the objectives of the business.
A company raises external finance basically from two fundamental variants: Debt and equity. The debt is an essential component of the capital structure of a company. Apohan advises a company in formulation of its capital structure, in deciding the strategy for a loan, in deciding the amount, drawdown and expenditure schedule, interest rate; in negotiating the contract with the lenders. However, Apohan is not into the business of identification of lenders. It is looking for the opportunities to act as the direct selling agents or the channel partners of prestigious banks. For now, so, we will not look into the classification of debt instruments.
Latest look into what all types of equity instruments are available for a company to raise funds:
Most of the small and medium enterprises have only common equity held by a very few people. For the private limited companies, the number is limited to 200. God forbid, but if a company is liquidated, the common equity holders have the last rights on the proceeds of liquidation/disposal. Even during routine operations of a company, they have the last right on the the proceeds of sale. Dividend is paid only if the liability of every other stakeholder is fully met and adequate provisions have been made for the existence & growth of the company. Provided that it is going to be a successful business story, a fresh equity capital is the costliest form of funding available. A business has to share everything with the new owners in the proportion of their ownership. Unlike one can redeem a bank loan and get full control of company back; equity cannot be redeemed, at least technically.
When to issue new common equity? Issue of additional common equity will provide the ownership rights to the new participants that the old business owners would have. This results in dilution of the control. A company should issue equity if it is psychologically amenable to dilute its control on a company. The proceeds of the common equity can be used for any and every purpose of the company that the management feels appropriate. For a business in financial distress, it should raise common equity for financial turnaround and to run the facility at 100% capacity. For a business operating in high growth market, equity capital can be raised to undertake new projects and new marketing initiatives. Looking at it in another way, common equity should be raised when the banks are not lending, or are lending much less band requirement. It is a handy tool, when the institutional lenders cannot understand your business story and growth ambition.
There are two main aspects of ownership of a share. The financial benefit and the other is control of the company. Please note that control of the company, in one’s subjective opinion, has a lot of impact on the financial benefit from the company in long term future. Issue of differential voting rights is very much possible in small small and medium enterprises before the year of listing with less hurdles of corporate process.
This creates Three Types of shares: 1. Common shares – where one share can have one vote 2. Shares with fractional voting rights: Where one share has only a fraction of vote 3. Shares with superior voting rights: Where one share has multiple number of votes in the General Meeting of the company. Despite these differences, all the shares have same rate of dividend or any other financial benefit. Obviously, shares with fractional voting rights are cheaper and shares with superior voting rights are at premium.
When are differential voting right shares issued? The prevalent management of the company sometimes may like to give away the financial benefit in a larger proportion to raise more money but would like to retain the control in the decision making of the company. This is achieved through differential voting right share.
Some equity instruments mixed nature. They are basically equity instruments but also they have some characteristics of debt. These mixed characters are achieved by the terms in the contract giving various rights to the holders of the the equity instruments in the form of fixed guaranteed periodic returns. Company can create several classes of equity in its capital structure and give these different kinds of rights to the holders of the instruments or securities. One basic principle should be remembered: The lesser the risk taken by the capital provider, the lesser the returns he should get. There can also be an option of converting the preference shares into equity shares at some point of time in the future in a certain agreed proportion. Following are the types of of complex equity instruments:
Typically, preferred equity is a different class of equity and the holders of preference shares don’t have all the rights or at least the most important rights that the common shareholders have. Though they are shareholders,they cannot participate in the General Meeting (there could be a separate meeting for them) and they don’t have any say in the main decisions of the company. They are paid an agreed rate of dividend per annum which is liable to pay after all the the operational and debt liabilities are met. The preference equity is not for infinite time period like the common equity but it has a specific tenure. The advantage is that the payment of dividend is subject to availability of distributable profits. It may add to the liabilities of the next year or may expire.
When to raise preference equity? Unlike the bank, preference equity does not require any security north holders of preference shares will liquidate the company for payment defaults. Beard expectation of annual dividend rate is higher but the terms they offer are highly conducive than that of a bank loan.
Options are the instruments issued by a company for consideration of a option premium amount giving the buyers of them a right to buy a specified number of equity shares at a future date specified in the contract. Typically, options are issued by the shareholders of a company and are traded on stock exchanges. These options are listed on stock exchanges.
When are options issued? Their main objective to benefit from the price movement. The options are written by players to trade more volumes with less amount for a given total price of share.
Warrants are of the same nature as the options, however, instead of by the shareholders, they are issued by the company itself. They are not traded on the stock exchange. If the option holder exercise is the option, he becomes the shareholder of the company.
When are warrants issued? A company issues warrants to to attract more number of investors and to raise low cost capital.
There are many instruments which can be issued basically in the form of a debt or a loan, but they may have certain characteristics of equity. In the future the securities have impact on the capital structure of the company. One of the basic characters of such capital contracts is convertibility of the instrument. Under the terms and conditions of the contract, the debt security may get converted into equity type.
Convertible debentures are typically short term and they are not backed up by any security. They get converted into common equity in the specified manner of its terms and conditions.
When are convertible debentures issued? Convertible debentures are issued when there is no security to offered to the investors, and also the ability to pay higher interest on the amount raised is not there. In addition, treating the capital as loan gives tax benefits.
These are secured instruments and they get converted into common equity in the specified manner of its terms and conditions.
When are convertible bonds issued? The philosophy behind issue of convertible bonds is same as that of convertible debentures. However, the rate of interest on convertible bonds would be lower as it is a secured instrument.
Foreign currency convertible bonds (FCCB):
These are secured instruments issued in foreign currency by a company and in the same way as the domestic currency convertible bonds, they get converted into common equity.
When is money raised to foreign currency convertible bonds? If the interest rate benchmarked with the LIBOR is much lower than the domestic interest rate, it makes a good sense to raise capital through foreign currency convertible bonds. Since the bonds are nominated in a foreign currency and the local operations generate money in local currency, the company has to manage foreign exchange risk.
All above are means of how a company raises capital through various types of equity instruments. Apohan carries out professional, end-to-end, customized consultancy services under above classification of equities to achieve the objectives of the business. Apohan carries out all these equity transactions, right from the problem identification phase, to the closure of deal with perfection.
In private limited companies, public limited companies (listed or not), anyone who wants raise the money in a company cannot take it without a proper corporate process. The choice of corporate process is called mode of placement of new equity. The mode of placement is decided by whether the share placement is done with the existing shareholders for new shareholders, whether the issue is being made to select private individuals or the public at large. (In case of private limited company, please note that an individual unrelated to company cannot even lend a small amount to the company without RBI approval which typically would be rejected.). All these processes are evolved to take care of specific interest of the the company raising fund, to protect the interest of the shareholders and to protect the interests of the various types of investors. Following are the various modes of issue of new securities to raise equity capital:
A company can raise capital from its existing shareholders by issuing them the rights to buy new equity shares in proportion of their existing shareholding percentage. It can be also provided that the existing shareholders can transfer right to the other individuals who are outsiders.
When is rights issue carried out? When the existing shareholders of the company believe in the growth story of the company and also when they have additional personal funds with them for investment in the company. Right issue results equity funding with the ownership of the same set of people as before and no involvement of new entities. Rights issue is undertaken if if the existing group of owners of a company do not want to include third party new investor and also have sufficient capital who raise required money.
Preferential allotment of shares (convertible instruments or common shares) refers to the procedure of bulk allotment of fresh shares to a specific group of individuals, investors, companies, or any other outsider person. It is for to a pre-identified people, who may or may not be the existing shareholders of a firm.
What is the process? The company needs to pass a special resolution for preferential allotment. For the listed companies, preferential allotment is subject to to all the regulations such as the Takeover Code. Valuation from certified valuers has to be carried out. (Please note that you did not get confused between preferential allotment of shares and allotment of preference shares.)
When is preferential allotment done? Preferential allotment is done to the individuals who are interested in getting a material stake in the company. Preferential allotment is also a means of awarding specific individuals for their contribution in the progress of the company. The word preferential connotes a certain kind of preference when it comes to eligibility, selection, concession, discount and favourable terms. Among all the prescribed methods, the preferential allotment is considered to be the best fundraising option for unlisted companies.
Private placement is raising equity or any other form of security capital through placement of additional equity to the existing shareholders or new individuals. These individuals are identified by the management and their selection is based on a criteria. The word private converts that the company cannot raise money from the general public as it does in the the initial public offer.
What is the process? The maximum number of individuals in a single issue can be around 50 and the maximum number of investors in a year can be maximum 200. The consideration is only cash. The security can be of any type. The terms of investment have to be elaborated and communicated to the investors. The compliance of this process is very less as compared to the public issue.
When is private placement used? When are small and medium enterprises takes equity funding from private equity investors, this is the most preferred mode of placement of shares. The word private in private placement refers to no involvement of public investors.
It means the option given to the directors, officers or employees of a company or of its holding company or a subsidiary company to purchase the shares of the company at a future date at a predetermined price. It helps the company to save liquid cash by making part payments in the form of these options. Issuing equity options to the employees themselves mitigate all the risks of involvement of outsider equity investors. Discount given to the Employees on the market price is typically 5-20%.
When are ESOP issued? They are issued when the company is in the formative stage. They provide liquidity as a certain fraction of employee compensation or incentives is postponed. They save tax. They make the employees work hard for growth of the company.
A company issues bonus shares to its existing shareholders instead of paying a dividend. These shares are given to the current shareholders on the basis of their existing holding in the company. Bonus shares are given out of the profits or reserves of the company. The reserves in the form of accumulated profits are typically expected to be distributed as dividend. The issue of bonus shares results in increase in the total shares of the company keeping the market capitalisation for value of anyone’s portfolio same. Corporate process has to be followed. No Tax is payable by the recipients of the bonus shares.
When are bonus shares issued? Bonus shares are issued by a company when it is not able to pay a dividend to its shareholders due to shortage of funds in spite of earning good profits for that period. When the company converts them into equity capital, it indicates the the confidence of the management in the growth of the company. Bonus issue has a psychological value for the shareholders. For a listed company, the number of shares listed on the stock exchange increases and the price per share falls in line with the bonus ratio. This makes it easy to trade in that stock.
Public offers means issuing the fresh shares of a company to general public listing on stock exchange. Company has to fulfill a lot of eligibility criteria to be able to get listed on the stock exchange. Even after listing, the company has to do a lot of compliances with the regulator: Securities and exchange Board of India (SEBI). Various varieties of public offers which are studied below.
Initial public offer means when a private limited company or a public limited company makes the first offered to the general public. There are two routes of initial public offer.
