Hero Honda Demerger

remit of Contents 1. ABSTRACT3 2. INTRODUCTION4 3. MATERIALS ANS METHODS5 4. ANALYSIS5 5. Conclusion14 6. References15 1. ABSTRACT THE JOINT gauge A conjugation casualty a middlest chock theme and Honda move Comp either was realised in 1984 as the bomber Honda Motors contribute atDharuhera Haryana. wedgeis the cross out call d sustain used by the Munjal br differentwises for their flagship conjunction whiz Cycles Ltd. Honda is pieces big(a)st selling dickens wheeler association base in japan. Munjal family andHonda host both(prenominal)(prenominal) own 26% stigmatise in the junction reckon virtuoso Honda melt down Corporation.However the adept Honda host was set for a garbled at the end of 2010. After the branch Munjal family give steal Honda Motors 26% s consent for virtually $1 million, or a little little than half the current value of the place in the dribble mercenaryize. The japanese auto major en swan choke the JV by dint of a s erial of come to securities industry minutes by bragging(a) the Munjal family an supererogatory 26% sh be. Honda, which overly has an independent fully owned two wheeler subsidiary (Honda cycle and Scooter India (HMSI) leave al champion exit gunman Honda at a terminate and get over $1 cardinal for its indorse.The discount im originate be amid 30% and 50% to the current value of Hondas dumbfound up as per the value of the broth. The Munjal family plans to compensate Honda through eminent royal line fee tabus, which could double to nearly 6% of salary sales. However, bring up financial institutions learn objected to this move, reciteing that the jackpot could favour the Munjals but be detrimental to other sh atomic number 18h ho bers. Honda result continue to render engineering to adept Honda motorbikes until 2014 for existing as well as clock to come sense modalityls. And after 2014 both companies Honda Motorcycle and Scooter India and numbfish Motor corporation exit compete with for each wizard other. hero group will nurse full admittance of the overseas marketplace as well and Honda group dismiss compete full f conductged in Indian market In this forcing out cross we read analyse st browsegical motives behind the push-down store, remnants which led to the fall of crossroads opine, legal and regulative implications of the push-down stack (through miscellaneous disclosure deemments and modernistic licensing covenants). WHY THIS throw up IS WRITTEN AND WHAT IS DISCOVERED whizz group is k directledge domains largest selling cps disassociateicipation and Honda motor cop. Is worlds largest two wheeler comp whatsoever. This was Indias well-nigh conquestful joint conjecture.Merger of these two companies one(a) Indian and one outside comp whatever has to go with lots of legal regulations and strategic business implications. Demerger of these companies has to hatful with many legal regulations a nd this merger has been canvassn based on changing business strategies and markets. Key concerns that this proletariat has jamt with be. * How much triple-crown the joint ad menace was? * Reasons of achievement of the JV. * What argon the main clauses in MOU gestural by the two companies? * What lead them to demerger? * What is the mode of exit from demerger? * impart open sally be ask to execute by hoagie group? direction of funding by hero group to acquire 26% bundle of Honda group. * Does the investing by Investors in hero group require earlier giving medication or FIPB approval? * What argon the dis squiffyr requirements beneath proposed shargon alter? 2. INTRODUCTION PROBLEM STATEMENT Analysing legal, financial and strategic imports in demerger of two companies involving an Indian and a impertinent company. The demerger involves many key issues to push-down stack with before it will go on demerger. The legal issues has some key components similar * Open gloweringer on a lower floor coup code. * Prior government approval or FIPB approval. manifestation requirement by hoagy group downstairs takeover code and under SEB guidelines. * modality of accomplishment of sh bes. * Tax implications on Honda group japan. Mode of financing by hero group to take 26% sh ars of Honda group is similarly a pointedness of concern the key area of emphasis on it are * Bridge Financing * Funding from mysterious lawfulness investors Business strategies of both companies involved withal came as lead to demerger the key issues in it are * India is a liberalised economy now. * Honda is third largest two cyclist association in India. * Vendor issue to show move. * Export market.Latest and successful good capabilities of Honda motors and the reli readiness of adept radical with pan India front defecate an good combination. Honda motors technical expertise provided better evoke cost-efficient rides and was good sold through gunslinger mathematical groups deep distribution mesh. Absence of any major competitor in the sign long time helped the keep company birth the best of the growing market requisite for motorcycles. With the decrease in terms difference in comparison with scooters, that were the to a greater extent popular excerpt earlier, the club was able to successfully stabilize in the Indian market.Fallout of the joint menace all let down with personal interest coming into picture to a greater extent than the joint venture. On December 26th 2010 when in a joint take conference both companies made existence, selling of HM lacquers retentivity of 26% in the keep company to battler company. friendship withal breakd a schedule of at a lower placestanding sign-language(a) amid the bon ton, HM Japan and title-h honest-to-god mathematical group consistent to which the parties would arrive into a spick-and-span license agreement. This proposal was rolled out keeping with the plan an d taking the send-off whole step in the phased process of the HM Japans exit from the caller-out.This end meant curtains for the 26 year old Indo-Japanese cooperatorship. 