Overview of Corporate Restructuring

Need for Restructuring

Introduction
Scope of restructuring encompasses enhancing economy(COST
REDUCTION) and improving efficiency (PROFITABILITY)
Cost cutting and value addition are the two aspects that get
highlighted in a highly competitive world
The common objectives is
to eliminate the disadvantages and
combine the advantages at all level
Restructuring is concerned with arranging the business activities of
the corporate as a whole.
It aims at:
Reducing cost of capital and
translate into profits.
There has been a steady increase in cross-border mergers with the
increase in global trade.
Such mergers and acquisitions can bring long-term benefits
when
they are accompanied by policies to facilitate competition and
improved corporate governance.
Meaning
Corporate restructuring refers to the changes in ownership, business
mix, assets mix and alliances with a view to enhance the
shareholder value.
It can also be defined as a process of rearranging the organizational
or business structure of the company for increased efficiency and
profitable growth.
Hence, corporate restructuring may involve
ownership restructuring
business restructuring
assets restructuring.
Corporate Restructuring is a process of redesigning one or more
aspects of a company.
It is a corporate action in which a significant modification is made to
the debt, operations or structure of a company.

Ways of Restructuring
Expansion: Mergers, Acquisitions, Takeovers, Tender offer, Joint
Venture
Contraction: Sell offs, Spin offs, Split offs,Split ups, Divestitures,
Equity Carve outs
Corporate Control: Takeover Defenses, Share Repurchases,
Exchange Offers, Proxy Contests
Changes in Ownership: Leveraged Buyout, Going Private.
Corporate restructuring is needed:

to grow and survive in the present ongoing corporate environment

for increased efficiency and Profitable growth.
To achieve synergistic operating economies
To Reduce/diversify business risk
To avail the benefit of provisions of set off and carry forward of
losses as per the Income Tax Act
To achieve growth by avoiding delays in respect of
purchasing of building,
site,
setting up of plant,
hiring personnel
Raw material procurements etc.
To consolidate production capacities and increase market power
To Develop core competencies
To Exploit the inter dependence among the present and perspective
business within corporate Portfolio
Mergers and Acquisitions

A business may grow over time as the utility of its products and
services is recognized.
It may also grow through an inorganic process, symbolized by an
instantaneous expansion in
work force,
Customers
infrastructure resources and
thereby an overall increase in the revenues and profits of the entity.
Mergers and acquisitions are manifestations of an inorganic growth
process.

 Mergers and acquisitions are used as

instruments of momentous growth and
are increasingly getting accepted by Indian businesses as critical
tool of business strategy.
They are widely used in a wide array of fields such as
information technology,
telecommunications, and
business process outsourcing as well as
in traditional business to gain
strength,
expand the customer base,
cut competition or
enter into a new market or product segment.
Case1 Whatsapp and Facebook
Whatsapp
WhatsApp reported a meager $10.2 million in revenue in the
previous year
The money presumably came from charging some users $1 a year
to use the mobile application, which lets users share:
text messages and
images,
since WhatsApp does not allow advertising
To generate that revenue, WhatsApp spent heavily across the board.
Research and development at the start-up, which employed just 55
people at the time it was sold, totaled $77 million, a figure that
includes some salaries.
General and administrative costs amounted to $18.6 million.
In total, WhatsApp spent about $149 million last year, resulting in a
net loss of $138 million.
That far exceeds the net loss reported in 2012, a relatively modest
$55 million.
Facebook
$4 billion in cash and
$12 billion in stock,
with the companys founders eligible for an additional $3 billion in
restricted stock.
But as Facebooks own stock has continued to rise, so has the value
of the deal.

 The final tally came in at $21.8 billion

Since announcing its acquisition of WhatsApp, Facebook stock has
risen 20 percent, giving it a market value of $208 billion.
Investors appear unfazed by the willingness of its founder, Mark
Zuckerberg, to make huge bets on money-losing companies, instead
trusting Silicon Valley logic over conventional measures of corporate
worth.
Acquiring WhatsApp was never about making money for Facebook.
Instead, Mr. Zuckerberg was enticed by the companys swift
accumulation of 450 million users at the time of purchase.
Services in the world that have one billion people using
them are all incredibly valuable,
The right strategy is to focus on connecting the people
before aggressively turning them into businesses, Mr.
Zuckerberg said, anticipating further growth.
Case2 Flipcart and Mintra
Value:Rs. $300 million or Rs 2,000 crore
Date: May 2014
Flipkart co-founder Sachin Bansal insisted that this was a
completely different acquisition story as it was not driven by
distress, alluding to a plethora of small e-commerce players either
having wound up or been bought over in the past two years.
Together, both company heads claimed, they were scripting one of
the largest e-commerce stories.
Objective was to consolidate.
Case3 - Online Real Estate platform Housing.com and Risk
assessment firm Realty Business Intelligence

Value:Rs.10 crores.
Date: June 2015
Aim:
To remove ambiguities in the realty industry and bring about faster
growth for the industry
Objectives:
To Strengthen its technology platform
To deliver a powerful collateral risk management platform
To provide trustworthy information
To provide end-to-end services to all stake holders

Case4 - Professional Certification company Simplilearn and Silicon

Valley Based online marketing firm Market Motive
Value:Rs.63 crores ($10 million)
Date: June 2015
Objective:
To add courses such as..
Social Media Marketing
Digitial Advertising
Web analytics
Marketing automation
Post this acquisition, Market Motive will continue to operate as an
independent arm of Simplilearn
Case5 - Worlds Largest Renewable Energy development company
Sun Edison and renewable energy firm Continuum Wind Energy,
Singapore ,with assets in India
Value:Rs.3,900 crores
Date: June 2015
Objectives
To add to renewable capacity in a time bound manner (To deliver
15.2 gw of renewable energy by 2022)
To capture opportunities in solar and wind energy
"With the acquisition of Continuum, a leading wind energy company
in India, we have added significant assets and a skilled wind
development team to drive further growth in our renewable energy
development platform.
This acquisition reinforces SunEdison's commitment to India and
will drive immediate shareholder value.
said Ahmad Chatila, SunEdison president and chief executive
officer.
M&A Indian scenario
The year 1988 witnessed one of the oldest business acquisitions or
company mergers in India.
As for now the scenario has completely changed with increasing
competition and globalization of business.
It is believed that at present India has now emerged as one of the
top countries entering into merger and acquisitions.