When is IPO route explored? When the company undertakes a very big expansion step and it requires funds for that growth initiative, it raises money through initial public offer. Full subscription of the offer is a big success event in the life of a company. A company being eligible to raise money from the general public under the laws of land is seen as the indication of it having reach a actual level.
To explore the profitability route, the company has to fulfill the following conditions: Minimum net worth of Rs 1 Crore in each preceding three full years; minimum net tangible assets, of at least Rs 3 Crores each, not more than 50% of which are held in monetary assets, in the preceding three full years; minimum Rs 15 Crores as average operating profit (before tax) in at least three out of five preceding years.
When is IPO under profitability route is undertaken? When a company is able to meet the stringent conditions of eligibility under this route and when the size of issue permitted is more or equal to the requirement of funds, profitability route is used.
Qualified institutional buyer (QIB) Route:
Qualified institutional buyers are by definition knowledgeable and aware investors. The regulator need not put restrictions on them in the way they invest. For all those companies who genuinely require a larger capital base, but fail to accomplish any of the rules laid down under the profitability route, SEBI has introduced an alternative. This route enables the companies to access the public interest through book building process. 75% of this net offer to the public is to be mandatorily allotted to Qualified Institutional Buyers (QIBs). If the minimum subscription of QIB is not achieved, the company shall refund the subscription fee to everyone.
When is QIB used? If the requirement of fund is more than the one permitted under the profitability route and if the management is able to convince the qualified institutional buyers, this route can be used.
A follow-on public offer (FPO) or further public offer is the one in which a fresh issue of shares to the public is made to raise funds. When a listed company goes for fresh issue of shares through FPO, it should ensure that the size of issue should not exceed five times the pre-issue net worth. Also, in the case of FPO, if the company changes its name, minimum 50% of the revenue in preceding one year should be from the activity denoted by the new name.
When is follow on public offer used? When a company wants to tab additional money from the general public after the initial public offer, it can explore this route of FPO.
When a Indian company taps the global equity market to raise foreign equity fund through listing on the stock markets there, it is called equity funding through depository receipts. They do not appear in the books of accounts of the issuing company directly. They are called depository receipts because all the new shares issued in foreign currency are kept with the depositary in that foreign country. The depository receipts trade on foreign exchanges in the same way shares of the companies are traded on Bombay Stock Exchange. There may be an over- the- counter market, too. These equities, also called Euro equity, represents shares that are denominated in a foreign currency and are issued by non-American/non-European companies such as Indian companies. These shares are then listed on American and European stock exchanges by complying to their regulations.
There are four types Euro equity issues:
Global Depository Receipts (GDR)
American Depository Receipts (ADR)
European Depository Receipts
Singapore Depository Receipts
These types indicate where they are issued and where they can be traded. The American Depository Receipts are the most popular.
When are depository receipts used to get equity funding? The companies issue depositary receipts if they have a very large client base in that geography. It serves as a marketing tool. It provides the international visibility and the discussions about the investment in the company among the global investor take the company to a different league. Also, the folders of depository receipts do not have any voting rights taking away the risk of interference.
Companies can raise funds via different methods/modes listed above. Apohan carries out professional, end-to-end, customized consultancy services for above classification of modes of issue of equities to achieve the objectives of the client business. Apohan carries out all these equity transactions, right from the problem identification phase, to the closure of deal with perfection.
We have use this word corporate transactions here only for convenience to describe the transactions between a company and its “existing” shareholders or a select few stakeholders. All the transactions listed here are one or other way the company rewards the shareholders. The company as such by law is called a going entity and is not designed for an intent of closure at point of time. So, what are the means available with the company to compensate its promoters, directors, shareholders, etc.? We have discussed the same here in this section of classification.
Salary and benefits as such is not a strategic capital payment or return on investment. It is a routine operational activity. In case of large companies, the payment of salaries and benefits to the promoters or founders or directors is regulated by the norms for directorial compensation. The payments to the top management are governed by the norms for managerial remuneration. Even in case of small private limited companies, the salaries and benefits of the executive directors are subject to the approval of the board.
Hence, they have an important strategic corporate perspective behind them. Apohan has observed that many companies prefer to show marginal profit and very high levels of salaries of directors.
When to restructure compensation of the directors? For successful mergers and acquisitions, when the 3rd parties have to share the financial benefits, the level of salaries and bestowal of benefits for the promoters for directors (who are typically the shareholders in the small and medium enterprises) need to be at par with the market levels or the real worth of their work. When the profit margins are seen to be very lean when there is no history of dividends, it becomes difficult to attract more value.
Dividend is the real (in the sense ordinary) means of a company to compensate its shareholders for their equity investment. From the profits made in a year, a fraction is retained for the provision of increased working capital and any growth initiatives or any other liability; and the rest should of the amount be distributed to the shareholders. The ratio of dividend to the current market price of the company share is called dividend yield. Dividend could be in the form of cash, stock, property, products, promissory note, scrip, etc. Payment of dividend is highly regulated by the law and dividend strategy is a key corporate strategy.
Went to prepare a dividend policy? Distribution of dividend is minimal in the growth phase of a company and it increases as the company reaches the state of stable, profitable operations.
The company can buy back its own shares from the shareholders in compliance with the corporate laws. Buybacks are carried out to consolidate the holding of the long-term, strategic players in the company. For company to be able to pay for the buyback, it needs to have a very sound financial position.
When to undertake buyback of shares? Buyback of shares increases the price of the outstanding shares as the value gets distributed over fewer shares. It makes the hostile acquisition difficult. Consolidation of share in a few hands increases the relative bargaining power of the holders.
Capital withdrawal is a process in which a company reduces the paid up capital by paying it back to the shareholders. This is a very complex process and is rarely seen in the industry.
When is capital withdrawal undertaken? This is undertaken when the company under goes for voluntary dissolution.
In the process of bonus issue, the company issues new shares to the existing shareholder in the proportion of their existing shareholding in the company. Bonus issue is carried out to energize the shareholders, and to make the stock of the company more liquid by reducing per share price.
When is issue of Bonus shares is carried out? Bonus shares are issued when the company wants to signal its investors that it is in a strong position of growth and is not in a mood to distribute the cash as it makes more sense for it to stay in the company.
It is up to the shareholders whether they want to start their shares or not. However, the company goes on making more and more profits every year and as its potential to become bigger company increases, the price of share increases.
When an investor is supposed to liquidate his equity shareholding? A shareholder is supposed to sell off his shares either if the value of the equity is going to go down, or the growth of company has reached saturation level or there is personal need of money.
All above are means how are company returns the original investment amount it are the the profit made using them. Apohan carries out professional, end-to-end, customized consultancy services under above classification of corporate activities to achieve the objectives of the business.
Three Types of circumstances of a company. They decide the bargaining power of the company in the M&A transaction.
Equity funding for growth is necessary and desirable but it not emergent and exigency. The company has time to explore the right kind of investor. The company has highest bargaining power and can get highest premium when it is in growth phase or is seeking funds for growth projects. Following are the different kinds of requirements of funds in growth activities in a company:
Working capital for 100% (or more) capacity utilization
Capacity expansion through refurbishment, revamp, modernization, etc
Product portfolio expansion
Vertical – forward & backward integration
Horizontal or lateral expansion
New greenfield or brownfield projects
New product development, technology, R&D
New business structure, new contract structure
A company has the least bargaining power and minimum time available to turnaround through equity funding. Turnaround is the most difficult kind of equity funding initiatives. Apohan has Special expertise in turnaround of financially distressed companies. The investors are highly skeptical about the very viability of a business in financial district. They are more so when it comes to a private limited company in which the compliance requirement and the transparency is very less. Generally, the investors do not go to the root cause of financial distress. If the business is intrinsically viable, profitable, able to generate expected rate of return, if the management is ethical, and if the offer made to the investors is attractive, it is not very difficult to achieve a financial turnaround through equity investment.
Apohan’s market survey shows that the lending institutions, banks and other lenders are of no use in the times of financial distress. They just don’t believe that a turnaround is possible. Even if they believe, they don’t have the risk appetite. And even if someone does have the risk appetite, they don’t have sufficient authority in the institution to disburse the funds. Equity funding is a good resource to the small and medium enterprises. A lot of novel initiatives of restructuring the company on various fronts have to be undertaken for a successful turnaround.
One of the important aspects of turnaround financing is understanding the psychological condition of the business owner and having empathy for the same. Having to lose all the fortunes made till date, having to lose the capital brought from own pocket in the beginning, repeated reminders of the creditors, repeated reminders of the suppliers, and the banks process of recovery including auction of the personal assets of the promoters and the guarantors results in a very depressing situation for the business person. Such kind of financial turnaround also becomes a very challenging process for a merger and acquisition consultant.
Following are the circumstances of financial distress:
Employee payment defaults
Supplier payment defaults
Working capital shortfall to operate beyond break-even capacity
Working capital shortfall to operate below break-even capacity to minimize losses
Inability to meet financial liabilities fully
Bank term-loan becoming Non-performing Asset (NPA)
Litigation in Lok Adalat by creditors
Litigation under SARFAESI for recovery
Strategic debt restructuring
A case with Debt Recovery Tribunal (DRT) by creditors
CIRP under IBC process
High Court/ Supreme Court cases for recovery
Loss making but still viable business if capital is made available
The companies that are neither aspiring growth not having any kind of financial problem also engage in merger and acquisition activities depending upon the quality of the opportunity available & their mood. Following are the varieties of managements that suddenly may take interest in merger and acquisition activity:
Not able to take M&A decisions because there is no experience
Don’t know weather this is the right time for M&A
Waiting to fail on the financial front but the management currently doesn’t know that
Loosing good opportunities frequently and falling behind competition
Companies with no timely succession planning and likely to be sold at dirt cheap value after value destruction
Companies with no timely succession planning and likely to be liquidated after retirement of the business man
Companies without horizontal or vertical integration and suffering from supply chain shocks.
Companies surviving on luck without any risk management mechanism
Surviving on relationships with political circles or with big companies
Companies can be in any of the circumstances mentioned above. Apohan carries out professional, end-to-end, customized consultancy services for above classification of circumstances of the company to achieve the objectives of the client business. Apohan carries out all these equity transactions, right from the problem identification phase, to the closure of deal with perfection.
There are basically two types of investors that are looking for buying a private limited business.
These investors are cash rich companies (i.e. businesses themselves) with a long history in a sector. They are not any kind of financial company or institution. They know the sector the product, market and the business in and out. Acquisition of a small private limited company provides a lot of benefits for these companies in terms of speed of expansion and other synergies.
When to look for strategic investors? Strategic investors typically would provide more valuation. They will be also willing to acquire assets in financial distress as they understand the target business perfectly and know how to extract value from the asset. Hence, it makes a sense to approach the strategic investors in difficult financial times.