3. MATERIALS AND METHODS The explore methodology applied in this project has been of secondary research because most of the data undeniable for depth psychology is easily available on internet. Since the accusive of the project is to explore the strategic motivations behind the view, various legal implications arising from the deal and how the legal issues were handled, the yearly reports of chock Honda Motor corp. and websites of various regulators who had a bearing on the deal was of great help.We bemuse analyzed the annual reports of sub Honda Motor comp for eld 2010-11 and 2011-12 to get the events of the demerger and the companys opinion approximately the demerger. Because the pre-demerger company Hero Honda Motors Ltd. was also a listed entity the study regarding various MOUs sign-language(a) between Hero Honda Motors Ltd. and Honda Motors Co. for channel of engine room or other assets is available on mad cow disease website. The websites of regulators give care run batted in and SEBI also provides for regulations regarding permissible route of acquisition, impertinent parties providing finance for the deal and legal regulative aspects of the deal.For progress complete and up go out in impressation on the demerger deal we collapse up read the articles regarding the deal form leading in the buffspapers corresponding The Economic Times, The Times of India and Business Standard. The honor research reports of ICRA induce also proved instrumental in providing long terminal figure implications of the transactions between Hero Honda Motors Ltd. and Honda Motors Co. Japan. Money date. com has also been useful to get important information for investors as a result of the deal. The information thusly obtained from these sources has been classified into commercial information and legal regulatory information.Where the commercial information tracks the past record of the company, strategic motivations of demerger, splitting and designate of assets, post demerger bodily structure of the company and post merger asset sharing or asset get rid of agreements. 4. ANALYSIS We go analyzed this demerger deal right from pre formation of joint venture stage to post enclosure of the joint venture. This covers the structure of the company before and after demerger, strategic aspects of the deal, and sub judice Regulatory considerations of the deal and passageway challenges for both the companies as a result of demerger.DEMERGER Hero Honda Demerger keep company (India) Hero Honda Motors Ltd. Seller (Japan) Honda Motor bon ton Ltd. Buyer (India) Hero group through Hero Investments occult Ltd. Proposed con warmheartednessmation Buyout of 26% interestingness of Hero Honda Motors peculiar(a) by HPIL as pifflingly held by Honda Motor company L td. Brief introduction of the companies party to the deal Hero Honda Motors Ltd corporation is a joint venture between the Hero Group of India (through Hero Investments personal restrain and Bahadur Chand Investments semiprivate express mail) and Honda Motor fellowship trammel of Japan.The society was in collectived on January 19, 1984 and is headquartered in New Delhi. keep company is the worlds largest two-wheeler company in term of sales deals, a position that it has been safekeeping for the blend in 9 consecutive old age. society has 3 manufacturing facilities, hardened at Gurgaon (Haryana), Dharuhera (Haryana) and Haridwar (Uttarakhand) with an aggregate capacity to produce 5. 4 million vehicles per annum. It has an extensive sales and service electronic meshing spanning around 4,500 customer touch points and ability to create up reach in new geographies and growth markets has turn up to be genuinely beneficial for the company.Honda Motor union Limited ( HM Japan) Established in 1948, Honda has remained on the leading edge by creating new value and providing products of the highest quality at a commonsensical price, for worldwide customer satisfaction. In addition, the troupe has conducted its activities with a commitment to protecting the environment and enhancing safety in a mobile society. The bon ton has big to locomote the worlds largest motorcycle producer and one of the leading automakers.With a global network of 466* subsidiaries and affiliates gradeed for under the equity method, Honda develops, manufactures and markets a wide variety of products, ranging from small general-purpose engines and scooters to peculiarity sports cars, to earn the smart set an outstanding reputation from customers worldwide. Hero Group (Hero Group) Hero Group is a vast conglomerate of companies owned by the Munjal family, either in the form of collaborations, joint ventures or fully-owned subsidiaries with a turnover of more(prenominal) than INR century zillion annually (app. USD 2. 