Various forms of restructuring

Mergers
Acquisition
Amalgamation
Slump sale
Spinoff
Demerger
Leveraged buyout
The concept of merger and acquisition in India was not popular until
the year 1988.
The key factor contributing to fewer companies involved in the
merger is the regulatory and prohibitory provisions of MRTP Act,
1969. (Monopolies and Restrictive Trade PracticesAct,1969)
Various forms of Restructuring
Merger
It refers to the process whereby at least two companies combine to
form one single company.
Mergers and acquisitions used

For consolidation of markets

For gaining a competitive edge in the industry.
For enhancing long-term profitability
For expanding the operations
For minimisation of Risks.
A merger results in the legal dissolution of one of the companies.
Mergers occur when the merging companies have their mutual
consent as different from acquisitions, which can take the form of a
hostile takeover.

GlaxoSmithkline
Glaxo Wellcome shareholders received
58.75 per cent of the merged company, and
SmithKline Beechams shareholders 41.25 per cent.
Projected cost savings were around $1.8 a year, to be comprised of
combining
their R&D operations,
manufacturing consolidation and
substantial headcount reductions

 Born from the merger of Glaxo Wellcome and SmithKline Beecham,

the new company had
$25bn in sales,
a market value of around $180bn and
an industry-leading market share of 7.3 per cent.
Types of Merger

Horizontal Merger
Vertical Merger
Conglomerate Merger
Congeneric Merger
Reverse Merger

Horizontal Merger
The two companies which have merged are in the same industry.
It increases a firms market share by exploiting business
opportunities.
The resultant company may move closer to being monopoly or near
monopoly to avoid competition.
Vertical Merger
Apple
Vertical integration dictates that one company controls the end
product as well as its component parts.
In technology, Apple for 35 years has championed a vertical model,
which features an integrated hardware-and-software approach.
For instance, the iPhone and iPad have hardware and software
designed by Apple, which also designed its own processors for the
devices.
This integration has allowed Apple to set the pace for mobile
computing.
Vertically integrated conglomerates
Google acquired mobile-device maker Motorola Mobility
Amazons Kindle Fire tablet represents its bridge between hardware
and e-commerce.

 Oracle bought Sun Microsystems and now champions engineered

systems (integrated hardware-and-software devices).
A long-standing software giant Microsoft made hardware for its Xbox
gaming system.
Technology titans are increasingly looking like vertically integrated
conglomerates largely in an attempt to emulate the success of
Apple.
Vertical Merger
It happens when two companies that have buyer-seller relationship
(or potentialbuyer-seller relationship) come together.
It may be an acquisition of a supplier or distributor of one or more of
the firms goods or services.
Conglomerate Merger
It involves company engaged in unrelated type of business
operations.
The business activities of the acquirer and the target are neither
related to each other horizontally (i. e. producing the same or
competing products) nor vertically (having relationship of buyer and
supplier functions)
Objective is to diversify.
Proctor & Gamble Buys Gillette in 2005
The Proctor & Gamble Co., headquartered in Cincinnati, Ohio,
acquired the Gillette Co.
Although the two companies did produce some similar products,
P&G agreed to divest related products to meet Federal Trade
Commission regulations and complete the merger.
Acquiring the global market leader in men's safety razors helped
P&G diversify and expand its personal care product line.
General Motors and EDS Merge and Split
Electronic Data Systems, specializing in information technology and
data services, was acquired by giant automaker General Motors in
1984.
At the time of the merger, the purchase price for EDS, $2.5 billion,
was the most ever paid for a data processing service.

 This conglomerate merger, although huge in the business world at

the time, lasted only until 1996 when GM separated from EDS.
ITT, Avis Rent-a-Car, Sheraton Hotels and Continental Baking
Founded in 1920 with a focus on multinational telephone service,
International Telephone & Telegraph Corp. merged with several
unrelated businesses to become a huge conglomerate.
Although ITT had acquired several related telecommunication
companies previously, in 1959 the company began the acquisition
of unrelated enterprises.
For example, car rental company Avis Inc., hotel chain Sheraton
Corp. of America and Continental Baking Co., makes of Wonder
Bread, were three unrelated companies that ITT acquired.
OmniConglomerate Inc.
Beginning its existence as OmniMotors, it focused exclusively on the
production of automobiles.
However, it expanded and diversified through conglomerate
mergers with such firms as
The Acme Sundial Company, which manufactured sundials;
Tasty Cola Drinks, which produced soft drinks;
Bank of the World, which offered banking services; and
Mobility-Plus, which provided wireless telephone services.
Conglomerate merger
Conglomerate mergers are considered relatively harmless when it
comes to inefficiencies that result from market control.
Because a conglomerate merger is between two firms in different
industries, the degree of competition within EACH industry is largely
unaffected.
While conglomerate mergers tend to be relatively harmless, they
can set the stage for problems.
If several different markets are dominated by divisions owned by
two large conglomerates, the potential for collusion is greater.
Congeneric Merger
In these mergers, the acquirer and target companies are related
through basic technologies, production processes or markets.

 These mergers represent an outward movement by the acquirer

from its current business scenario to other related business
activities within the overarching industry structure.
Example: Prudential Financial and Bache & Co

merger between
Prudential Financial and
stock brokerage company Bache & Co.
both companies were involved in the financial services sector,
prior to the deal,
Prudential was focused primarily on insurance while
Bache dealt with the stock market.

Reverse Merger
Such Mergers involve acquisition of a public (Shell company) by a
private company
it helps a private company to by-pass lengthy and complex process
required to be followed in case it is interested in going public.

Three tests for reverse merger

 Assets of Transferor Company being greater than Transferee

Company
Equity capital to be issued by the transferee company pursuant to
the acquisition exceeds its original issued capital.
The change of control in the transferee company clearly indicated
that the present arrangement was an arrangement, which was a
typical illustration of take over by reverse bid.
Examples
In 2002 , the board of directors of ICICI andICICI Bank approved the
reverse merger of ICICI, ICICI Personal financial services limited and
ICICI Capital services limited into ICICI Bank.
Godrej soaps LTD.(GSL) with pre-merger turnover of RS.436.77
Crores and entered into scheme of reverse merger with loss making
Gujarat innovative chemicals limited(GGICL) with pre-merger
turnover of Rs 60 Crores.