Financial investors are individuals or financial companies or other types of financial organisations which collect money from the ultimate savers such as general public like you & me, financial intermediaries like banks, NBFCs, various types of funds, various types of schemes, etc. Their understanding of the technical, operational & market part of business is relatively lesser compared to the strategic investors but more compared to the banks. They invest with a perspective of a limited number of years. They want to exit from the business after adding a lot of value during its growth phase. Financial investors are experts in valuation, mergers and acquisitions, transactions, equity contracts and they have immense negotiation skills. If a private limited business or a small-cap listed company directly approaches the financial investors, they may lose on valuation as well as terms of the contract. It is better to approach to expert Consultants.
When to approach financial investors: When the growth story of a company is clearly evident, a company can approach the financial investors. They join in when there is potential but no capital, they help in creation of a huge value at a fast pace and exit creating value for all.
Apohan very well understands the difference in the approach of strategic investors and financial investors. Apohan carries out professional, end-to-end, customized consultancy services by approaching the right kind of investor to achieve the objectives of the client business. Apohan carries out all types of equity transactions, right from the problem identification phase, to the closure of deal with perfection.
In the business world, it is said that one requires everything to grow and absence of only one thing is sufficient to hold you down or fail. Many companies have many advantages, capabilities, cash, good management, etc but they lack one or the other critical resource that they cannot develop in-house or purchase in the open market. This precious resource, however, may be easily available with a small time company around them. It is in benefit of both of these parties to associate together and complement each other’s strengths.
Following are the objectives on operational front of the companies why they come together:
This is called acquihiring in merger acquisition world. A large company acquires a smaller company basically to to hire its trained talent pool or manpower strength rather than recruiting people from the employment market.
Many a time, a company wants to enter a certain range of products but it doesn’t have a starting point to manufacture the product or to enter a market. Acquiring a company in that product line gives the acquirer insight into the business and avoid all the the errors in the beginning of entry into new product.
When two companies combine, they get access to each others clients, markets, advertising channels, promotion strategies, marketing agencies, distribution channel, etc. This reduces the cost of marketing and also cost of the sales process. This may help in increasing the sales volume. This may help in selling additional products. This may help in using the companies’ distribution channels to take the products to more customers. This may reduce the advertising budget.
A company might be doing excellent in its own geographical area but it may not be getting good opportunity in a neighbouring area or an excellent market located somewhere else because of the lead time required to get established in any new market. Tp tap such attractive markets it makes all the sense to get associated through mergers and acquisitions with the existing players in those markets.
When two companies combine, in the market share of the merged entity becomes much higher. Hence, the importance of the company in determination of the prices, margins, supply chain parameter, imports, exports,
service quality, visibility takes altogether new dimension.
Most of the public sector and private sector tenders have stringent eligibility norms to put a price bid. Many small and medium enterprises do not grow because they cannot participate in the tenders. A small company cannot meet eligibility criteria in terms of the number of projects, size of projects, value of projects, the complexity of the project, etc and cannot participate in the tender. The authorities generally require that the bidder has at least one experience in the specific niche activity expected in the project. The companies cannot meet all these conditions nor they can bargain for lowering these criteria in the pre-bid meetings. However, when the companies get combined, their operational credentials and financial net worth increases and they can participate in the large tenders which they individually could not.
For many companies, production, financing, technology, manpower, me not be a problem. For them, the problem is competition by advertising. The sale might be directly proportional to the recall of the brand in the mind of the general buyer. The moment you reduce the advertising spend, sale starts to go down. In this types of circumstances, the advertising expenses may form as good as 25 to 30% of the total cost. If the company join hands through mergers and acquisitions, they save the cost on redundant marketing infrastructure.
If the two competing companies are combined through mergers and acquisitions, from the perspective of the companies, the market share increases, and the probability of failure due to excessive competition reduces. The companies have to obtain approval from the Competition Commission of India if they are large scale players before the merger.
While some companies might have modern technology, modern processes, very high quality product, very high margin of profit but they might be very new in the market and the customers maybe hesitant in buying their products. There advertising may not go in the right direction. Or they may be unsatisfied with the pace of growth. In such circumstances they are supposed to acquire or get merged with a well-established, famous, repeated brand with very large goodwill in the general society.
There are two fold advantages on the scale front of a merger. First that the company can manufacture the goods on a larger scale. The second benefit is that it reduces cost per item of production due to economies of scale.
The products and services a company produces show the operational capability that is being used. Given a chance, the same set of people and machines can also produce new products, may be more valuable. These are called operational capabilities of an organisation. When companies combine through mergers and acquisitions, they acquire manufacturing and operational capabilities of each other.
Getting merged with the cash rich company helps a business to marry its business plans with the the capital rich people. This can be achieved through issue of additional equity.
When two companies combine the volume of purchase increases and the new resultant company can bargain for bulk buying discounts, more credit period, better terms of supply, etc which is otherwise not possible when the requirement is on small scale.
Getting ownership of the intellectual property of a company can be one of the great objectives of a merger and acquisition activity. Patents, trademarks, copyrights, industrial designs, geographical indicators have very long protected life. Their use might not be permitted for the outsiders, or may be permitted under hectic royalty, or may be permitted under very strict conditions. Companies may acquire other companies for the value or the potential of their patents, brands, stage of advancement of the research and development efforts, etc.
If a company acquires a company having reached advanced stage of research and development attempts, it can tap the fruits of such successful research. The company with ability to do successful research and company that can finance costly research initiatives and can bring the developed the product to the market, can benefit by association through mergers and acquisitions.
In many businesses working capital forms a large chunk of initial funds required. Apohan has observed in its market survey that many small and medium enterprises of the first generation businessman are not aware of the concept of working capital. Rather, they are not aware of the seriousness the concept of working capital provisioning. Small and medium enterprises live under the misconception that working capital is a short-term finance and it is at a constant level for every year. They also use 100% CC and OD limits with the bank which should be actually reserved for seasonal fluctuations and occasional credit crunch. SMEs run a business with the lower working capital at operating capacities much below the break even capacity and are not able to meet all the liabilities of the business.
A break-even operating capacity is the capacity at which a business generates sufficient cash to exhaustively meet its all operational, financial and any other kind of liabilities. Operating the plant below break even capacity leads to liquidation of the company in the long-term. A company always must operate much beyond its break even working capital city. But, this requires ample amount of working capital. Companies requiring very high level of working capital can finance the same through equity funding through mergers and acquisitions.
Overhead means input of the manufacturing process which cannot be attributed or allocated to a specific output item. For example, if you are manufacturing pillows, you can calculate how much cloth per pillow directly, but the rent of the manufacturing plant cannot be calculated so directly. There are two types of overheads- Manufacturing overheads (such as rent of manufacturing facility, utility bills) and corporate overheads (salaries of top management, head office expenses, consulting charges). Merger of two companies results in saving corporate overheads as now there is only one management, one head office for the new setup. A lot of redundant managerial posts can also be done away with. The cost of company secretaries, chartered accountants and other consultants also can be saved.
If one of the merging companies has a good credit rating, it can implement the same financial strategy for the merged entity and the credit rating benefits can be availed on a larger scale. More amount of money can be borrowed from the banks, NBFCs, institutional lenders, through bonds and also on better terms at cheaper rates.
In a merger, when the the accounting statements of two companies are consolidated, and if one of the companies has accumulated losses then the merger results in saving of tax for the acquiring company. It is also possible, that the various types of input credits or indirect taxes can now be quickly used in the new merged company. Depending upon which legal entity remains, its tax incentives may now be available for the entire setup. Also, there is saving on tax compliance fees.
If one of the company is availing a certain scheme or exemption from a certain tax, or from certain charges in the utility bills. It main benefit from a government grant, or occasional government support, government preference in procurement, etc.
When up private limited company acquires or gets acquired by a public limited company, then the company automatically becomes a listed company. Thus, the company achieves the objective of going public without the painful process of initial public offer. There are two main advantages of going public: The amount of capital available with the general public can be treated as good as infinite for all practical purposes; the cost of capital from the perspective of the incumbent investors can be treated as good as the lowest among all investor classes as the public is is ready to pay a very heavy premium depending upon real perspective of the potential of the company.
As we discussed, turnaround from a the bad financial situation can be one of the objectives of mergers and acquisitions. Many a time, a company has very good product, very good technology, very good knowledge of manufacturing process, very good knowledge of management of operations, very good client network, a decent margin on sales, very good ideas of new projects, very good ideas of new products, very good human resources, but they just don’t have knowledge of financing the company properly. Some unfortunate external events, aur an occasional internal error, or due to lack of business judgement, these companies having poor understanding of finance become loss making and start moving in the direction of liquidation. Timely acquisition of full or partial control of these companies through infusion of equity funding through issue of additional shares not only turns around it financially but also takes care of the financial management aspect in future.
Having two setups means duplicity of expenses, duplicity of efforts, duplicity of of compliances, duplicity of overheads. It also means excessive supply in the market with a negative impact on prices of the products the companies selling. When two companies combine, the wastage on these redundant expenses it stopped and the negative impact on the prices in the market is also stopped. The wealth or valuation of the merged entity far exceeds the addition of the wealth of the two companies before merger. This is called energy.
If a company acquires another company in a different business, then the impact of business cycles or unfortunate events cannot destabilise the company. If one business is not doing good, the other will keep everything afloat. This is called diversification and it reduces the long-term risk of a business.
After a merger, measures are undertaken for the transformation of the target company. Associated with the company that has very high standards of corporate governance, very high calibre of management, higher degree of compliance, higher visibility in the market results, a very high brand reputation in transformation of the merged company. A set of good company policies governing the processes of all the departments, access to professional business software, standard operating processes, compliance of technical standards for products and manufacturing processes, compliance of quality standard certifications, all the licences, permits, approvals from all relevant government bodies, etc result in transformation of the acquired company as well. This acquired entity starts functioning in the manner of the acquirer an address a lot of value.
Apohan very well understands all the benefits of the activities of strategic nature such as mergers and acquisitions. Apohan carries out professional, end-to-end, customized consultancy services by understanding the operational objectives of a business. Apohan carries out all types of equity transactions, right from the problem identification phase, to the closure of deal with perfection.