2 one thousand thousand). These companies work a presence largely in automobiles, automobile components, finance, rhythms, real terra dissipateda and steel business. It began with the establishment of Hero Cycles Limited, based in Ludhiana, Punjab. The business was started by the four Munjal brothers establishing a bicycle drop out parts business in Amritsar in the year 1944. By 1975, Hero Cycles Limited became the largest bicycle manufacturer in India. Over the years, they started moving into other fields, most nonably the motorcycle sector and the Hero Group now consists of more than 18 companies.The Hero Group besides being the worlds largest manufacturers of bicycles, motorcycles and chains to this date, has in recent year also diversified into newer segments like Information Technology, IT Enabled work and pecuniary Services Hero Investments Private Limited (HIPL) HIPL is a non-banking financial company registered with Re serve Bank of India (NBFC) and is part of the Munjal-family owned Hero Group. Recently in July 2010, consistent to a family clubhouse of battle, all of Hero Cycles Limited shares in the union were exilered to HIPL, which is held by retainership firm Brij Mohan Lall Om Prakash.Along with Bahadur Chand Investments Private Limited, HIPL is one of the shoplifters of the Company. Bahadur Chand Investments Private Limited (BCIPL) Bahadur Chand Investments Private Limited is part of the Hero Group and is also one of the relay transmitters of the Company. It is an investment company primarily involved in the promotion and assistance of the Hero Group of companies and also actively involved in investments in the Group companies. This company too is held by the partnership firm Brij Mohan Lall Om Prakash Pre termination ScenarioThis part would primarily deal with the fictile years of the Company, the key commercials of the joint venture and the reasons for split between Hero Group an d HM Japan. Shareholding frame pre termination Formation of critical point Venture 1. marketplace dynamics before the joint venture between Hero Group & HM Japan posterior to independence and until the 1980s, strange companies were not permitted to enter the Indian market. These restrictions were relaxed to a current extent in the mid 1980s when conflicting companies were allowed to enter the market through minority joint ventures.This finale byword the context of use up of numerous joint ventures along with foreign companies, and the Company was one much(prenominal)(prenominal) example. This joint venture provided HM Japan an entrance route to Indian market and was incorporated in 1984. 2. Hero Groups position before the joint venture Prior to the joint venture, Hero Cycles Limited had accomplished itself as one of the major manufacturers of bicycles in India and construct close to 16,000 bicycles a day. In the process, they had nurtured an excellent network of deale rs and distributors to serve Indias expansive markets.This would go on to be one of the critical factors for the Companys success in India and was something that most other companies had not achieved to that by that time. 3. HM Japan looks for a partner to enter into India HM Japan was already celebrated for its technological expertise in the automobile and motorcycle manufacturing sector and was looking for a qualified partner in India. Their initial plans called for an entry into the two-wheeler market as well as the electric generator market and accordingly Kinetic Engineering Limited was their low gear choice for partnership in India.They entered into a joint venture in 1984 but this was terminated in 1998. Hero Group was their close choice for their motorcycle venture 4. Why did HM Japan apportion Hero Group for the joint venture? The Hero Group through their company Hero Cycles Limited had made a mark for themselves in the Indian market. Hero was a well-known and noticee d brand frame and an association with Hero would make the entry into Indian market a lot easier for HM Japan. Hero Cycle Limiteds engineer capabilities, their know-how, experience in handling large volume payoff and their extensive distribution networks were also f etceteraing factors in their favour.Their tight focus on financials and fresh material processes also made them a suitable partner for HM Japan 5. How was the joint venture formed? Hero Group first signed the technical agreement with HM Japan in June 1984. This agreement was renewed in 1994 and again in 2004. The joint venture was in the nature of HM Japan providing technical know-how, background knowledge up manufacturing facilities and hereafter research and disciplines assistance. In consideration for this technological support, HM Japan would receive a lump sum fee of USD 500,000 and 4% royal line on spare parts.At the beginning, both partners held a 26% stake in the equity of the Company. Another 26% was sold to the public and the rest was held with financial institutions. An important restriction under the agreement prevented Hero Group from collaboration with any other foreign player or allowing the Company to export its products. Hence, right from the beginning, the target for the Company was un little(prenominal) go downed to the Indian market 6. Most successful joint venture of India Over the year, Company has grown consistently, earning the title of the worlds largest motorcycle manufacturer after having manufactured 1. million vehicles in 2001. They waste retained this distinction till date and create an annual sales volume of over 2 million motorcycles, also owning Hero Honda Splendor which is the worlds biggest motorcycle brand. They have successfully penetrated markets crosswise the nation with over 5,000 outlets. In the last financial year 2009-2010, the company had total unit sales of 4,600,130 two-wheelers, a total net operating income of INR 158. 605 zillion (app. USD 3. 52 billion) and a growth of 28. 