Acquistion
Example
Bharti Airtel acquired Zain Africa, February 2010
Deal size: $10.7 billion, Country: Kenya
At present, Bharti Airtel is the largest mobile network in India. It is
also expanding its reaches throughout the globe.
In February, 2010, Bharti Airtlel added 180 million new customers in
its list by acquiring an African Mobile Network provider called Zain
Africa. This acquisition took place against an amount of $10.7
billion.
Acquisition
Acquisition may be defined as an act of acquiring effective control
over assets or management of a company by another company
without any combination of businesses or companies.
A substantial acquisition occurs when an acquiring firm acquires
substantial quantity of shares or voting rights of the target company.
This involves buying assets of another company.
The assets may be tangible assets like manufacturing units or
intangible like brands.

 Eg.HLL buying brands of Lakme is an example of asset acquisition.

Distinction

Takeover
The term takeover is understood to connote hostility.
When an acquisition is a forced or unwilling acquisition, it is called
a takeover.
Takeover example

Takeover example
Tata Group Acquired Corus, October 2006
Deal size: $12.98 billion, Country: United Kingdom
Tata Steel is Indias second largest steel company with a capacity of
producing 3.8 million tonnes of crude steel. It has most of its plant in
Jamshedpur, Jharkhand. It is considered as one of the best
companies in producing steel.
In October 2006, Tata Steels acquired Corus with an outstanding
price of $12.98 billion.
Hindalco Industires acquired Novelis , February 2007
Deal size: $5.73 billion, Country: Canada
Hindalco Industries is one of the main branches of the Aditya Birla
group. It is headquartered in Mumbai and is one of the largest
producers of aluminum in the world. On the other hand, Novelis is a
Canadian company which has been the best in its kind during 2007.
Few years back, Hindalco acquired Novelis with an outstanding
amount of $5.73 billion.
Amalgamation
The combination of one or more companies into a new entity.
An amalgamation is distinct from a merger because neither of the
combining companies survives as a legal entity.

 Rather, a completely new entity is formed to house the combined

assets and liabilities of both companies.
Objectives of amalgamation
To avoid competition: This will give the company an edge over its
competitors.
To reduce cost: The amalgamated company can derive the
operating cost advantage through lowering the cost of production.
This is possible because of economies of large scale.
To gain financially: The amalgamated company can derive
financial gain which may be in the form of tax advantage, higher
credit worthiness and lower rate of borrowing.
To achieve growth: The amalgamated company can pool its
resources to facilitate internal growth and to prevent the advent of a
new competitor.
To diversify the activities: The risk of a company can be lowered
by diversifying its activities into two or more industries. At times,
amalgamation may act as hedging the weak operation with a
stronger one.
Amalgamation Examples
Maruti Motors operating in India and Suzuki based in Japan
amalgamated to form a new company called Maruti Suzuki (India)
Limited.
Tata Sons operating in India and AIA Group based in Hong Kong
amalgamated to form a new company called TATA AIG Life
Insurance.
Slump Sale
Slump sale is transfer of a whole or part of business concern as a
going concern.
Slump sale means the transfer of one or more undertakings as a
result of the sale for a lump sum consideration without values being
assigned to the individual assets and liabilities in such sales.
Spin of
Spin offs are a distribution of subsidiary shares to parent company
shareholders.
As such, no money (necessarily) comes into the parent company as
a result.

 No shares (or assets) of the subsidiary are sold to the market(IPO) or

to acquirer.
Eg. Dr.Reddy formed new drug development company Perlecan
Pharma
Sun Pharma demerged its R&D as a Sun Pharma Advance Research
company to reduce R&D cost.
De-merger
Demergers means split or division of a company.
Such divisions may take place for various internal or external
factors.
Internal factors generally consist of split in the family rather than
lack of competition on the part of management.
E.g. DCM Limited was divided into four separate companies which
are being managed by different family members of Late Shri ram.
Leveraged Buyout
A leveraged buy-out (LBO) is an acquisition of a company in which
the acquisition is substantially financed through debt.
When the managers buy their company from its owners employing
debt, the leveraged buy-out is called management buy-out (MBO).
purposes of debt financing for LBOs
Increased use of debt increases the leverage which results in
increased financial return to the private equity sponsor.
The debt in an LBO has a relatively fixed cost of capital, thus any
return in excess of this cost of capital flows to the equity investor.
The benefit of tax shield is also applicable in case of high debt.
This results in higher valuation as well.
Targets Companies for LBOs
High growth, high market share firms
High profit potential firms
High liquidity and high debt capacity firms
Low operating risk firms
The evaluation of LBO transactions involves the same analysis as for
mergers and acquisitions. The DCF approach is used to value an LBO.
Indian M&A framework

 The Indian regulatory framework broadly facilitates acquisitions or

hive-offs through multiple legal modes.
Each mode is different from the other on tax outgo parameters as
well as the regulatory ease of implementing the deal.
Listed shares
Long-term capital gains (LTCG), i.e. gains resulting from shares held
for more than 12 months (in case of listed securities), are exempt
from tax if sale is on a recognised stock exchange in India.
In case the transaction is carried out off the stock exchange, gains
are taxed at 10%* (without indexation benefits) or 20%* (with
indexation benefits), whichever is beneficial
Short-term capital gains (STCG) are taxed at 15%*, if sale is on a
recognised stock exchange in India.
In case the transaction is carried out off the stock exchange, it is
taxable in a similar manner as unlisted shares.
Unlisted shares
LTCG is taxed at 10%* (without indexation benefits) for nonresidents and 20%* for residents.
The Union Budget 2014 has amended the period of holding of
unlisted shares to 36 months from the existing 12 months, for a
share to qualify as a long term capital asset.
This provision is effective from 1 April 2014.
STCG is taxed at 40%* for non-resident companies and 30%* for
resident companies.
Indirect Transfer of shares
The transfer of underlying assets in India (including shares of an
Indian company) by virtue of a transfer of shares from a company
outside India is taxable, if the shares of the foreign company derives
its value substantially from assets in India or the shares of an Indian
company.
This provision may impose an Indian tax liability on global deals with
underlying substantial Indian assets.
However, the term, substantial is not defined in the law and is
open to subjective assessment by tax authorities.
Implications for the buyer
The acquisition of shares of a listed company requires compliance
with the Takeover Code.