The term fund is not name or type of any legal entity. A fund might be organised in any legal form. The funds are constituted with a particular investment objective. These are registered with various government bodies such as the Ministry of Corporate Affairs (MCA), the Reserve Bank of India (RBI), the Securities exchange Board of India (SEBI), Ministry of Finance (MoF), various Commissionerates such as the Charity Commissioner, State Governments, local urban bodies (ULBs), Finance Department of state governments, enactment of special acts by the central parliament are the state governments, multilateral or bilateral international institutions such as the World Bank, Asian Development Bank, etc. In this section, Apohan has made an attempt to classify the funds by their objectives. Following are the types of funds classified on the basis of their objective:
Growth funds invest in high growth potential companies. The objective of these funds is to multiply their investment in a short span of time (1-5 years). Typically, the risk associated with such growth companies is very high and the corresponding expectation of rate of return on investment is also very high.
The distressed Asset funds look at the lower valuation of the companies in financial problems as an opportunity. Many investors, investment banks, private equity funds, etc are now constituting stressed asset funds in India and the trend is increasing these days.
When a loan becomes a non-performing asset, the bank may not have bandwidth to tap maximum value from that asset. Banks generally don’t entertain enhanced credit for endangered business. They also do not have capability and legal authority to manage the businesses themselves. It is also not worthwhile to liquidate the business as the realisation from liquidation is hardly any. In this case, the bank transfer the assets to asset reconstruction companies at a discount which try to to conserve value by restructuring the business, financing, etc.
There are a plethora of funds that invest in blue chip companies listed on stock exchange and the safest debt instruments, But, the number of funds interested in investing small and medium enterprises directly is unfortunately very small in India. This is basically on account of absence of professional corporate management, strategic plan, financial documentation, transparency and democratic board of directors in the SMEs. Apohan wants to play and instrumental role in bringing up a semi focus investment funds. It is not that only the small and medium enterprises are at fault. Investment funds of all types ask to be lacking the energy, enthusiasm and patience to approach the small and medium enterprises and to carry out all necessary communication. Different simply don’t entertain small and medium enterprises under the pretext of high risk even without carrying out the proper business analysis. Apohan has the unique energy, zeal and enthusiasm to sell the dream of growth and turnaround to meritorious SME businessmen, to explain them the world of mergers and acquisitions in simple language and to take their story to the investors who stand a chance to grow their capital in a much better way then the alternative avenues.
There has been a lot of interest in the startups as many startup stories have reached success. Many investors providing capital to the startups at various stages of the business such as seed capital, angel capital, venture capital have come up in thousands of numbers all over India. An investment in a Startup is typically a failure, almost in 95% cases, mainly owing to absence of business experience among the the young promoters. Still, the kind of support startups are getting from the investor communities is of never before kind. Startups are seen and the future of business world. The work with startups is more intensive due to their poor understanding of corporate management, financing and business strategy.
Apohan engages with any stage of a startup provided that they are able to pay retention fees we charge, they have a reasonable expectation of the evaluation from the investors, etc. Apohan does not entertain a startup with “an idea in a mind” nature without a tail or a head, without any investment of own stakes or own money, without concrete efforts for the development of the final product, etc.
Impact funds desire to invest in the areas that will have a positive social impact. Their main outlook is not absurd kind of financial return. They do desire to be profitable and want to have a decent return on their investment, but they want to impact lives of millions of people. Typically, their focus sector are health, education, sanitation, environment, food, renewable energy, etc.
There are many charity funds that will provide capital (in the form of a grant which expects no return) to businesses that will help in one or other social cause. Such help is provided to the business till it becomes self dependent. The objective of such charity funds is to create huge employment and social prosperity through promotion of entrepreneurship. Charity funds would prefer donating to those companies that fulfill the criteria of performance in terms of number of beneficiaries and the quality of service. Funds would prefer that the company availing funds is registered under Companies Act appropriately. The financial concession by these funds can be in three ways: 1. Substantially reduced rate of interest; 2. No requirement of payment of interest for no expectation of return on investment; 3. No requirement of repayment of the the original capital amount.
There are many funds that are based outside India focus is to invest in India. They see India as a promising upcoming growing market and the expect that the returns in this market will be much higher than the saturated developed markets.
Emerging market funds want to invest in countries like India, Brazil, Russia, South Africa, southeast Asian countries, etc. The attraction of investment in the emerging market is against the saturation of growth in the developed markets. One of the major risks for investment in the emerging markets from the perspective of investors is the risk of exchange rate.
There are certain funds that are focused only in specific sectors such as technology fund, infrastructure fund, telecom fund, e-commerce fund, food fund, etc. Find specific comfort with respect to hope of growth, stability, and acceptable degree of risk. There are two categories of sector funds:
These days the rage is technology funds which invest in new-age technologies such as blockchain, virtual reality, drones, robotics, artificial intelligence, navigation, genetic, location based services, holography, 3D printing, natural language processing, mobile apps, renewable energy, green energy, electric vehicle, big data, networking, biometrics, CCTV cameras, internet of things, etc.
These funds invest in in the conventional businesses real estate, transport infrastructure, energy infrastructure, social infrastructure, core sectors such as steel, cement, other sectors such as pharmaceuticals, food, water, automobiles, engineering ,etc.
Microfinance funds lend in extremely small amounts such as a few thousands or a few lacs to the marginalised and poor people to start a very small business or a small shop. That typically don’t ask for any security. The rate of interest is also reasonable. Apohan as such is not in the business of making microfinance deals as they are too small. However, Apohan formulates strategies for microfinance funds.
Apohan very well understands the orientation of all these kinds of funds in making investment through mergers and acquisitions. Apohan helps a small and medium enterprise, in identification of the funds that might be most interested in them and add more value. Apohan carries out professional, end-to-end, customized consultancy services by understanding how to successfully approach and obtain investment from these funds. Apohan can manage the transaction right from the problem identification phase, to the closure of deal with perfection.
The payment (or consideration) for acquisition of share for acquisition of the corporate entity can be done in various ways. Following is the list of the ways in which the mergers and acquisition payments are made:
In a cash deal, the acquirer pays the acquired company or the shareholders of the acquired company in cash. This is the most preferred mode by the business sellers.
In the equity deals, when two companies combine, the shareholders of the acquired company are paid in the form of shares of the new entity. The number of shares issued to them if such that the value of their stake is equal to the valuation of the target company in the form of a pre-fixed ratio. If the shareholders of the acquired company do not want to continue as investors with the merged entity they can sell the shares in the open market. If the company is not listed, then the acquisition contract (business transfer contract) may stipulate their rights in terms of disposal of shares. It helps the acquiring company to conserve the cash liquidity as not all the shareholders of the target company will sell their shares.
It is not necessary that the payment of acquisition is made on the spot and only through cash or equity. The application of payment of the consideration can be settled through issue of any kind of securities that is acceptable to the sellers of a business. These instruments can delete the payment of the consideration. They may be interest bearing.
Apohan very well understands the cash constraints of the acquired and cash requirements of the sellers in the mergers and acquisitions. Apohan helps a small and medium enterprise, in deciding the correct mode of realisation of the consideration of M&A deal. Apohan carries out professional, end-to-end, customized consultancy services by understanding how to successfully realised the M&A payments. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
The newspaper statistics describing the M&A activity in India speak of only large deals. For example, in year 2019, around 1000 main deals took place and the average value of of a deal was rupees 500 crore. In India there is no mechanism of maintaining database of merger and acquisition deals. SEBI maintains data of only M&A deals in the listed companies. CMIE maintains the data of M&A deals but it has many limitations.
There is no professional record of the mergers and acquisitions of the small and medium-sized companies with any authority. These deals are reported to the the Ministry of Corporate Affairs but they aren’t compiled into any useful database. It is only a matter of guess what would be the count of the deals and what would be their value.
Apohan considers any merger and acquisition deal where the net transaction consideration is more than rupees 100 crore as a large deal.
Apohan considers any merger and acquisition deal where the net transaction consideration is more than rupees 10 crore and less than rupees 100 crore as a small deal.
Apohan considers any merger and acquisition deal where the net transaction consideration is less than rupees 10 crore as a micro deal. Apohan is not in the business of micro deals.
Apohan very well understands the different degrees of complexities and other sensitivities in the different sizes of M&A deals. Apohan helps a small and medium enterprise in approaching the investors of appropriate ticket sizes for the M&A deal. Apohan carries out professional, end-to-end, customized consultancy services by understanding how to quickly close the small deals. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
When one company invests in the other, or buys the equity stake in the other company, or subscribes to the fresh issue of shares it need not be always 100%. When it comes to small and medium enterprises, Apohan has observed that, it is the personal strength of the founder/ promoter/ director that keeps the enterprise going on. He has the highest quality of relations and network with all the the stakeholders of the business. Hence, it would be kind of unwise to remove off this original promoter and put in place a completely new management. It depends on the circumstances, but the original management should continue at least for couple of years for hand holding, or for integration of the merger, or as independent directors, or on salary basis, or till the demonstration of potential performance promised at the time of the deal even in case a business is completely bought out.
The functioning of the board of directors and the General Body of members (shareholders) requires a specific percentage of the ownership or the control to be able to take a specific type of decisions. On one side, the importance of ability to lead the decisions (or importance of the power and authority to be able to take important company decisions without interference of the other shareholders) is very critical and on the other side, the available cash for purchase of adequate percentage of total holding is a serious limitation.
When it comes to listed companies, the degree of compliance for acquisition of control requires larger compliances including open offer to retail investors according to the takeover code. The companies also have to see that the cross holding of certain shareholders does not result in conflict of interest for tenders. If a company has more than 5% equity in another company and if both of them bid for a tender, both of them may be disqualified for conflict of interest. Increased acquisition of equity stake also results in requirement of compliance of related party transactions, the regulations also called transfer pricing regulations.
Following is the classification of the merger and acquisition activity based on the extent of acquisition of control:
It means the acquirer acquires 100% stake of the original shareholders. The basic objective behind a buyout deal is the complete flexibility in the new management and no interference from the legacy management in key decision making.
In the deals for absolute majority, the acquirer acquires 90% or more stake in the target company. With 90% stake, the number of corporate process complexities in terms of taking care of the minority shareholder reduce drastically.
Concept of majority stake:
Majority stake means more than 50% shares. Having more than 50% shares is as good as having veto power. Without the consent of the majority, not even a small decision can be taken in a company. However, it is to be noted that majority stake is not sufficient, it gives the shareholder the power to veto out the decisions that disapprove but it doesn’t give them the power to execute all the decisions that they want to undertake. For the special type of decisions, the board must pass special resolution which require minimum 75% holding in case there is friction or difference of opinion in the board.
Control deal are the merger and acquisition deals in which investors’ preference is to acquire more than 50% equity and replace the existing management or board of directors with new one or at least to substantially reconstitute it. Typically, the valuation of shareholding for 49% stake, 50% state, and 51% stake is not in the proportion 49: 50: 51. There is control premium for exercising equal control on the company and there is even more control premium for handing over the control at 51% stake. Control premium is the amount over and above the mathematically proportional valuation.