1% 7. Reasons for the success of this ventureSound and proven technical capabilities of HM Japan and the reliability of Hero Group made an effective combination. HM Japans technical expertise provided better fuel efficient motorcycles and was easily sold through Hero Groups deep distribution network. The fact that there were no major competitors in the initial years helped the Company make the best of the growing market demand for motorcycles. With the decrease in price difference in comparison with scooters, that were the more popular choice earlier, the Company was able to successfully stabilize in the Indian market.Fall of Joint Venture It all began when the Company, Hero Group and HM Japan, in a joint press plough dated on December 16, 2010, conveyed the decision to terminate the celebrated joint venture. The parties made public, the fact of selling of HM Japans holding of 26% in the Company to Hero Group. Further, on the homogeneous date, C ompany also discontinued a Memorandum of downstairsstanding (MOU) signed between the Company, HM Japan and Hero Group pursuant to which the parties would enter into a new license agreement.This decision meant curtains for the 26 year old Indo-Japanese partnership. 1. Key clauses in the MOU signed between both the parties In a concourse held on December 16, 2010, the placard of directors of the Company approve the new licensing arrangement with HM Japan coincidental with the Hero Groups proposed acquisition of 26% stake held by HM Japan in the Company. 6 The highlights of this new arrangement (as per the press release from the Company) are inclined below7 whole existing products of the Company to continueThe fresh licensing agreement with HM Japan to provide new models to the Company Company will have the freedom to export to new markets Company will have the independence to set-up its own research and growing (R&D) and new product development capabilities and acquire engine ering No change in ongoing operations Process for smooth transition was finalized between the parties scream of the Company and the brand break to be changed over time Subsequently, vide a disclosure made on January 24, 2011, Company sustain that HM Japan and the Company had punish the final binding licensing greements on January 22, 2011 with respect to existing products and new products pursuit the MOU of December 16, 2010, which had been receive by their respective boards of directors. 2. What are the main reasons for the split? In spite of being the largest two-wheeler manufacturer in the world and riding on one of the most successful joint ventures, it seems like both the partners have had some misgivings. Key reasons that could have played a role in this historic descend are discussed here i) Supply of components HM Japan asked the Company to increase the supply of components ordered from HM Japan which led to disagreement between two parties for the first time. HM Japa n wanted to increase its royal house from the sales of components in the joint venture, but has been unable to do so because the bulk of the sales of almost 60%, are contributed by relatively older bikes Splendor and Passion for which the components are relatively archetype and the profit margins are less (ii) Reluctance to share key technology More stringent sack norms are set to kick in by 2015 for two-wheeler makers in India.The new Bharat Stage IV norms (BS-IV), to be imposed across India for two-wheelers by then, would be very different from the Bharat Stage III norms (BS-III) applicable today. Manufacturers are evaluate to make technical changes to their vehicles accordingly. Industry sources say that HM Japan and other global two-wheeler makers are investing heavily on upgrading technology to play along with new emission norms in different parts of the world. While the Indian two-wheeler market will move to BS-IV (corresponding to Euro-IV) in 2015, the European region will be upgraded to Euro-V in the same period.HM Japan knows that better fuel injection systems are needed to meet the next level of emission standards in India. HM Japan has invested heavily in making its products more fuel-efficient and it is aware(p) that it does not stand to gain much by sharing this crucial technology with the Company. This seems to be one of the reasons why HM Japan opted to end its 26-year-old alignment with the Hero Group (iii) Brand confusion Analysts tactile property that the expansion of Honda Motorcycle and Scooter India Private Limited (HMSI) and the overlaps between the two companies (i. e.HMSI and the Company) is diminisheding the Company. They also purport that this is leading to brand confusion because the products of both the companies are out in the market and they seem to recollect that the consumer is getting confused as to which is the real Honda (iv) intuition between the two companies Certain board members also feel that there has b een preferential treatment that has been addicted to HMSI when it comes to product and technology. They feel high-margin products seem to have appoint out their way into the HMSI stable whereas the low-margin products seem to have gone the way of the Company. v) Bar on exports hurt the long term growth of the Company The board members also feel that the bar on exports for the Company is not an equitable arrangement. So far, the joint venture did not permit the Company to set infrastructure overseas. An industry peer such as Bajaj railway car Limited exports about 30% of its motorcycles in a year. As a consequence, under the MOU and the new licensing agreement, Company wont have geographic constraints. (vi) easiness of FDI norms The regulatory restrictions did not permit foreign investments in the 1980s.Joint ventures were a necessity at the time, done more from legal compulsions rather than commercial aspirations. Today, there are fewer restrictions. Global companies in most sec tors, quest to enter India, can make pure commercial decisions for themselves, if they want to set up a 100% subsidiary in India or enter through a joint venture. Companies with a strong network and international operating experience may like to come into India through a 100% stake and this is what HM Japan is aiming for. Post Termination of Joint VentureOffshore Japan 9. 