demerger of bajaj auto

Demerger of Bajaj Group

January 21, 2014

Presented By:

MBF Group 5

CA.Salil Mishra CA. Rakhee GargCA. Rohit Kr. Modani CA. Pawan Kr. GattaniCA. Vikesh Bansal CA. Bineet Sundriyal

Demerger of Bajaj Group

January 21, 2014

Presented By:

MBF Group 5

Contents

Company Profile

Objective & Purpose of Demerger

Motivation behind Demerger

Group Structure (Pre & Post Demerger)

The Scheme

Implications – Accounting

Implications – Tax

Value GAP

Key Take Away

Company Profile

Company – Bajaj Auto Limited is India’s largest

manufacturer of scooters and motorcycles with a market

share of 31%. Bajaj is also engaged in the generation of

wind-energy, Insurance Business & Consumer Finance

Founder – Jamnalal Bajaj

Headquarter – Pune, Maharashtra, India

Leadership – Rahul Bajaj, Rajiv Bajaj, Sanjeev Bajaj


Considering the growth opportunities in the auto, wind-energy, insurance and

finance sectors, it was considered timely and appropriate to de-merge these

activities into separate entities, each of which can focus on these core businesses

and strengthen its competencies.

The demerger scheme created three separate entities with management focus on

clearly laid out objectives, pursuant to which: -

a. the auto company would focus on auto business; [Bajaj Auto Limited]

b. the wind power and financial services company will focus on wind-energy

generation, insurance, consumer finance and new initiatives in financial services

space; [Bajaj FinServ Limited] and

c. the primary investment company will focus on new business opportunities. [Bajaj

Holding Investment Limited]


The two new companies will be able to tap (on an arm’s length basis) into the cash

pool of the investment company to support future growth initiatives, if required.

The demerger will enable the investors to hold separate focused stocks

The demerger will facilitate more transparent benchmarking of the companies with

its peers in their respective industries.

The demerger unlocks value for the shareholders and would also benefit the

employees and other stakeholders

Motivations for Demerger Mobilising India – by supplying 4 million motorcycles out of a projected

market of 10 million.

Globalising India – by rapidly enhancing exports and international facilities to

become among the three largest global player in two-wheelers.

Financing India – by ramping up the group’s financial operations.

De-Risking India – by expanding the group’s life and general insurance

business across the land.

Regarding ‘Financing India’ and ‘De-Risking India’, the de-merger that occurred

in the course of 2007-08, and the consequent formation of Bajaj FinServ

Limited, should enable the group to unlock greater value by widening its

financial reach and portfolio.

[From the Vision Statement by the Chairman]

Structure of Demerger

Bajaj Auto Ltd.

Bajaj FinServ Limited (BFS) Bajaj Holdings and Investment Limited (BHIL)

Structure – Pre & Post Demerger

Post demerger structureStructure prior to demerger

Media Report of Demerged Structure

Event Ladder

Sr. No. Events Date

1 Appointed Date 01.04.2007

2 Approval by Board of Directors 17.05.2007

3 Approval by Shareholders/Creditors 18.08.2007

4 Approval by Court to Demerger Scheme 18.12.2007

5 Effective Date [Scheme filed with RoC, Pune] 20.02.2008

6 Record date for allotment of shares 25.03.2008

7 Listing Date of the 2 Demerged Companies 26.05.2008

Key elements of the Scheme

Prior to the finalization of the Scheme:

Erstwhile Bajaj Auto Ltd. (BAL) formed two subsidiaries in April 2007 viz.Bajaj Holdings & Investment Limited (BHIL) and Bajaj FinServ Limited (BFS).

Erstwhile BAL subscribed to the shares of the two companies as under :-BHIL (new BAL) - 43.5 million shares of Rs. 10 each i.e. Rs. 435.0 million.BFS - 43.5 million shares of Rs. 5 each i.e. Rs. 217.5 million.

The Auto business of the company along with all assets and liabilities pertaining thereto, including investments in PT Bajaj Auto Indonesia and in a few vendor companies, are transferred to BHIL (i.e. the current BAL). In addition, a total of Rs.15,000 million (market value) in cash and cash equivalents are also transferred to this company.

The wind power project, investments in the insurance companies viz. Bajaj Allianz Life Insurance Co Ltd., Bajaj Allianz General Insurance Co. Ltd. and investment in the consumer finance company Bajaj Auto Finance Ltd. along with relevant assets and liabilities are transferred to BFS. In addition, a total of Rs. 8,000 million (market value) in cash and cash equivalents are also transferred to BFS.

The remaining assets and liabilities including investments in group companies and balance cash and cash equivalents are retained in BHIL (formerly BAL).

Key elements of the Scheme

Shareholding Pre & Post Demerger

Pre & Post Demerger Shareholding Pattern - Applicant Company [BHIL (earlier BAL)]

Pre Demerger Post Demerger

Particulars Shares % age Shares % age

Promoter and Promoter Group 30,465,154 30.11 30,465,154 30.11

Public 70,718,356 69.89 70,718,356 69.89

Total 101,183,510 100.00 101,183,510 100

Pre & Post Shareholding Pattern - Resultant Company 1 [BAL (earlier BHIL)]




Public - - 70,718,356 48.88

Total 43,500,000 100.00 144,683,510 100

Pre & Post Shareholding Pattern - Resultant Company 2 [BFSL]




Public - - 70,718,356 48.88

Total 43,500,000 100.00 144,683,510 100

Assets and the Liabilities of the Demerged Company transferred to the respective Resulting Companies at values appearing in the books of accounts of the Demerged Company as on March 31, 2007.