Any state less than 50% of the total equity is called minority stake. While the financial benefits are proportionately available, the majority shareholders may oppress the minority shareholders as they have the control over the management of the company. There are several statutory provisions for the protection of interest of the minority shareholders.
If a shareholder for a group of shareholders have more than 25% equity in the company, they have the right to nominate one director on the board of directors. The presence on board of directors does not help in leading any decision making, does not help much in avoiding adverse (to the group) corporate decisions. It provides a comfort that they are being treated fairly. Every director has access to critical company information and the shareholder group can rest assured that no siphoning of funds is happening.
When the stakeholding of a single shareholder or a single company or a single group of companies exceeds 5%, or exceeds 10% but is lesser than 25%, depending upon the domestic or foreign origin of the company, several reporting, declaration, disclosure, compliance, etc norms shoot in.
Marginal stake means very small equity shareholding (0 to less than 5%) in a company. It cannot exercise any kind of control but can be part of the financial benefits exactly on the same lines and in the same proportion as any other shareholder. In India, technically, ownership of a single share gives the right the to the shareholder to attend the Annual General Meeting of a company with even having the largest market capitalisation.
Some mergers and acquisitions take place in which both the companies continue their legal existence but they acquire shareholding in each other. This may be done by the shareholders as well in place of being done by the companies. If the companies have cross holding in each other, subject to compliance of transfer pricing and conflict of interest rules, they would not undertake any commercial decisions that will cause adverse effect on one another.
Differential voting right is one of the key tools for retention of the financial benefits in proportion of (or more than) the proportion of financial investment. This is achieved by tweaking the control management with differential voting rights for different classes of shareholders. There are examples of 200 votes for one share (in the General Meeting) in some companies and also there are examples of 200 shares for one vote in some other companies. Dilution of control rights in a company results in lower valuation of DVR shares.
Apohan very well understands the various sensitivities around control management in the M&A deals. Apohan helps its clients in the proper management of the control of the merged entity in the right hands so that no destruction of value happens. Apohan carries out professional, end-to-end, customized consultancy services by understanding how to allocate various control functions in the board of directors. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
In the way various tools, technologies, methods and processes are used for procurement of goods or works, equity control of a company can also be procured or sold in the same ways. Following is the list of different kinds of ways in which equity is sold:
Shareholders are companies can undertake auction of shares with a floor price in the open market. They can invite the interested parties through a newspaper advertise. Adequate information about the company and about the issue needs to be made available to the prospective investor in the form of a information memorandum. All the precautions to make it a transparent, open, fair and equitable process need to be taken. All the applicable laws of the land need to be meticulously followed.
Shareholders are companies can undertake issue of the fresh shares or existing shares for sale of existing share competitive tenders in the open market. The conditions of eligibility for the bidders can be specified. All the details can be provided in the same manner as in an auction. It goes without saying that all the applicable laws need to be carefully followed. It should be noted that search offer cannot be made to general public except as in IPO.
An open offer constitutes offer of a fixed number of shares at a fixed price or a range of price in a fixed time period. Keeping the laws of land in mind, search offer can be made to the shareholders of the listed companies or individual owners of private companies can we approached for acquisition.
In book building, the investment bankers approach a wide variety of institutional investors for private individual investors. A substantial chunk of is shares agreed to be bought by qualified institutional buyers (QIBs) through one-to-one interactions involving financial intermediaries and brokers. This process is also called a road show. As of the date, apohan is not a registered investment banker with SEBI. However, it has a wide network of money investment bankers to carry out successful book building.
Equity shares can be sold to the various types of public issues (IPO, FPO, AGR, GDR, etc) that we have discussed elsewhere in this page.
Apohan very well understands the advantages and disadvantages of these processes. Apohan understands the minute details of all these processes. Apohan helps its clients in the proper management of the issues. Apohan carries out professional, end-to-end, customized consultancy services through efficient implementation of these processes. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
With the onset of insolvency and bankruptcy code, the protection framework for the financial creditors and the operational creditors of a business has entered into a new paradigm.
This has a very big adverse effect on the the shareholders of the insolvent companies. The negative impact of the IBC code on genuine businesses can be captured in the following way: 1. A private limited company or for that matter any body corporate is a highly illiquid asset and it takes a lot of time to raise money by selling a fraction of it. 2. The declaration of insolvency results in the loss of the remaining wealth in the company even for a genuine businessperson. 3. In its original version, the IBC code permitted the existing members or shareholders of a company to participate in turnaround process by submission of a resolution plan. However, when this channel was misused by some for a backdoor entry to get rid of loads of self-incurred debt, the participation of the incumbent shareholders has been totally prevented through an amendment. 4. The code completely fails to understand the difference between solvency and bankruptcy. Why a businessman not be able to pay on the time that was promised in the contract, it need not necessarily mean that the business doesn’t have sufficient wealth to make a payment. The code fails to understand that the wealth of a business cannot be taken as the current value of inoperative assets but the potential of the company to generate sufficient returns on investment. It gives an opportunity to a new to bidder to get rid of the substantial liability of the lenders, but it denies the same opportunity to the incumbent management. 5. The IBC code denies authority to undertake M&A activities to the incumbent management. A strategic investor may find it more useful to respectfully involve the incumbent promoters and to exploit the synergies. But, this is not possible.
Liquidation of a company results in loss of huge economic value and brings grief in the personal lives of shareholders, promoters, directors, guarantors, employees, suppliers, operational creditors, their dependents, etc. Hence, it is important that, before the creditors approach the National Company Law Tribunal (NCLT), the promoters themselves should undertake restructuring exercise in-house. These exercises are also called compromises, arrangements, schemes, etc.
Following are the types of strategic restructuring exercises:
In this, the company changes its management, board of directors and their ways of functioning. There may be restructuring of the group of the companies, mergers or divisions. The legal form of the company might be changed. The constitutional documents also might be changed. Various shareholder groups may nominate their directors in a certain proportion, allocate responsibilities to them, decide the mechanism of evaluation of their performance, etc.
In this exercise, the company changes its business model, in terms of how it generates revenue. This can be achieved by changing the products or the role in value chain or the terms and conditions of sale.
A contract between two business entities captures the scope of work, risks taken by the parties, their rights and obligations. A company can change the key contracts with the business stakeholders aur it can enter into new variety of contracts keeping the physical operational setup same.
In this exercise, the company changes its capital structure, substitutes the high cost, high commitment, high risk components of capital with suitable alternatives. It made convert one type of capital instrument into another. It may change the rate of return on any instrument downward. It may extend the tenure of the loans creating more liquidity. It may refinance its loan by transferring them to other banks. It may raise additional capital to overcome critical times. All of these initiatives can avoid a default and subsequent loss of control or liquidation.
There is another perspective of restructuring of companies. Original promoters are forbidden from taking part in restructuring process through submission of evolution plan, it provides a good opportunity for the cash rich corporate raiders to acquire these companies. The insolvency proposed professionals are mandated to first see to that all attempts are made to sell the company as a Going entity and exercise the option of liquidation as the last record. Strategic investors can look at it as a good opportunity to acquire companies by submitting a competitive resolution plan with the help of expert consultants.
Apohan is aware that there are around 7000 companies under CIRP and more are on the way. Apohan helps the financially distressed companies in the early stages to overcome the problems through restructuring. Apohan carries out professional, end-to-end, customized consultancy services in this domain. Apohan also helps the companies that want to acquire the companies under CRPC true or competitive acceptable resolution plan. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
The feasibility and applicable legal and regulatory framework changes drastically depending upon the nationality of the involved companies. Nationality of a company is the nation of its registration irrespective of where the owners stay. The conditions for according a nationality require a company to have a physical presence in the country. Following are the types of bills based on the nationality:
Domestic deals means the deals where both of the companies are Indian.
Foreign deals means where both of the companies involved in merger and acquisition are not Indian.
Cross border deals means the deals in which one company is Indian and the another company is foreign (or at least one individual investor is a foreigner). There are two types of cross border deals:
Inward M&A deals (FDI):
the inward deals are the deals in which a foreign company makes investment in Indian company. It is called foreign direct investment (FDI). The word direct means investment directly in a business as a shareholder without involving any financial intermediary. If the norms of investment in that sector geography are relatively liberal, this investment can be made through automatic route. If the investment is to be made in certain reserved sectors or beyond certain shareholding percentage, then approval of RBI or other government bodies in addition to all other approvals is required. (Note that the inward investment need not necessarily be in the existing companies.)
Outward Deals (ODI)
Indian company makes investment outside its geography or political borders, it is called overseas direct investment (ODI). Since this results in outflow of foreign exchange, again, the company that wants to acquire a foreign target has to take certain approval from authorities in India. For international merger and acquisition activities, the companies have to carefully understand the legal and regulatory frameworks of both the origination and destination countries in detail. Investing companies also have to understand, the specific country risks including the political risk, economic risk, social risks, cultural risks, business culture risks, etc.
Apohan management has experts understanding of international merger and acquisition deals. Apohan carries out professional, end-to-end, customized consultancy services in these domains. Apohan manages the international transaction right from the problem identification phase, to the closure of deal with perfection.
The main classification of investors is strategic investors who are businesses themselves and are not any finance companies or organisations. The rest are the financial investors. However, the financial investors come in a wide variety. It depends upon what is the legal nature of the organisation, what is their governing regulation, from whom they collect (and can collect) the money, what is their selection criteria for a target, what is their investment criteria, what is their risk appetite, what is their expected rate of return on the investment, how much they want to interfere they in (or assist) the management, what is the complexity of their investment process, how long they want to keep invested, etc. Following is the classification of various types of financial investors. (There is a lot of redundancy in this classification and the types are not necessarily mutually exclusive.)
An investment from friends and family on very liberal terms is very helpful in the initial stage of a business. A businessman should keep very good personal relationships with its social circle. Relationships come handy in the most difficult times. The friends and relatives are typically not aware of the terms of business investment. A businessman on his own should offer transparent and fair terms of investment in the form of written down contracts. He should apprise his friends of the risks of his business. It is a good idea in these turbulent and unpredictable times of the employment market to take along close friends even in the management of the company as directors if they can develop requisite skills in due course of time.