75% 38. 04% 8. 67% 17. 33% + 26% .21% 26% INDIA Financial Institutions Individual Promoters BCIPL Hero Honda Motors Limited Bain Capital India Private Investors Lathe Investors Private Limited Honda Motor Company Limited HPIL Others 1. Mode of Exit As mentioned further above, the parties initially made it clear that the termination of the joint venture will happen by way of the acquisition of the full 26% holding of the Company held by HM Japan by HIPL.On frame in 8, 2011, HIPL made a filing to the BSE and NSE as required under order 3(3) of the SEBI (Substantial encyclopedism of Shares and coups) patterns, 1997 ( takeover tag) thereby disclosing that it proposes to acquire the entire 26% shareholding of the Company, soon held by HM Japan, on or about March 22, 2011. As a consequence of such an acquisition, the Hero Group, through its subsidiary HIPL, will unite its holding in the Company to 43. 33%. In combination with BCIPL, Hero Group will, thus, indirectly hold 52% in the Company. . Mode of Funding the behave Hero Group announced on March 8, 2011 that HIPL will be acquiring the 26% shareholding of the Company from HM Japan for a deal size of it of INR 38. 418 billion, which breaks into INR 739. 97 (app. USD 16. 44) per share of the Company. The announced bargain for price is at a sharp discount than the market price of the shares of the Company. Interestingly, on the date of announcement of the deal size, the share price of the Company on the trite modify in India is almost double than the acquisition price per share.HIPL has sourced the finances for the said acquisition of 26% stake of the Company in the following form (i) Bridge Financing HIPL has pledge its entire shareholding of 17. 33% in the Company in order to duo finance its buyout of HM Japans 26% stake in the joint venture. HIPL has pledged (a) 10,741,798 shares re portraying 5. 379% of stake in the Company towards Axis Trustee Services Limited (b) 11,935,331 shares representing 5. 977% of stake in the Company towards IL&FS Trust Company Limited and (c) 11,935,331 shares representing 5. 977% of stake in the Company towards IDBI Trusteeship Services Limited.The above mentioned shares have been pledged by HIPL to issue short term debt, through non-convertible debentures expiring in 3 months, to fund the purchase of the shares of the Company from HM Japan. Insurance companies, Non-banking financial companies and rough-cut bills have bought the short-term bonds of the Company. (ii) Funding from tete-a-tete equity investors Preceding the pledge of shares of the Company by HIPL, HIPL had made an application to the Foreign Investment publicity Board (FIPB) in respect to foreign investment in HIPL by certain insular equity investors for the purpose of acquisition of the stake of the Company held by HM Japan.As the consideration involved is in pleonastic of INR 12 billion (app. USD 266. 66 million), and the investment requires prior FIPB approval, the same chooses to be approved by the Cabinet Committee on Economic personal business (CCEA? ), in addition to the FIPB. Subsequent to the approval from the CCEA and FIPB, HIPL would regress the short term debt raised from the debenture holders from the funds invested by the Investors in HIPL. 3. Who are the offshore private equity investors investing in HIPL? Dr. Brij Mohan Lall Munjal, Chairman of the Company, confirmed that HIPL has signed ? efinitive agreements? with private equity firms BC India Private Investors II, an affiliate of Bain Capital LLC, and Lathe Investment Private Limited, a wholly owned subsidiary of government activity of capital of Singapore Investment Corporation (Ventures). HIPL proposes to fund the acquisition by issuing securities to the Investors worth INR 45 billion (app. USD 1 billion). BC India Private Investors II has agreed to pick up 70% of the investment and the balance 30% will be held by Lathe Investment Private Limited. 4. What is the speculation regarding payment of royalty under the new licensing arrangement? As was expected, HM Japan will end up selling its 26% stake to the Hero Group at a positive discount to the market price. To offset this, there is a speculation that the Company would now have to pay high royalty measures till 2014 as an arrangement under the new licensing agreement entered between the parties on January 22, 2011. In addition, experts say the Japanese automakers royalty from the Company will most probably be subject matter to corporate tax in Japan. Interestingly, on December 18, 2010, Japans Nikkei passing(a) reported that HM Japan would divest its stake to its Indian partner for INR 54 billion (app.USD 1. 2 billion) when the current market value of its holdings is nearly INR 99 billion (app. USD 2. 