 An open offer is required to be made for the acquisition of 25% or

more of voting power in a listed company or for acquisition of
control in an Indian listed company.
The document evidencing a transfer of shares is subject to stamp
duty at 0.25% of the value of shares transferred.
However, no stamp duty may be payable if such shares are held in
electronic form.
Funding costs in the form of interest burdens on a loan applied for
the acquisition of shares may not be tax-deductible, as the
corresponding dividend income will be exempt from tax in the hands
of shareholders
In case a corporate buyer receives shares of a closely-held company
at less than the tax fair market value (FMV) determined according to
the prescribed methodology, the difference between the FMV and
the sale consideration of such shares is taxable in the hands of the
buyer at the applicable corporate tax rate.
Withholding tax
The buyer (including non-residents) is required to withhold the
applicable taxes resulting from the capital gains in the hands of the
non-resident seller.
Practically, this requires the buyer to obtain Indian tax registration
numbers
Preservation and carry-forward of tax losses
There is no impact on carrying forward tax losses on a transfer of
shares of a listed company
The transfer of shares of non-listed companies beyond 49% shall
disentitle the company from carrying forward previous years
business losses
There is no impact of transfer of shares on carrying forward
unabsorbed depreciation allowance, irrespective of the Indian
companys listing status.
Share Valuation
The RBI regulates the pricing of each share transaction between
resident and non-resident shareholders of an Indian company.
The RBI has recently standardised the valuation methodology,
allowing the parties to value the shares in accordance with
internationally accepted methodologies.

Business purchase or asset purchase

In India, businesses can be acquired through asset purchase or
business purchase.
In the asset purchase model, the buyer may cherry-pick the assets it
wants, and leave the liabilities and some assets in the seller entity
itself.
In the business purchase model, the buyer acquires an entire
business undertaking, inclusive of all assets and liabilities, for a
lump sum consideration on a going concern basis.

Asset purchase model

Implications for the seller
Computation of gains is done with respect to each asset and this is
taxable as short- or long-term capital gains, depending on the
period of holding the assets.
The sale of depreciable assets always results in STCGs under the
applicable provisions
Capital gains are determined by reducing the acquisition cost of
assets from the sale consideration.
In the case of LTCGs, the acquisition cost is indexed based on the
cost inflation index, which is specifically notified by the tax
authorities for each financial year.
Asset purchase model (Implications for the seller)
The seller is liable to charge VAT or sales tax on the transfer of
movable
property at specified rates
The cost of acquisition of self- generated intangible assets such as
goodwill will be considered as nil for the purpose of calculating
capital gains
In case the asset purchase model involves the transfer of
immovable property, the sale consideration is benchmarked at the
minimum value determined by stamp taxes authorities, for the
limited purpose of calculating capital gains tax.

Implications for the buyer

The buyer is liable to pay stamp duty on the transfer of immovable
property at the rate applicable in the state in which the property is
situated.
The buyer is also liable for stamp duty on movable property at the
applicable rate.
However, this is generally minimised through novation, or physical
delivery, or both
The buyer is eligible to claim depreciation on the purchase
consideration of each asset.
Business purchase model
Capital gains are determined by reducing the net worth of the
business undertaking from the sales consideration, which shall be
determined in a prescribed manner
Capital gains are taxable as LTCGs in case the business undertaking
is held for more than three years.
No indexation benefit is available in the case of a slump sale of
undertaking.
Taxable at 20%* if long term, or
taxable at 30%* if short term
Business transfers (also known as slump sales in India) are typically
not subject to VAT or sales tax
Implications for the buyer
In case of a slump sale, a lump sum purchase consideration is
allocated by the buyer to various assets based on a valuation report,
and hence the purchase of assets such as buildings, plants and
specified intangible assets for use in business is entitled to an
increased depreciation allowance.
The buyer is liable to pay stamp duty on the transfer of business
undertakings at the rate applicable in the concerned state.
Funding costs
Interest on loans taken for the acquisition of assets or business
undertakings through slump sales is generally tax-deductible,
subject to certain prescribed rules.
Amalgamation(Conditions for Tax Exemption)

 All the assets and liabilities of the transferor entity should be

transferred to the transferee entity
Shareholders holding at least 75% of shares (in value) in the
transferor company are to become shareholders in the transferee
company.
Demergers(Conditions to be satisfied to claim tax exemption)
All the assets and liabilities of the relevant undertaking of the
transferor company should be transferred to the resulting company
The transfer of such a business undertaking should be on a going
concern basis
Consideration for a de-merger settled through the issue of shares to
the shareholders of the de-merged company should be done on a
proportionate basis
Shareholders holding at least 75% of shares (in value) in a demerged company are to become shareholders in the resulting
company.
Carrying forward of accumulated loss and
unabsorbed depreciation
Amalgamation
Accumulated loss or unabsorbed depreciation of an amalgamating
company running an industrial undertaking (defined under the law)
are to be carried forward by the amalgamated company
Specified conditions are laid down like continuance of business,
holding of assets, etc
De-merger
Accumulated loss or unabsorbed depreciation directly related to the
undertaking being de-merged is transferable
Proportionate common losses are also transferable.
Other matters
Amalgamations and de-mergers normally attract stamp duty at
varying rates.
Such rates are derived from the laws of the state involved.
Stock exchange, high court and other regulatory clearances are
required for amalgamations or de-mergers.
A more robust process has been recently notified for obtaining
approval from the stock exchanges and the SEBI.

Inbound investments
At the first stage, any investment in India is governed by the Indian
Exchange Control Regulations, which are administered by the RBI.
The RBI has issued a Foreign Direct Investment Policy which requires
the prior approval from the Ministry of Finance in some cases, and
also permits the investments in India without any approval, subject
to certain sectoral and general conditions.
Most investments in India (except the restricted sectors) are
permitted without any prior approval from RBI subject to satisfying
certain conditions.
Inbound investments
On a broad basis, Indian policymakers have been encouraging
greenfield as well as brownfield investments in India.
A few sectors like telecom, single or multi-brand retail, defence,
aerospace, insurance and banking may require approval from the
respective ministries.
Inbound investments(contd.)
On the tax front, there are certain benefits given to new
investment(s) in India.
For instance, the purchase of additional plant and machinery has
been given an increased depreciation allowance.
Also, establishing units in special economic zones entrails tax
holidays for 15 financial years beginning with the year in which the
operations commence.
From a cost-feasible structure perspective, investors may need to
evaluate the options for choosing the right legal entity (like a
company or a limited liability partnership).
Investors may also look at a cost effective capital structure of the
Indian entity, keeping in mind a long term perspective of the
investment.
Profit and capital repatriation
Apart from payment towards various services provided by the
parent company, funds can also be repatriated through the
distribution of dividends, the repurchase (buy-back) of shares, or
capital reduction by the Indian company.
Dividend