It is the equity issued to the the employees and executive directors of a company in lieu of of their work for the company. It is the reward for contribution to the development of a company in non-cash form. In many cases members of a company contribute capital for the growth whereas others are spending time for the growth. Sweat equity has equal value as cash equity by distributing stocks or other forms of equity. As a businessman, if you are able to convince high cost employees or executive directors about the growth story of the company, they can wait to get rewarded. This provides sufficient liquidity to the company. It is very important for a business to have a talent pool at the top to manage the complex operations of the business, the complex relationships with stakeholders and the complex external business environment. If a businessman does not recruit or associate with competent professionals or does not associate with them because they do not have money to invest, he might have made a major error. Lack of sufficient top-level resources delays the fulfilment of various business activities and may have impact on viability of the business itself. In the issue of sweat equity, devaluation of efforts and time needs to be made. A proper contract needs to be signed retailing all the aspects of participative ownership.
The employee stock option plan is a form of sweat equity. The difference is that it is not a definitive issue but an option to participate in the ownership. In the initial stages of a business, money is required for creating infrastructure. To attract good talent and to retain it, it is necessary to compensate them with good salaries. This is not possible in the beginning. Hence, an employee given an option to acquire the equity of a company at a future point of at a discounted rate. An employee is paid a cash salary out of the total remuneration for basic subsistence. And the rest of the incentive is in the form of ESOPs. This way the business can turn its employees themselves as the investors in the company.
As the name suggests, seed investment is provided when the business is at the seed stage or before the proof of concept. Seed money is used to fund the earliest stages of a new business, potentially up to the point of launching the product. It can be in the equity form or debt form. The amount of seed funding is usually very small. Money can be used for market survey, feasibility study , detailed project report, membership of associations, obtaining approvals and licences, preparation of contracts with the key stakeholders, incorporation of the company, design and development of the product, etc.
An angel investor is a high net worth individual who provides financial backing to SMEs typically in exchange for ownership or equity in the company. The investor is called an angel investor because the stringent eligibility criteria are not applied by them and investor takes a lot of risk in terms of losing the capital. They do basic due diligence, but largely they trust your ability to create a viable business. The funding is provided by them even before generation of revenues or even before it is established that a business can generate revenues (forget profitably or not). The amount of angel fund typically ranges from 1 crore to 5 crore. But they want to multiply the investment hundred times or thousand times and they do achieve this target if any one of their investments succeeds.
A SAFE is an agreement, a mechanism of equity capital provision, that is be used between for a company in the formation stage.
When is SAFE used? A private limited company, cannot take loans from individuals according to the laws of India. The process to take loan from ordinary individuals involves a complex RBI approval route which is generally not explored. So the only way left is to to get equity funding. But, in the initial years/stages of the company, either the valuation of the company is not done or it is not possible to do the valuation in a sensible and meaningful way because just too many things are unclear. As the time passes, the potential of the company becomes visible and the range of valuation can be estimated with more accuracy. So the problem arises: How much control and ownership should be offered to the investors whose capital contribution in proportion of the promoters capital is very substantial today what is going to be hardly any amount when compared to the future valuation of the company after its Idea succeeds? A SAFE is the perfect solution to this. It is considered as a better solution than the preference share in such circumstances.
What is the process? In exchange for the money, with a SAFE, the investor receives the right to purchase equity in a future round (trigger). SAFEs are not debt instruments and there is no risk of insolvency. It is a simple legal contract and the corporate process also it simple. The trigger is the investment round issuing preferred shares by the company. Investors and the company agree the mechanism of participation in the next investment round without any valuation as of the moment. There may be a valuation cap in terms of the total amount or there may be a discount with respect to the price offered to the third parties in terms of a percentage.
In the era of internet, it has become very easy to get connected with potential investors on various social media platforms. One need not run around meeting every person individually and understand his investment orientation only to discover that it was simple wastage of time. The solution to this is crowdsourcing. Crowdfunding refers to collection of funds from multiple investors through the web-based platforms or social networking sites for business investment. The relatively small financial contributions from a number of persons cumulatively do fulfil the fund requirements of the businessmen. Crowdfunding provides a new mode of financing for the SME sector.
When two raise equity capital through crowdsourcing? It is a handy resource of capital when the personal social network is either small or not rich enough to provide capital. It is also a good tool when typically Indian banks ask a businessman to wait for minimum 3 years from the year of incorporation to be eligible to apply for loan. Crowdsourcing raises funds at relatively lower costs. There is no rigorous corporate procedures.
What is the process of equity crowdsourcing? The operators of a crowdfunding platform carry out the basic due diligence of projects to be included on their website basically to maintain the reputation of the website. The funds from the crowd are available in several variants. The promoters have to provide proposed business plan, intended fund usage, audited financial statements, management details etc.
What are the conditions for equity outsourcing in India? The business must be less than 2 years old. The retail investor can contribute between INR 20,000 to INR 60,000 only. The maximum number of retail investors can be 200. This limits the retail investment to 1.2 crore rupees. Only “Accredited Investors” can invest without much restrictions. The Qualified Institutional Buyers (QIBs) can hold maximum 5% of issued securities. As per the SEBI norms, issuers can raise only up to total Rs 10 crore by issuing equity shares. No single investor shall hold more than 25% stake in a company. The promoters should have a minimum of 5% equity stake in the company for at least 3 years. These conditions are very unfair to the Indian businessman especially in the light of highly efficient financial intermediaries in the legacy market.
Following are the types of mechanism of crowdsourcing:
Donation crowdfunding denotes solicitation of funds for social, artistic, philanthropic or other similar purposes, and not in exchange for anything of tangible value
The investors contribute today with the objective of receiving a product later (may be at discount with respect to future market price) if it is an advance payment. The investors receive the product of the company if it is successfully designed and developed. This manner of capital funding not only provides capital but also creates a market.
In this type, funds are given with the objective to receive a tangible reward. So if you invest in business of a gym, you may get a free membership or a discounted membership.
Debt Crowdfunding (P2P lending):
This is a form of Peer-to-Peer lending. Apohan has covered it here only for the completeness sake.
Equity based Crowdfunding:
It refers to raising equity through crowdsourcing. You may have noticed that most other mechanisms are either for marketing or for debt. Technically, equity crowdfunding can be Deemed to be illegal in India unless carried out with the prescribed rules. The reason for this is that it can make the stock markets, the initial public offers and SEBI irrelevant and investor protection can go for a toss.
The term ‘venture capital’ represents financial investment in a highly risky project with the objective of earning a high rate of return. Venture capital is a form of equity financing especially designed for funding high risk and high reward projects. Typically, the investment ranges from INR 5 crore to around INR 100 cr. This investment is available when a business start making revenue i.e. The proof of concept (POC) is achieved. The term of investment is around 5 to 10 years. The instrument is preferably in the form of convertible preference shares. Venture capital funds invest in: 1. Ventures promoted by technically or professionally qualified but unproven entrepreneurs, or 2. Ventures seeking to harness commercially unproven technology, or
3. High risk, high reward ventures.
Private Equity firms are the investment funds that invest in the capital of the enterprise so as to acquire a strategic stake in it, once it is set up as a successful unit. Private equity funding is available at a very advanced stage of a business. Investors get attracted when the business starts making profits, has crossed the break even point of investment and the growth in the revenues is very fast. The amount of investment available is very large, typically more than 500 crore rupees. This money is utilised for rapid capacity expansion and acquisitions of companies.
How is a private equity fund organised?
Private equity fund is an alternative investment fund. It operates on the lines of a liability partnership. It raises a very large capital pool from pension funds, high net-worth investors, and a wide variety of investment funds. Its general partner plays the role of the fund manager. It plans the portfolio of investments. It manages the limited partner’s capital commitment and capital calls whenever an investment opportunity arises. A limited partner can be a retail and institutional investor such as an angel investor, a pension fund, a charitable trust, a bank, an insurance company, etc.
Family offices are the consulting firms that represent the rich families. Rich family could be a family of a big businessman for the family of a great artist for a sports person, etc. Family office is a generic term and it is not a type of a legal entity. They are into private wealth management and investment banking operations. They can be legal or informal organisations that manage investments for high-net worth and ultra-high net worth families. They provide a wide variety of financial consultancy to the family. They employ their wealth to make investments on behalf of the family. Their (family’s) source of money is sale of a business, inheritance of shares, sale of ancestral property, progress in personal career, top level jobs in very rich companies, etc. The families other than the business families are not expected to have financial investment awareness. However, they would be interested in having some or other say in how their money is being invested. Hence, their personal investment philosophy, personal attachment for a certain cause or a location, transparency and openness in the business proposition, etc need to be taken into account while approaching them. While the family office managers themselves might be very busy, the members of of high net worth families might be even more busy. Another important aspect is sensitivities of different members of the the family itself. Unlike the offices of the family office, the members of the ultra high net worth family may not have knowledge of the rational concepts of business investment. One must also understand the difference between high networth individuals and high net-worth families. While the decision making power in the family maybe widely scattered, it is fully concentrated in case of high networth individuals. They have a relatively longer investment horizon which is good for raising long-term capital. The business expertise of the the family offices of the businessmen, having run successful businesses themselves, may come handy. Family offices allocate the highest fraction of their portfolio for a direct investment in a private business. They also provide capital to the private equity funds and other type of equity funds for ultimate investment in private businesses. The family offices are divided into two types:
Single family office (SFO):
It is the personal wealth management firm of a very wealthy families. It only serves a single family.
Multi-family office (MFO):
It is an independent investment consulting firm aur financial advisory firm which specialises in to management of the the financial aspects of rich families.
Network means the difference between market value of assets (or total wealth) and liabilities, including liabilities of personal expenses in this context. High net worth individuals have much more personal wealth than they need (for expenditure purpose). There is no standard definition of HNIs in the market. The criteria can be net worth or the investible surplus or assets under advise or any similar parameter. The word investible implies that the majority shareholding in one’s own business cannot be added. However, a small fraction of shareholding company with liquidity on stock market (such that it doesn’t affect the price of the share much due to sale in a short span) can be treated as part of networth.
How do high net worth individuals invest? There are two modes in which HNIs invest. Direct equity investment means an investment without involving any financial intermediary. It is risky & time-consuming process in which HNIs have to do all the M&A consultant’s work. In the indirect equity investment mode, they invest in equity with the services of portfolio management companies or stock advisory firms. Here, their simple role is to bring in the capital and perusal of the dashboard. Following are the three types of high networth individuals:
Individuals with Investible surplus of Rs.25 lac – Rs.2 crores are considered as Emerging HNI.
Individuals who have more than 2 crores investible capital are considered HNI or HNWI
Ultra-high net worth individuals (UHNIs):
Individuals who have more than Rs.25 crore investible surplus are called ultra-HNIs.