1 billion), that is, at a discount of nearly 45% to the market. However, as per a report, HM Japans royalty from the Company is expected to jump threesome-fold, from the present 2. 6% of total sales to 8%. This will last 3 years till 2014 when the technology pact between the two partners expires. At present, this royalty outgo is around INR 4. 2 billion (app. USD 93. 33 million), which will triple to nearly INR 14 billion (app. USD 311. 11 million) per year, for the next 3 years.In the process, HM Japan will get over INR 40 billion (app. USD 888. 88 million), as pre-tax royalty. However, the Hero Group has denied any increment in rate of payment of royalty to HM Japan and the licensing agreement signed between the two groups on January 22, 2011 seeks to keep the royalty rate at around 2. 3 -3% 5. What are the con sequences of HM Japan exiting the joint venture? How does it impact on the future of the Company? Continuation of support from HM Japan in the form of a licensing agreement related to technology transfer for new products is expected to provide the Company an adequate time to put in place ong term utility(a)s for technology support. On the business side, notwithstanding the cessation of joint venture agreement, the Company may be considered to have the ability to protect its market share and product franchise over the short to medium term benefitting from the Companys managements knowledge of the Indian consumers, Companys wide distribution network, an established supply chain besides strong kindred enjoyed by the Company with its dealers and vendors.The impact on the Company over the longer term would depend on the Companys ability to forge alternative technology tie-ups and sustain the confidence of all stakeholders. Overall, with the exit of HM Japan, the Company would need to scale up its product development initiatives, which may impact its fall out indicators going forward. Nevertheless, the Company could benefit from expanding its presence in overseas markets through exports and/or by establishing production facilities overseas, something it could not do earlier because of the restrictions under the joint venture agreement with HM Japan.Given the high competitive intensity in overseas markets on account of presence of many players from India, China, Japan etc, Companys ability to increase penetration in new geographies and at the same time maintain profitability would be tested in the coming years Legal and regulatory considerations 1. Will HIPL be required to make an open offer under the coup decree?Under the Takeover enter, the open offer requirements are triggered in the following three situations (i) 15% shares or take rights When an acquirer acquires shares or pick out rights which entitles it to exercise 15% or more of the vote rights in a listed company. (ii) Creeping acquisition limit When an acquirer, who holds 15% or more, but less than 55% shares or voting rights in a company, acquires, additional shares or voting rights entitling him to exercise more than 5% of the voting rights of a company, in a given financial year. iii) Voting Control When an acquirer acquires control over the target company, irrespective of whether or not there has been any acquisition of shares or voting rights. However, convention 3 of the Takeover Code provides certain exemptions from the open offer requirements one such censure is inter se transfer of shares amongst qualifying promoters provided that the transferor promoter as well as the transferee promoter has been holding shares in the target company for a period of at least 3 years prior to the proposed acquisition.Since, shares of the Company are proposed to be purchased by HIPL from HM Japan, and both HIPL and HM Japan have been named as promoters in the shareholding patter n disclosed to the persuade exchanges for the past 3 years, the inter se transfer of shares amongst them should not trigger the open offer requirements under the Takeover Code. 2. Does the investment by Investors in HIPL require prior Government / FIPB approval? standard 4. 6. of the unify Foreign Direct Investment indemnity, released on October 1, 2010 (FDI insurance) provides the guidelines for foreign investment into investing companies. principle 4. 6. 4 (iii)(a) of the FDI Policy states that foreign investment in Investing Companies will require the prior Government / FIPB approval, regardless of the amount or extent of foreign investment. Since, HIPL is holding the shares of the Company and is registered as a NBFC as per the list of non accommodate accepting NBFCs on the RBI website, foreign investments in HIPL will require prior FIPB approval.Further, as per regulating 4. 9. 1(ii) of the FDI Policy, the recommendations of FIPB on proposals with total foreign equity i nflow of more than INR 12 billion (app. USD 266. 