 Dividend income received from an Indian company is exempt in the

hands of the shareholders (resident or non-resident).
However, the dividend is taxed at source in the hands of Indian
company declaring it at the rate of 15%*
However, any foreign sourced dividend is taxable in the hands of the
Indian shareholder at an effective rate of 15%* on a gross basis,
subject to a minimum participation of 26% in the equity share
capital of the foreign company.
To simplify the taxability of dividend income in case of multi-tier
structures, suitable provisions have been made to remove the
cascading effect and the dividend is effectively taxed at one source
only.
However, the cascading effect is only removed subject to
compliance with prescribed condition
Share Buyback
A specific tax regime is in place for taxing share buy-backs by
Indian companies effective from 1 June 2013.
Under the new regime, the share buy-back transaction is exempt in
the hands of the shareholder and, instead, is taxable in the hands of
the Indian company buying back its own shares
In the hands of the Indian company buying back its own shares, the
difference between the share buyback price and the amount
received by the company for the corresponding shares, is taxable at
the rate of 20%*
Share buy-back is further governed by the provisions of the
Companies Act, 2013 (recently introduced, replacing in phases the
old Companies Act, 1956).
An Indian company can undertake a share buy-back of up to 25% of
its capital, and that too, only once a year.
Reduction of share capital
Requires an approval of the jurisdictional High Court under the
provisions of the Companies Act, 1956/ 2013.
The amount of distribution on capital reduction is deemed to be a
dividend to the extent of the accumulated profits of the company.
The balance distribution, over and above the accumulated profits, is
taxable as capital gains in the hands of the shareholders.
Residuary provisions like withholding taxes, and categorisation of
capital gains into long term and short term, apply here equally.

Outbound Investments (Regulation of overseas direct investment)

Outbound investment from India to invest in a joint venture or a
wholly owned subsidiary abroad is allowed under the automatic
route (except for prohibited or controlled sectors like agriculture or
financial services) for bona fide business purposes, subject to a
maximum investment of up to 400% of the net worth of the Indian
investor
The existing regulations do not provide for outbound investments in
partnership firms or in any other form of entity other than a
company, without the prior approval of the RBI
Tax on overseas investments
Considering the tax regime of target countries coupled with nascent
foreign tax credit regulations, it becomes imperative that
investments are structured to optimise overseas tax efficiencies.
Essential tax considerations for the Indian outbound investor are
offshore capital gains optimisation, foreign tax reduction and
optimisation of Indian tax credits on the repatriation of funds to
India.
Dividends received from overseas companies (in which an Indian
company holds 26% or more of the equity share capital) are taxable
at 15%* in hands of the Indian company on a gross basis
Currently, India has no controlled foreign corporation (CFC) rules
and there is no Indian tax on foreign profits that remain with
offshore subsidiaries.

Various forms of Restructuring

Divestiture
It means sale of assets but not in piecemeal manner.

 Accordingly all assets i.e. fixed assets, capital WIP, current assets
and many a times even investments are sold as one lump and the
consideration is also determined as one lump sum amt. and not for
each asset separately.
Due to this reason it is also called as slump sale under the Indian
Income Tax Act.
Consideration is payable in cash because..
The divesting /transferor co needs cash to pay off the liabilities and
secured/unsecured loans.
Most of the times divestiture is done to bring cash into the co. for
pumping into remaining business or to start a new business.
Divestiture
At times, in case the divestee co. is not able to raise cash for entire
consideration and if the divesting co. also has no need for all the
cash, some part of the consideration is treated as a debt and is paid
over a period of time.
However, no part of the consideration is payable by way of issue of
equity shares of the divestee co.
Divestiture is used to mobilise resources for core business or
businesses of the co. by realising value of the non-core business
assets.
Slump Sale
Slump sale is transfer of a whole or part of business concern as a
going concern.
Slump sale means the transfer of one or more undertakings as a
result of the sale for a lump sum consideration without values being
assigned to the individual assets and liabilities in such sales.
The term slump sale under the Income Tax Act (Section 2(42C))
means the transfer of one or more undertakings as a result of the
sale for a lump sum consideration without values being assigned to
the individual assets and liabilities in such sales.
In a recent ruling the Income tax Appellate Tribunal, Hyderabad (the
Tribunal) has held that a transfer of business without monetary
consideration would not be considered a slump sale under section
50B read with section 2(42C) of the Income-tax Act, 1961 (the Act).
Accordingly, capital gains on such transfer would not attract any
capital gains tax

Tax Provisions
The law expressly provides that undertaking shall have the
meaning assigned to it in explanation 1 to clause (19AA) specifically
clarify that for the purposes of this clause, undertakingshall
include
any part of an undertaking, or
a unit or division of an undertaking or
a business activity taken as a whole,
but does not include
individual assets or
liabilities or
any combination thereof not constituting a business activity.
Slump sale- Whether Transfer
The undertaking has to be transferred as a result of sale.
If an undertaking is transferred otherwise than by way of sale, say,
by way of exchange, compulsory acquisition, extinguishment,
inheritance by will, etc., the transaction may not be covered by S.
2(42C).
This is because the definition of transfer in S. 2(47) specifically lays
down the different modes which shall be regarded as transfer.
Sale is just one of them. Slump sale is restricted only to
transfer . . . . . . as a result of sale.
Taxability
The existing taxation provisions seeks to treat the profits arising
from a slump sale as
short-term capital gains, if the undertaking is held by the assessee
for not more than 36 months, and
long-term capital gains in other cases
Explanation 2 to Section 2(42C) clarifies that determination of the
value of an asset or liability for the sole purpose of payment of
stamp duty, registration fees or other similar taxes or fees shall not
be regarded as assignment of values to individual assets or
liabilities.
Accumulated loss/Depreciation

 In case of slump sale the unabsorbed depreciation or losses can be

carried forward only in the hands of the transferor and unlike in the
hands of the transferee in case of demerger.
Depreciation post slump sale:
The purchaser can claim depreciation on the basis of fair
apportionment of total consideration.
Essential ingredients for a transaction to constitute a slump sale
are :

there must be a transfer ;

of one or more undertakings ;
such transfer must be the result of a sale
such sale must be for a lump sum consideration ; and
values must not be assigned to the individual assets and liabilities.