Non-Resident Indians invest in an Indian private limited company. NRIs can make a direct investments in a private limited Indian company without needing an approval from the Reserve Bank of India or MCA. NRI investment in an Indian private limited company is a growing trend. They can also act as founders and promoters right before the incorporation. The non resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizen of India (OCIs) are allowed to become the directors of a private limited company at any later stage. In case there are too many foreign resident Indians are on the board of directors, it is mandatory that least one investor should be resident in India. The small and medium enterprises in India can play the role of resident Indian director and join hands with these capital rich entities.
A Mutual Fund collect money from general public and many other types of investors by launching schemes from time to time. They invest this money into a variety of instruments. They provide high risk high return diversify investment portfolio in the context of equity investment. A number of mutual funds invest in private companies. Mutual funds also invest in initial public offerings (IPOS) if their bylaws permit.
What are the restrictions on mutual funds for investment in private business? No mutual fund scheme can make any investment in the unlisted shares of an associate company or a group company of its sponsor. They cannot invest in the shares issued by way of private placement by such companies. Even in case of listed companies, they can invest maximum 25% of the net assets. When it comes to unrelated companies, a mutual fund cannot invest for more than 10% of any company’s shares. They can not invest more than 5%-10% of the scheme’s NAV in a single unlisted equity for the open ended and closed ended schemes respectively. In our context, there are two types of mutual funds important from the perspective of equity investment:
Equity mutual funds:
They are the mutual funds that invest only and only in equity.
Hybrid Mutual Funds
They are the mutual funds that invest in equities and other types of securities.
Shares of a Private Limited Company can be issued to any of the following legal persons:
Hindu undivided family (HUF);
A Limited Liability Partnership;
Any other Body Corporate;
An association of Persons; or
A body of Individuals
A minor (only through his/her guardian)
REITs, a globally known investment vehicle, are beneficial to both investors and real estate industry. It provides an opportunity for investors to invest in properties which they would be unable to be invest otherwise. The investors stand to earn from both dividends (from rental income of the property) and
How do investment trusts invest? They have to invest in at least 2 projects. Who can invest maximum 60% of value of assets in one project. Minimum 80% of their assets are commissioned and revenue generating properties. They can invest maximum 20% value in developmental properties, mortgage backed securities, listed/ unlisted debt of companies, equity shares of listed companies in the real estate or infrastructure sector.
How does investment trust function? An infrastructure investment trust is formed under the Trusts Act and registered under the Registration Act. A trust is basically an obligation or duty (under trust in its ordinary sense) attached for entrusting the ownership of property. An obligation is created by the author of a trust, accepted by the now owners (trustees) of property and owed to the beneficiaries. All this is captured in its constitutional document or trust Deed. In the context of an InvIT or REIT, the trust is created by the sponsor (source investor), the ownership of the property vests in the trustees and the beneficiaries of the trust are the unit holders. They are governed by SEBI regulations.
There are two types of investment trusts:
Real estate investment trusts (REITs):
They invest in real estate sector.
Infrastructure investment trusts (InvITs):
They invest in infrastructure sector such as transport infrastructure, urban infrastructure, rural infrastructure, health infrastructure, social infrastructure, etc. Largely the term infrastructure means a very heavy focus on civil engineering.
Essentially, investment bankers are corporate financial advisors.
What Is Investment Banking? Investment banking is a specific division of financial services business regulated by SEBI related to the creation of capital for other companies, governments and other entities. They assist in large, complicated financial transactions. Investment banks’ clients include governments, companies, funds, banks, etc. The services they provide include Private Placements, Mergers and Acquisitions, sales & trading services, fairness opinions, structured finance, securitization, risk management, merchant banking, Public Trading of Debt and Equity Securities, Equity Research, asset Management, Security Analysis, Wealth Management, Alternative Investments advisory, Public / Government Finance advisory, International Investment banking.
What is underwriting? In the course of arranging capital markets financing for their clients, investment bankers typically undertake the underwriting of the deals. This means that they manage the risk inherent in the process by buying the securities from the issuers and selling them to the public or institutional buyers with a markup. There are generally three types of underwriting:
Firm Commitment Underwriting:
The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
Best Efforts Underwriting:
Underwriter commits to selling as much of the issue as possible at the agreed-upon offering price but can return any unsold shares to the issuer without financial responsibility.
If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.
Qualified Institutional Buyers are the institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. These institutional purchasers of securities are deemed financially sophisticated and are legally recognised by exchange boards to need less protection from the issuing companies than most public investors who invest directly. The listed companies raise funds by placing securities with QIBs complying minimum public shareholding norms in the form of equity shares or other forms convertible into equity (except warrants). They are not registered with SEBI as QIBs but are governed by its regulations. The mode for listed companies to raise funds from these investors is called Qualifies Institutions Placement (QIP).
Following investor are classified as qualified institutional buyers:
Foreign institutional investor registered with SEBI;
Multilateral and bilateral development financial institutions;
Venture capital funds registered with SEBI.
Foreign Venture capital investors registered with SEBI;
State Industrial Development Corporations;
Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA);
Provident Funds with minimum corpus of Rs.25 crores;
Pension Funds with minimum corpus of Rs. 25 crores;
Public financial institutions such as SIDBI;
The other variants of nbfcs are not permitted to carry out any kind of equity investment. CIC concept was promoted to avoid requirements of RBI compliances by the NBFCs formed for business group investments. Core Investment Companies, (CIC) are those companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity. They hold at least 90% of its net total assets on the balance sheet in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in the group companies. Their investments in the equity shares in group companies and investment trusts is more than 60% of its net assets. They can’t trade their investments except through block deals for dilution. They can undertake an investment in bonds or debentures issued by group companies, loans to group companies and issuing guarantees on behalf of group companies. Here, a group companies means the companies that can exercise at least 26% voting rights or appoint 50% or more directors in each other, directly or indirectly.
A hedge fund (or an investment safety fund) uses the funds collected from accredited investors like banks, insurance firms, High Net-Worth Individuals (HNIs), business families, and endowments funds, pension funds. Their per investor minimum investment requirement is INR 1 crore in India and USD 1 million in the Western markets. They have initial lock-in periods and monthly or quarterly withdrawl facility. They function as overseas investment corporations or private investment partnerships. They do not need to be registered with SEBI but they are regulated by SEBI and have compliance requirements similar to Foreign Institutional Investors(FIIs). They need not disclose their NAV periodically. They can invest directly in Indian stocks. Hedge funds are a type of alternative investment funds with a large initial investment. Hedge funds are classified as category III AIFs as per SEBI regulations. They are managed by fund managers whose fees is around 1% of the fund value per annum. Their managers tend to invest their own money along with the investors. Hedge funds can invest in long term and short term instruments. Income accruing to them is taxed at the fund level. Only to accredited investors can invest in them. They are not required to maintain very high degree of liquidity. They invest in a very wide variety of assets. Their investment strategy in equity is called long/short equity in which they go long and short on two competing companies in the same industry. A version of hedge funds, i.e. Distressed Hedge Funds are involved in capital restructurings for financial turnaround of companies.
An SWF is an investment fund which is primarily owned by the central government of a country. It sources it corpus from balance of payments surpluses, foreign currency operations, proceeds of privatizations, governmental transfer payments, fiscal surpluses, resource exports, etc. These funds invest in many financial instruments including equity in businesses in the home country or abroad. Sovereign wealth funds are typically applied for stabilization of the economy, projects for future generations of the country, payment of pension, investment in strategic foreign assets, acquisition of foreign companies, nationalisation of domestic companies, etc.
National Investment and Infrastructure Fund (NIIF) is India’s first & only sovereign wealth fund for infrastructure investment in commercially viable projects. It has three entities:
NIIF Master Fund:
The Master Fund is an infrastructure fund with the objective of primarily investing in operating assets in the core infrastructure sectors such as roads, ports, airports, power, etc.
NIIF Fund of Funds:
The Fund of Funds invests in the various other funds managed by various other fund managers who have good track records in infrastructure and associated sectors in India.
NIIF Strategic Investment Fund:
Strategic Investment Fund invests in equity and equity-linked instruments in the core infrastructure sectors such as steel & cement.
Pension funds are created out of the pension contributions employee and employers. They need good investment avenues to ensure that retirees receive promised retirement benefits. The rules governing their investment are highly restrictive. For many years this meant that funds were limited to investing primarily in government securities, investment-grade bonds, and blue-chip stocks. The percentage of the fun they can invest in equity instruments is very small. However, this is expected to change over time. Liberal investment norms for at least private pension funds are expected.
As the name suggests, this fund is a combination of various Alternative Investment Funds. The investment strategy of the fund is to invest in a portfolio of other AIFs rather than making its own portfolio or deciding what specific sector to invest in. However, it should be kept in mind that Fund of Funds under AIFs cannot issue units of fund publicly.
The term alternative investment fund is used to contrast them with the mainstream investment funds. The mainstream investment funds such as stocks, debt securities, etc receive investments from ordinary individuals whose knowledge of financial investment and the risk involved in them is relatively poor. They need a lot of protection in the form of stringent laws governing their receipt and application. On the other hand, alternative investment funds source their investment from the entities that are deeply educated in financial investment. They need relatively lower degree of regulation when it comes to how they invest the funds.
How do alternative investment funds operate? AIF can be established in the form of a company or a corporate body or a trust or a Limited Liability Partnership (LLP). Private equity (PE) and venture capital (VC) are the most popular AIF followed by real estate funds; hedge funds come as distant fourth. They are categorised in three types by law. Following is the classification of alternative investment funds:
Category I AIF:
Funds which invest in StartUps, Small and Medium Enterprises (SMEs) and new businesses which have high growth potential and are considered socially and economically viable, are part of this category. The government promotes and incentivises investment in these projects as they have a multiplier effect on the economy in terms of growth and job creation. Following are the types of category I AIF:
Venture Capital Fund (VCF)
Social Venture Fund
Category II AIF:
Funds investing in various equity securities and debt securities come under this category. All those funds that are not described under category I and III by SEBI, fall under category II. No incentive or concession is given by the government on investment in these funds. Following are the types of category I AIF:
Private Equity (PE) Fund
Fund of Funds
Category III AIF:
Funds which aim at short term returns fall under this category. They employ various complex and diverse trading strategies to achieve their goal of short term capital appreciation. There is no specific incentive or concession given by the government on investment on these funds as well.
Private Investment in Public Equity Fund (PIPE)
All these varieties of funds for investment entities can be of foreign origin for foreign registration. Investment by them in a Indian company is called foreign direct investment.
There is a specific reason why Apohan has listed all these type of investors exhaustively here. A typical small and medium enterprise owner always thinks that there is a great shortage of capital. He is in despair after not getting good quality response from the bank. Apohan believes that a technocrat businessman should prepare a viable business plan without an assumption of capital constraints. They should focus on the core business of generating value. There is a wide variety of investors in the market to Cater to almost all kinds of needs. Apohan carries out professional, end-to-end, customized consultancy services as it understands the investment philosophy & process of all of these types of investor M&A deals. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
Certain forms of foreign direct investments are governed by foreign exchange management act.