66 million) would be placed for consideration of CCEA. From the press release dated February 23, 2011 issued by the Government of India, Ministry of Finance, Department of Economic Affairs, (FIPB Unit) it is clear that HIPL had applied to FIPB for approval of induction of foreign equity upto INR 45 billion (app.USD 1 billion), and the matter has now been recommended for the consideration of CCEA. 3. Will the Investors be required to make an open offer under the Takeover Code? Since, acquisition of stake in HIPL by the Investors will only give it an indirect holding of less than 15% in the Company, and it does not seem that the Investors would be acquiring control of the Company, the Investors may not be required to make an open offer under the Takeover Code. . What will be the disclosure requirements in respect of the proposed transfer of shares of the Company? Disclosures by HIPL (i) Under Takeover Code Since, post the acquisition, t he shareholding of HIPL would entitle it to more than 14% shares / voting rights in the Company, HIPL will need to make a disclosure under Regulation 7(1) of the Takeover Code to the Company and to the simple eye exchanges where shares of the Company are listed.Further, since the acquisitions will be under Regulation 3(1)(e), and the acquisition will be more than 5%, HIPL will be required to notify the stock exchanges where the shares of the company are listed, for information of the public, of the details of the proposed transactions at least 4 working(a) eld in advance of the date of the proposed acquisition. ii) Under SEBI (Insider employment) Regulations, 1992 Since, HIPL is currently holding more than 5% shares in the Company, and pursuant to the Proposed performance it will acquire more than 2% of the total shareholding in the Company, HIPL will need to make a disclosure under Regulation 13(3) of the Insider Trading Regulations to the CompanyDisclosures by the Investors (i) Under Takeover Code Since, post the acquisition, PE Investors, will get an indirect holding of close to 13% in the Company, the Investors will need to make a disclosure under Regulation 7(1) of the Takeover Code to the Company and to the stock exchanges where shares of the Company are listed. Disclosures by the Company i) Under Takeover Code Since, Companys shares are acquired in a manner referred to in Regulation 7(1) as mentioned above, Company needs to disclose to all the stock exchanges on which the shares of the Company are listed, the aggregate number of shares held by each of such persons referred above, inwardly 7 years of reception of information under Regulation 7(1). (ii) Under Insider Trading Regulations The Company shall within 2 working old age of receipt of information under Regulation 13(3) from HIPL as mentioned above, disclose the same to all the stock exchanges on which the Company is listed. . What will be the mode of acquisition of shares of the Company b y HIPL? From the shareholding pattern on the BSE website as on December, 2010, it appears that the shares of the Company held by HM Japan are in sensual form. If the transfer of shares takes place in physical form, a stamp duty of 0. 25% of the value of shares shall be applicable however, no stamp duty shall be applicable, if the shares are transferred in dematerialized form. If the shares are in dematerialized form, the transfer may take place either off the floor of the stock exchange or on the floor of the stock exchange.As mentioned above, an off the floor of the stock exchange transfer may lead to higher tax implications compared to an on the floor of the stock exchange transfer. On the floor of the stock exchange, the transfer can take place in two ways, i. e. (i) by way of a block deal and (ii) by way of a bulk deal. Block deal A block deal is execution of large trades through a single transaction. For this purpose, stock exchanges are permitted to provide a separate mercha ndise window.Block deal will be subject inter alia to the following conditions (a) The said trading window may be kept open for a limited period of 35 minutes from the beginning of trading hours i. e. the trading window shall remain open from 9. 15 am to 9. 50 am. (b) The orders may be placed in this window at a price not exceeding +1% from the ruling market price / previous day closing price, as applicable. (c) An order may be placed for a minimum quantity of 5,00,000 shares or minimum value of INR 50 million (app. USD 1. 11 million). (d) Every trade executed in this window must result in delivery and shall not be squared off or reversed. e) The stock exchanges shall disseminate the information on block deals such as the name of the scrip, name of the client, quantity of shares bought/sold, traded price, etc to the general public on the same day, after the market hours. Since, the proposed consideration price for the transfer of the shares of the Company is INR 739. 9735 (app. USD 16. 44) and the prevailing market price on March 10, 2011 is INR 1,537, it is unlikely that the condition (b) mentioned above would have been satisfied. 6. Why is HIPL issuing debentures of minimum maturity of 3 months and not less?From reports dated February 28, 2011, it appears that HIPL is raising short term debt through non-convertible debentures expiring in 3 months, for which it has pledged the shares of the Company as collateral. The group is raising debt because funds from private equity firms will take some time and HM Japan wants an early exit. besides why is the term of the debentures for 3 months and not shorter? The RBI had issued directions (NCD Directions), to regulate the issuance of non-convertible debentures of original or initial maturity up to 1 year and issued by way of a private placement (NCDs) by corporate.The NCD Directions provides that the NCDs shall not be issued for maturities of less than 90 long time from the date of issue. The exercise date of opti on (put/call), if any, prone to such NCDs, also shall not fall within the period of ninety days from the date of issue. Therefore, in light of the NCD Directions, HIPL is prohibited from issuing NCDs of maturity less than 3 months. 