Case study 1
One of the oldest textile businesses in India, Bombay Dyeing &
Manufacturing Company Ltd, has sold the last of its textile
manufacturing units, as competition from the unorganised sector
and growing imports from Taiwan, China and Bangladesh have
rendered its factory nonviable. (June 2015)
The Wadia group flagship's textile processing unit at Ranjangaon in
Pune was sold on a "slump-sale basis", or without assigning specific
values to individual assets and liabilities, for Rs 230 crore to a firm
called Oasis Procon Pvt Ltd.
The Ranjangaon unit was built to cater to exports and institutional
sales. However, this hasn't worked as per plan, as the company in a
notice to shareholders admitted that the manufacturing unit is no
longer viable.
The sale of the unit may not have any impact on the company's
existing retail business and its brand Home & You Bombay
Dyeing. But it may have some sentimental impact on those
associated with the company, which was established by Nowrosjee
Wadia in 1879 as a small operation of Indian spun cotton yarn dip
dyed by hand.
Other Cases

 Punj Lloyd Ltd: Infrastructure major Punj Lloyd will seek

shareholders' approval for slump sale of its defence business to its
subsidiary Punj Lloyd Industries for up to Rs 180 crore.
Alstom India Limited (AIL) had completed the sale and transfer of its
transportation systems undertaking
(Transport Undertaking) to ALSTOM Transport India Limited
(ATIL), as a going concern on a slump sale basis on March 31,
2014.
Kanoria chemicals sold its chloro chemicals division that contributed
70% of the companys total sales to Aditya Birla Chemicals for Rs
830 crores.
Aditya Birla Retail Ltd (ABRL) acquired Jubilant Industries'
hypermarket business in a slump sale all cash deal.(May15)
Piramal Healthcare sold to Abott- via a slump sale- its domestic
formulations business that contributed 55% of the companys
revenues.
Abbott paid $3.72 billion or more than 10 times sales proceeds that
Piramal said it would use to retire debt, invest in the remaining
business and new ventures.
Reliance Energy created Reliance Power as a separate entity in
September 2007.
Reliance Energy demerged its power business and raised money
through an IPO in January.
Though they did not get shares in Reliance Power, the shareholders
of Reliance Energy benefited because the valuation of Reliance
Power pushed up their share price up by 42% in four months-from
Rs 1,205 in September 2007 to Rs 1,716 in January 2008.

Slump Sale

Asset Purchase

Consideration for transfer is a

lump sum consideration.

Consideration may be in part

payment or as specified in the
Agreement.

In Slump sale value is not

assigned to individual units or
liabilities, but sometimes
land/building where separate
value is assigned to it under the
relevant stamp duty legislation,
the slump sale will not be
adversely affected

In contract the values may or

may not be assigned to
individual units like plants,
machinery.

Slump sale includes not only

transfer of asset but also transfer
of liabilities or obligations.

In Asset purchase transfer of

asset may or may not include
liabilities/obligations.

Illustration:
In Weikfield Products Co. (I) (P.) Ltd. v. DCIT, [71 TTJ 518 (Pune)], the
Tribunal observed that In our opinion, the transfer of a going concern means transfer by
lock, stock and barrel, where nothing is left with the vendor.
It includes not only the transfer of each asset, tangible or intangible,
but also the transfer of each debt and liability including any
obligation
Where the sale deed mentioned sale deed in respect of sale of
movable properties and separate prices were agreed for different
assets, the transaction was not treated as a slump sale, it comes
under asset purchase.
In Mahindra Sintered Products Ltd. v. DCIT, [95 ITD 380 (Mum.)], it
was held that Where price was fixed beforehand in respect
of identifiable assets of the undertaking and no liability was
transferred to the buyer, transfer of undertaking would not be
regarded as a slump sale.
De-merger
Demergers means split or division of a company.
Such divisions may take place for various internal or external
factors.

 Internal factors generally consist of split in the family rather than

lack of competition on the part of management.
E.g. DCM Limited was divided into four separate companies which
are being managed by different family members of Late Shri ram.
The expression Demerger is not expressly defined in the
Companies Act, 1956.
However, it is covered under the expression arrangement, as
defined in clause (b) of Section 390 of Companies Act.
Division of a company takes place when..
1. Part of its undertaking is transferred to a newly formed company or an
existing company and the remainder of the first companys
division/undertaking continues to be vested in it; and
2. Shares are allotted to certain of the first companys shareholders.
Demerger of group entities brings greater investor focus onto the
subsidiary company and its business potential
Demerger
A demerger is a form of restructure in which owners of interests in
the head entity (for example, shareholders or unit-holders) gain
direct ownership in an entity that they formerly owned indirectly
(the demerged entity).
Underlying ownership of the companies and/or trusts that formed
part of the group does not change.
The company or trust that ceases to own the entity is known as the
demerging entity.
The entity that emerge have its own board of directors and, if listed
on a stock exchange, have separate listings.
The purpose of demerger is to revive a company's flagging
commercial fortunes, or simply to lift its share price.
Mode of Demerger
Under the scheme of arrangement with approval of the court U/s
391 of the Companies Act.
Case Study
In 2004, Hindalco wanted to integrate Indals aluminium business
with its own alluminium business.

 For this, the process that was used was not amalgamating but
demerger.
Indals entire business except its aluminium foil business at Kollur
was demerged into Hindalco wherein Hindalco, which had much
bigger alumimium business of its own acted as a resulting company.
Indal was left with a small aluminum foil business.
Zee Telefilms demerged three new entities in January 2006.
Camlin Limited demerged its fine chemical business.
In this demerger, for the purpose of acting as a resulting company,
Camlin Limited used one of its existing group companies.
Legal aspects
To qualify as demerger, there is no bar under the Companies Act
1956 to pay any cash or any consideration other than equity shares
to the shareholders of the transferor company.
Tax aspects
However, under the Income Tax Act, 1961(Section 2(19AA) defines
demerger and makes it mandatory that consideration must be in the
form of shares of the resulting(transferee) co. only.
If this is not complied with the various benefits available under the
Income Tax Act in terms of various capital gains exemptions and
carry forward of losses etc. are denied.
Spin of
Spin offs are a distribution of subsidiary shares to parent company
shareholders.
As such, no money (necessarily) comes into the parent company as
a result.
No shares (or assets) of the subsidiary are sold to the market(IPO) or
to acquirer.
Eg. Dr.Reddy formed new drug development company Perlecan
Pharma
Sun Pharma demerged its R&D as a Sun Pharma Advance Research
company to reduce R&D cost.
Cases
Indiabulls Financial Services spun off Indiabulls Real Estate in July
2006.