The mergers between two large companies are governed by Competition Commission of India.
In order to make the merger and acquisition process simple for the small companies, fast Track business transfer guidelines issued.
Many types of financial intermediaries are registered with SEBI and they have to follow the guidelines of SEBI.
Financial intermediaries such as Pension Fund and insurance funds are governed by respective acts.
Apohan carries out professional, end-to-end, customized consultancy services as it understands the internal and external legal and regulatory framework of all the kinds of M&A deals. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
The equity contracts lay elaborate framework for the rights, obligations, assets, liabilities, risks, control, financial benefits, etc. of the parties. Following are the key terms:
Unless until provided in the articles of association, the equity shares of private companies are not typically transferable.
Participation in excess profit:
Certain types of convertible preference equity instruments can grant the holders of other than common equity e the rights to participate in excessive profits.
Accumulation of dividend:
The payment of dividend on the preference equity can be communicative or non cumulative. It means it can be transferred to the next year or not.
Certain security are convertible from Debt type into equity type and vice versa. Also, certain other securities are convertible from one class of equity to another class of equity.
If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company.
A drag-along right is a provision that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.
The capital investment in equity form is supposed to remain in the business for infinite time. However, the shareholders can agree between themselves when one of them would dispose of the shares to the other and on what terms and conditions.
First right of refusal:
The first right of refusal gives the other shareholders to buy dishes at the same price and terms and conditions that again given to a third party.
Apohan understands the terms of the contracts of all the varieties of M&A deals in depth. Apohan drafts full proof, practical and exhaustive contract without causing any interpretation for understanding issues between the investor and the businesses. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
Following are the forums where a strategic investor main acquire a company:
The ARCs acquire distressed assets from banks when the long term loans of the bank turn into non performing assets and the banks sees that the recovery of its capital is difficult.
A Bank may choose to auction the assets provided as security for the loan. Typically, apart from the other personal assets of the businessman, the manufacturing assets and the corporate assets also become available to the bidders.
Lok Adalat is one of the alternative dispute redressal mechanisms, it is a forum where disputes/cases pending in the court of law or at pre-litigation stage are settled/ compromised amicably.The cases under Lok Adalats relevant for the businesses are partition Claims, Damages Cases, Mutation of lands case, Land Pattas cases, Land acquisition disputes, Bank’s unpaid loan cases, etc.
The Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) provides speedy redressal to lenders and borrowers through filing of Original Applications (OAs) in Debts Recovery Tribunals.
It provides access to banks and financial institutions covered under the Act for recovery of secured debts from the borrowers without the intervention of the Courts.
The National Company Law Tribunal is a body that adjudicates issues relating to companies. All proceedings under the Companies Act, including proceedings relating to arbitration, compromise, arrangements, reconstructions and the winding up of companies are disposed off by the National Company Law Tribunal. It is the adjudicating authority for the insolvency resolution process of companies and limited liability partnerships under the Insolvency and Bankruptcy Code, 2016.
As a result of court litigations, an investor main get position of the disputed equity in a company.
Apohan understands the jurisdiction of various corporate forums. Apohan assists its client in management of the proceedings going on there in terms of strategic advisory. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
Following are the various stages of development of a business:
Pre incorporation activities are typically financed by the promoters’ own funds. This typically includes the incorporation expenses, expenses for market study, feasibility study, detailed project report, and mobilization of investors.
When a new company is able to design and manufacture a product and also is able to profitable is cell in the market at the desired scale aur volume, it is called proof of concept. Before the proof of concept, angel investors provide funds. After the proof of concept, venture capital investors provide the funds.
When our company reaches a break even, i.e. It recover the entire capital expense and also makes revenues more than the running cost, it is said to have reached break even. The risk Perception of a company is relatively very high before break even.
Beyond the point of break even, company start making profits. At this stage, the issue of equity of a potent company can command a premium even on the traditional investment criteria.
Depending upon the nature of the business, a company witnesses exponential growth in the volumes of sale. In this phase the valuation of the company is most favourable to the promoters.
After the phase of exponential growth, the company starts growing at a normal rate. It is relatively easier to to carry out systematic valuation of a company in this stage.
When the product and market saturate either with competition are by tapping all possible market, the company’s revenues get stabilized except for increase due to inflation.
When the products or the services of the company become obsolete, and if the management of the company is not able to do restructuring with the business model, the companies revenues and profits start declining.
A company may be relevant to the market in terms of what products it manufactures. However, the way the company operates, the way the company manufactures, the way the company uses raw materials, the kind of technology the company uses might be no more in vogue. This may result in decline of the revenues or profits of the company. In such case investment can be done in the company for refurbishment, revamping, modernization, digitisation, etc.
A company could be doing well financially in the past, but due to two adverse trends in the market for some unfortunate events in the sector are specifically for the company main give a major blow to its stability, liquidity, profitability, scale of operation, ability to repay loans, manage suppliers, take care of inflation, etc. If such company is provided with one time capital to come back to the original normal way of operations, it is called turnaround funding.
Apohan understands the phases of the business in its life cycle very well. Apohan assists its client in securing equity fund at every stage of its life as it has experts’ understanding of the specific issues in each phase. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
As the Businessman reaches retirement age, being the central person of the company, and many case being the face of the company, he needs to plan his retirement picture of the company in his absence. Following are the main strategic decisions in this direction:
Management outsourcing Services is a back office multinational company which decentralizes administrative, financial, accounting and marketing activities for entities of all types and sizes, through efficient Business Process Outsourcing (BPO). As the Businessman can spend lesser and lesser time as he grows older, he can outsource many management functions that he himself used to carry out to outside agencies.
Succession planning is a process for identifying and developing new leaders who can replace old leaders when they leave, retire or die. Succession planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available.
A businessman needs to write a will for the proper inheritance without any disputes in the subsequent generations. The will should elaborate distribution of of roles, designations, properties, shares, other business assets, minority ownership in other businesses, duties and responsibilities of heirs, any conditions for inheritance, formation of trust for charity, whether the business shall be dissolved or not, what will be given to the loyal long term employees, etc.
A businessman can sell his business in its prime and also in end of his own prime when the business is not facing any problem because of the age, abilities, time and participation of the retiring businessman. Once the trend is downward, evaluation of business falls drastically and also disproportionately. Hence, it is important to sell out the Asset at appropriate point of time if there is no future generation or internal leadership to run the business ahead.
Apohan understands the importance of appropriate decisions when a businessman grows older. Apohan assists the businessmen whose sons and daughters are somehow not able to run the business further in succession planning for sellout of the business. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
In this case, all the major documentation, valuation, contracts and Communications including the identification of the investor are carried out by the staff of a company.
This case, all the scope of work except for the statutory work to be carried out internally including identification of investor, and negotiations with the investor is carried out by the merger and acquisition consultant.
Investment bankers are typically hired by large companies. They are highly intelligent, experienced, and networked people. They typically carry out the most difficult, risky and challenging part of the scope of the work including the challenge of of being able to raise all required fund.
In this case, brokers carry out the work of finding the investors, and rest of the documentation is carried out by the company.
In this model, the company carries out the work of investment estimation, requirement schedule, affordability, internal approvals, business plan, etc. Mergers and acquisition consultants are appointed for deal structuring, preparation of profile of investor, identification of investor, valuation, contract and Merger integration. This statutory work accounting, taxation, company secretary process, due diligence, legal vetting of contracts, market study, technical analysis of the business in terms of Technology and process, etc can be outsourced to the respective experts.
Apohan understands the expertise, lack of expertise, mechanism of engagement, etc each of these types of entities. Apohan assists the businesses appropriately integrating the services of all these agencies. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
Following are the two cases of relative pricing. This comparison is made in the context of popularly perceived fair price. (Both the following prices would be mostly at a premium over the face value of the share.)
In this case , the investors pay a higher price over the book value or the market value or any other value that is perceived as a fair price by the wise.
In this particular case, the equity is issued at a discount with respect to the market price or the book value. Special consideration can be made with relative rehire is in private companies.
Apohan has expert’s understanding of the parameters that decide the premium or the discount in the merger and acquisition process. Apohan assists the businesses by negotiating the contract on their behalf to their best advantage. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
Who is looking at the merger and acquisition activity in the capacity of consultant, following is the classification of consultancies:
The M&A Consultants call it by side advisory when they advice the investors in equity.
The M&A advisors call it a sell side advisory when they advise the selling businessman or selling company or selling investor of the equity sellers
It is not necessary that both are either side should engage the merger and acquisition Consultants. This type of work is called principal to principal.
Apohan has immense experience both in the sell side advisory and the by side advisory. Apohan ensures that it client get all the fair treatment during the process it understands all the considerations & expertises on both sides. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
None of the following activities can be called as merger and acquisition activity. However, they are highly important strategic business activities which which can give an effect which may seem as good as the effect of a merger or of an acquisition. Following is the list of such strategic relations, associations and contracts:
Two businesses can associate with each other through a memorandum of understanding. MOU is not legally enforceable but it narrates the intent of future association and paves a way for a definitive final contract.
Two businesses can associate with a business contract for any purpose of executing joint projects, joint marketing, long term supply, long term seller buyer relationship, technology transfer, etc.
Joint venture is a mechanism in which two companies associate to carry out a project. The scope of work and the and the liabilities of each of the parties are very well defined beforehand. Depending upon what is the expectation of the investment for the role in the joint venture, the parties agree a proportion of ownership in the venture. Typically, there is a independent administrative mechanism, especially accounting mechanism and office set-up. This is to appropriately know & share the costs and profits. Joint ventures are typically meant to be unincorporated. The costs for expenses that cannot be attributed to any specific scope of work for a specific party are shared in a pre decided proportion.
In the franchise agreement, a company provides all the machine tools, capital equipment, technology, training, brand, etc to the third parties to realise some fees other on fixed period basis or on volume basis.
In this mechanism, a company allows another company to use its brand, for resources in the form of intangible assets for a payment called royalty.
In this mechanism, a company sells its give fixed assets to achieve more liquidity. It leases back the same Assets on rental basis from the party to whom the sale was made on long term basis.
Special purpose vehicle is a form of joint venture which is typically Incorporated for a specific purpose and is dissolved after the purpose is fulfilled. This is typically undertaken in the public private partnership projects.
Apohan has expert level understanding of all the available avenues for achieving a business objective. Apohan ensures that its client chooses a appropriate strategic path in formulation of a business alliance – equity or non-equity. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.