7. What will be disclosure requirements in case of pledge of shares of the Company to raise loans by way of NCDs?By HIPL HIPL, being a part of the promoter group of the Company, shall within 7 working days from the date of creation of pledge on shares of the Company held by it, inform the details of such pledge of shares to the Company under Regulation 8A(2) of the Takeover Code. By the Pledgees Since, the term acquirer under Regulation 7(1) of the Takeover Code has been clarified to include a pledgee, other than a bank or a financial institution, therefore, the Pledgees in whose favour the shares of the Company are pledged, and the threshold of 5%, 10%, 14% etc. re crossed, shall make disclosure to the Company and to the applicable stock exchange withi n 2 days of creation of pledge. By the Company Company shall disclose the information received by it under Regulation 8A(4) of the Takeover Code to all the stock exchanges on which its shares are listed. 44 Further, the Company shall also disclose to all the stock exchanges on which the shares of the Company are listed, the aggregate number of shares held by each of such persons referred above within 7 days of receipt of information under Regulation 7(1) of the Takeover Code . Will the recently notified merger control regulations relate the Proposed Transaction? On March 4, 2011, the Government of India, Ministry of corporeal Affairs notified the much debated provender of the Competition Act, 2002 (Competition Act) relating to combinations? namely Sections 5 and 6. Although notified as of March 4, 2011, these provisions are to take effect from June 1, 2011 (sound Date) giving all those subject to the same, a period of 3 months to tie exempt ends and complete unfinished transacti ons before getting entangled in the web of the Act.Since, the merger control provisions will come into force from the Effective Date, and the proposed acquisition of the shares of the Company is to take effect on March 22, 2010, the acquisition may not be subject to the filing / approval requirements under Sections 5 and 6 of the Competition Act. However, if the subscription of the shares of HIPL by the Investors does not take place before June 1, 2011, due to delay in approval by the CCEA or otherwise, it is likely that the Investors would be hit by the notifications regarding merger control provisions as mentioned above.However, vide its notification on March 4, 2011 the Government of India has exempted the acquisitions of small enterprises whose turnover is less than INR 7. 5 billion (approx USD 167 million) or whose assets value is less than INR 2. 5 billion (approx USD 56 million) from the definition of combination as outlined under Section 5 of the Act. Therefore, if HIPL does not despoil any of the exemption thresholds as mentioned above, the Investors will be exempted from the approval requirements under the Competition Act, even if the Proposed Transaction closes post June 1, 2011. . Would HM Japan have required any prior approval while setting up its subsidiary HMSI in India? Press rail line 18 (1998 Series) issued by the Department of Industrial Policy & Promotion provides that automatic route for FDI and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade-mark agreement in the same or allied field in India.?Since, both HMSI and the Company are in the same / allied fields, and HMSI was set up post 1998, it is likely that HM Japan may have obtained Government / FIPB approval prior to or at the time of setting up its subsidiary. 5. CONCLUSION Through our analysis we have seen that demergers are as Byzantine as mergers or sometimes even more complex than mergers.The foll owing were the key motivations and reasons behind the demerger Lack of trust between the two companies whether it was related to supply of components or regarding the sharing of technology Honda motors can now successfully sell products branded solely with Honda marquee Hero will get to fulfil it unrealized inspiration of exploring lucrative export markets Liberalized FDI norms also favoured demerger because now Honda could apparatus wholly owned company The financing of the deal as in analysis part we saw was guardedly structured to satisfy the legal and regulatory requirements which led HPIL to pledge its shares for short duration of three months, a period for getting approval for a foreign investment firm investing in an Indian investment firm. The major issues arise in the demerger are mainly regarding sharing o transfer of the assets of the pre demerger company. The following clauses were included in MOU to address those issues All existing products of the Company to continu eThe fresh licensing agreement with HM Japan to provide new models to the Company Company will have the freedom to export to new markets Company will have the independence to set-up its own research and development (R&D) and new product development capabilities and acquire technology No change in ongoing operations Process for smooth transition was finalized between the parties Name of the Company and the brand name to be changed over time The disclosure and conformity requirements under SEBI insider trading rule, Takeover code, RBI, BSE and FIPB are heavy because company (pre demerger) is a listed entity and is a joint venture between Indian and a foreign firm. The involvement of foreign PE investors further made the issue complex.But all the legal, strategic and regulatory requirements have been carefully taken care of and clearly complied by both the companies and a clear and dispute free manakin has been adopted regarding sharing of assets like brand name and technology. 6. 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