 When Indiabulls announced its plans to demerge its real estate

business in July 2006, its shares were trading at Rs 245.
By the time the real estate company was hived off and existing
Indiabulls shareholders allocated shares of the new company in
March 2007, the share price of the parent company had shot up to
Rs 659.
That's besides one share being allotted to each shareholder.
In December 2007, the company demerged its brokerage business,
sending the share price zooming to Rs 979
Split up
Split up involves transfer of all or substantially all assets, liabilities
loans and businesses(on going concern basis) of the company to
two or more companies in which unlike spin off the shares in each of
the new companies are allotted to the original shareholders of the
company on a proportionate basis but unlike spin off the transferor
co. ceases to exist.
Spin of/split up
Unlike in the case of divestiture, there is no sale of assets to another
company(ies).
Like in the case of amalgamation, in spin off or split-up, there is only
transfer of assets (and also liabilities or loans) under a scheme of
demerger which is required to be approved first by the shareholders
and then by the high court.
In case of both spin off and split up the consideration is always in
the form of equity shares of the transferee company(ies).
Since the consideration is being paid to the equity shareholders of
the transferor co. normally they will have to be given equity shares
of the transferee co.

Objectives of Spin of/Split up

Resorted to achieve focus in the respective businesses especially if
the businesses are unrelated.
They are also used to improve the PE ratio and consequently the
market capitalisation by demerging not so profitable business into a
separate company or companies.
It can be done to demerge or carve out capital hungry businesses
from the businesses which require normal levels of capital so that

further fund raising by equity dilution can be restricted to capital

intensive businesses while sparing other businesses from equity
dilution.
Split of
Split off is a spin off with the difference that in split off all the
shareholders of the transferor co. do not get the shares of the
transferee co. in the same proportion in which they held the shares
in the transferor co.
Normally split offs are used to realign the inter se holding of
promoters while businesses are being split off.

Various forms of Restructuring

Leveraged Buyout
In India, private equity investors have largely provided growth
capital thus far and leveraged buyouts in the classic sense have
been absent.

 This is because domestic banks are not allowed to lend for the
acquisition of shares and under the current laws an Indian company
is not allowed to provide any financial assistance including security
for the acquisition of its shares.
In India, given that banks are not proactive in lending for
acquisitions even based on the acquirer companys assets,
leveraging on the target companys assets is yet impossible.
Therefore, for domestic acquisitions in India, LBOs are not practiced.
However, Indian companies have been successfully resorting to the
LBOs for the overseas acquisitions.
M&A financing for inbound cross border deals has largely been
through offshore holding structures wherein the acquirer has raised
debt in its home country or some other suitable intermediate
jurisdiction.
However, in such structures creation of security in favour of the
lender at times proves to be an insurmountable challenge given the
Indian extant exchange control laws do not automatically (an
approval is required) permit a creation of security over the assets or
shares of the Indian company in favour of a non-resident.
The RBI is mulling a change in the regulations whereby domestic
banks may be allowed to finance M&As.
This could act as a catalyst for other legal changes that will then act
as enablers for leveraged buyouts.
Leveraged Buyout
A leveraged buy-out (LBO) is an acquisition of a company in which
the acquisition is substantially financed through debt.
It means mobilising borrowed funds based on the security of assets
and cash flows of the target company (before its takeover) and
using those funds to acquire the target company.
Jerome Kohlberg, Jr. and Henry Kravis coined the term.

purposes of debt financing for LBOs

Increased use of debt increases the leverage which results in
increased financial return to the private equity sponsor.
The debt in an LBO has a relatively fixed cost of capital, thus any
return in excess of this cost of capital flows to the equity investor.
The benefit of tax shield is also applicable in case of high debt.
This results in higher valuation as well.

Targets Companies for LBOs

High growth, high market share firms
High profit potential firms
High liquidity and high debt capacity firms
Low operating risk firms
The evaluation of LBO transactions involves the same analysis as for
mergers and acquisitions.
The DCF approach is used to value an LBO.
Steps in LBO
Incorporation of a privately/ wholly owned company to act as a
special purpose vehicle (SPV) for acquisition of a target company.
Mobilising of borrowed funds in the SPV based on the security of
assets and cash flow of the target company (before its takeover)
Acquisition of the entire or near entire share capital of the target
company.
Merger of the target company into the SPV.
This move which is also a critical step in the leveraged buyout has
two effects:
It brings the assets of the target company and the loans taken by
the SPV into one balance sheet by which the lenders security no
more remains a third party security.
It makes the target company go private i.e. the target company gets
unlisted.
Disadvantages of LBO
Financial distress
Uncertainties
Increased fixed costs associated with debt financing can worn out
the effect in case of downturn in business cycles
In Leveraged acquisition, banks have a say in what is being done.
Case Study
Tata Tea
Tata Tea was incorporated in 1962 as Tata Finlay Limited, and
commenced business in 1963.
The company, in collaboration with Tata Finlay & Company, Glasgow,
UK, initially set up an instant tea factory at Munnar (Kerala) and a
blending/packaging unit in Bangalore.

 Over the years, the company expanded its operations and also
acquired tea plantations.
Tata Industries Limited bought out the entire stake of James Finlay &
Company in the joint venture, Tata Finlay Ltd.
In 1983, the company was renamed Tata Tea Limited.
Tetley
In 1837, two brothers, Edwards and Joseph Tetley started to sell tea
and became so famous that they set up as tea merchants.
In 1856, in partnership with Joseph Ackland, they set up Joseph
Tetley and Co., wholesale tea dealers.
Tea was rationed during World War II, it was not until 1953, just after
rationing finished, that Tetley launched the tea bag to the UK and it
was an immediate success.
The Tetley Group was created in July 1995
On 10th March 2000, The Tetley Group was sold to Tata Tea Limited,
one of the worlds largest integrated tea businesses.

The deal..
This deal which was the biggest ever cross-border acquisition, was
also the first-ever successful leveraged buy-out by any Indian
company.

Structure of the deal

Tata Tea created a Special Purpose Vehicle (SPV)-christened Tata Tea
(Great Britain) to acquire all the properties of Tetley.
The SPV was capitalised at 70 mn pounds, of which Tata tea
contributed 60 mn pounds; this included 45 mn pounds raised
through a GDR issue.
The US subsidiary of the company, Tata Tea Inc. had contributed the
balance 10 mn pounds.

Structure of the deal

The SPV leveraged the 70 mn pounds equity 3.36 times to raise a
debt of 235 mn pounds, to finance the deal.
The long term debt was mobilised on the basis of security of assets
and cash flow of Tetley and acquired 100% of Tetley at the cost of
271 million.
The entire debt amount of 235 mn pounds comprised 4 tranches (A,
B, C and D) whose tenure varied from 7 years to 9.5 years, with a
coupon rate of around 11%.
The only missing point in this LBO was that Tata Tea did not
immediately merge Tetley with the SPV Tata Tea (GB) Ltd.
How was the money used?
Tetley Acquisition 271 mn
Legal, Banking and Advisory services 9 mn
Tetleys WC requirements - 25 mn
Why the deal made sense?..
Complementary specializations
Readymade access to the European and North American market
Acquisition enabled Tetley to reduce its debt- equity ratio

 Integration structure.
Unusual Deal..
Tetley's price tag of 271 mn pounds (US $450 m) was more than
four times the net worth of Tata tea which stood at US $ 114 m.
This David & Goliath aspect was what made the entire transaction
so unusual.
What made it possible was the financing mechanism of LBO.
This mechanism allowed the acquirer (Tata Tea) to minimise its cash
outlay in making the purchase.
Analysis
Some analysts felt that Tata Tea's decision to acquire Tetley through
a LBO was not all that beneficial for shareholders.
They pointed out that though there would be an immediate dilution
of equity (after the GDR issue),
Tata Tea would not earn revenues on account of this investment in
the near future.
This would lead to a dilution in earnings and also a reduction in the
return on equity.
The shareholders would, thus have to bear the burden of the
investment without any immediate benefits in terms of enhanced
revenues and profits.
Management Buyout
When the managers buy their company from its owners employing
debt, the leveraged buy-out is called management buy-out (MBO).
It is a leveraged buyout of a company by the professional
management or non-promoter management of a company from its
promoters.
MBO activities involve promoters divesting their stake in a firm by
selling out to PE players willing to finance the asking price.
The PE players are flexible enough to enter into a partnering
relationship with the existing management.
This sort of arrangement is basically just a stake buyout and not a
classical MBO.
It is common in scenarios where owners want to hive off entities
with poor results and the management lacks funds to hold on to the
entity (and their jobs) and are, in turn, bailed out by the PE firm.

MBO in India
The Indian model for MBO is very different from the West.
Most of the MBOs here are not of the classic variety wherein the
company's managements have created the deal and then involved
financial investors to fund the change of control.
In the desi version, promoters have spun off or divested and private
equity (PE) players have bought the businesses and then partnered
with the existing management.
Case 1
In 2007, the private equity firm Blackstone Group agreed to buy
Indian back-office company Intelenet Global Services, marking its
first management buyout (MBO) in India.
When Blackstone bought out the stakes of Barclays Bank and HDFC
in Intelenet, in what was the Indian IT industry's largest MBO,
Intelenet CEO Susir Kumar admitted that they "wanted a player who

could introduce us to other portfolio companies that could give us

business. Blackstone was a good fit."
This deal was Blackstone's first BPO investment in India.
Case 2
Actis had invested around Rs 315 crore to buy over 66 per cent in
Phoenix Lamps in 2006.
Additionally, they introduced the management of Phoenix Lamps to
newer suppliers, reducing production costs and provided numerous
customer introductions enhancing revenues.
Actis invested through a mix of stake purchase from previous
promoters, preferential allotment and an open offer that saw full
participation from the public shareholders.
Examples
Some of the buyouts by ICICI ventures are Tebma Shipyard, Ace
Refractories and Ranbaxy Fine Chemicals, which were later
converted into management buyout (MBO).
Indian M&A framework
The Indian regulatory framework broadly facilitates acquisitions or
hive-offs through multiple legal modes.
Each mode is different from the other on tax outgo parameters as
well as the regulatory ease of implementing the deal.
Common modes of executing transactions:
Share purchase
Business purchase through the asset purchase (itemised sale) or
business undertaking as a going concern (slump sale)
Amalgamations and de-mergers
Transaction through share transfer
Share Valuation
The RBI regulates the pricing of each share transaction between
resident and non-resident shareholders of an Indian company.
The RBI has recently standardised the valuation methodology,
allowing the parties to value the shares in accordance with
internationally accepted methodologies.
Indian M& A framework

 The transfer of shares in Indian companies is taxable as capital

gains in India, subject to benefits under the applicable DTAA, if any.
Furthermore, taxability is dependent on whether the subject shares
are listed or unlisted.
Business purchase or asset purchase
In India, businesses can be acquired through asset purchase or
business purchase.
In the asset purchase model, the buyer may cherry-pick the assets it
wants, and leave the liabilities and some assets in the seller entity
itself.
In the business purchase model, the buyer acquires an entire
business undertaking, inclusive of all assets and liabilities, for a
lump sum consideration on a going concern basis.
Inbound investments
At the first stage, any investment in India is governed by the Indian
Exchange Control Regulations, which are administered by the RBI.
The RBI has issued a Foreign Direct Investment Policy which requires
the prior approval from the Ministry of Finance in some cases, and
also permits the investments in India without any approval, subject
to certain sectoral and general conditions.
Most investments in India (except the restricted sectors) are
permitted without any prior approval from RBI subject to satisfying
certain conditions.
On a broad basis, Indian policymakers have been encouraging
greenfield as well as brownfield investments in India.
A few sectors like telecom, single or multi-brand retail, defence,
aerospace, insurance and banking may require approval from the
respective ministries.
Greenfield Investment
A form of foreign direct greenfield investment is where a parent
company starts a new venture in a foreign country by constructing
new operational facilities from the ground up.
The primary reason is that a new facility offers the maximum design
flexibility and efficiency to meet the project's needs. An existing
facility forces the company to adjust based on the present design.
In addition to building new facilities, most parent companies also
create new long-term jobs in the foreign country by hiring new
employees.

Brown Field Investment

An Investment is called as 'Brown Field Investment' When a
company or government entity purchases or leases existing
production facilities to launch a new production activity.
This is one strategy used in foreign-direct investment.
The clear advantage of a brown-field investment strategy is that the
building is already constructed. The costs of starting up may be
greatly reduced. The time devoted to construction can be avoided
as well.
However, it is rare that a company looking to engage in FDI finds a
facility with the type of capital equipment and technology to suit its
purposes completely.
If the property is leased, there may be limitations on what kinds of
improvements can be made.