Difference between the value of assets and value of liabilities reduced from the Capital Redemption reserve and balance will be reduced from the General Reserve of the Demerged Company.

Mark-to-market diminution in value of Fixed Income Securities debited to General Reserve.

Accounting treatment in the books of the Demerged Company:

Respective Resulting Companies record the assets and liabilities comprised in Demerged Undertakings transferred at the same value appearing in the books of Demerged Company as on March 31, 2007.

Respective Resulting Companies credited Share Capital Accounts with the aggregate face value of the new equity shares issued to the shareholders of Demerged Company.

Excess or deficit, if any, remaining after recording the aforesaid entries shall be credited by the respective Resulting Companies to their respective General Reserve Account or debited to goodwill, as the case may be.

Accounting treatment in the books of the Resulting Company:

Tax impact of the Demerger::

As per the Income Tax Act 1961, a transaction of Demerger per se has no tax implication on the shareholders. Hence, when the shareholders of Bajaj Auto Ltd. are allotted the new shares in each of the three companies, there would be absolutely no tax implication whatsoever. The tax implication will only arise when either the shares of Bajaj Auto Ltd. (now BHIL) or the shares of the new resulting companies are sold.

Tax implications when shares are sold:

When the shares of any of the companies are sold, it would give rise to capital gains tax liability. The three issues that arise are: Whether the new shares (in the resulting companies) are long-term assets or short-

term: To find out whether or not shares in the Resulting Companies are long-term or not, the holding period of the original Bajaj Auto Ltd. shares will be included in the period of holding of the new shares

Tax Implications – on Demerger

Tax implications when shares are sold:

Indexation of the capital gains: The indexation will start from the date of allotment of

the new shares and not from the date of acquisition of the original Bajaj Auto Ltd.

Relevance of indexation is only for working out the capital gain amount if the same

has to be set off against capital loss.

Cost of acquisition of various shares after the demerger transaction: To calculate

capital gains when the shares are sold, a vital piece of information is the cost of

acquisition. Your original cost of acquisition of Bajaj Auto Ltd. shares will change now

on account of the demerger. Plus, there will be a new cost accorded to the new

shares of the resulting companies.

Tax Implications – on Demerger

Value Gap

Bajaj Auto

Bajaj Auto had has grown at a CAGR of 16.4% since 2008 after demerger with 31% market share.

Pursuant to the Scheme of Demerger, the GDR programs for Bajaj Auto Limited (BAL) and Bajaj Finserv Limited (BFS) have got established on 21 August 2008

EBIDTA margins have grown from 14.3% to 19.6% The installed capacity of the Company has grown by more than 50% up to 2014. Partnered with Kawasaki for gain in the Asian region and partnering with

Taiwanese companies to gain access to the Chinese Markets.

Bajaj Allianz Ranks 2nd in terms of market share (22%) The Company has a revenue of 140 Cr for March 2013 with a CAGR of 12%.

Shareholder Value

Particulars Dec-2013 Mar-2013 Mar-2012 Mar-2011 Mar-2010 Mar-2009 Mar-2008Before

Demerger

Total 76,948 74,334 66,278 58,447 38,314 29,088 6,996 21,036Bajaj Holdings & Investment Limited 9,892 10,170 9,044 8,808 6,442 3,010 6,996

Bajaj Auto Limited 55,256 51,926 48,542 42,186 30,670 25,474 0

Bajaj Finserv Limited 11,800 12,238 8,692 7,454 1,203 604 0

Promoters Group 38,483 37,273 33,048 28,865 17,934 13,804 2,023 6,311Bajaj Holdings & Investment Limited 3,984 4,085 3,633 3,357 2,007 870 2,023


Bajaj Finserv Limited 6,854 7,209 5,120 4,390 708 297 0

Others 38,466 37,061 33,230 29,582 20,380 15,283 4,974 14,725Bajaj Holdings & Investment Limited 5,909 6,085 5,411 5,451 4,434 2,140 4,974


Bajaj Finserv Limited 4,945 5,029 3,573 3,063 494 307 0

In Crs

Different Share Prices

2008 End

2009 End

Current Price

At Demerger 605

391

1762

1928

Bajaj Auto Ltd (“BAL”)

Bajaj Holding and Investment

Ltd (“BHIL)

Bajaj FinServ Ltd (“BFL”)

598

242

620

924

515

149

345

682

Key Takeaway

Bajaj Auto Limited unlocked value for shareholders - Auto Division;

Bajaj FinServ Limited (BFSL) and Bajaj Holding & Investments Limited (BHIL)

showed negative EVA, indicating that capital was not being properly used by them;

Demerger done at a right time can give an organization a competitive edge;

Empowering management adequately in time can lead to consistent growth of group

companies;

The Market Capitalization of the companies post listing of the resultant company was

Rs. 22,245 crs as compared to Rs. 21,036 crs in the consolidated company as at the

last date of trading of the consolidated company;

Key Takeaway

The Manufacturing Business and Strategic Business separated were put in charge of

the 2 brothers thus taking care of the family needs in future;

Focused investment via FII – as the business specific investments could be made in

separate companies.

How the demerger affects the shareholders

Minority Shareholders’ stakes devalued post demerger;

Larger equity base of the new Bajaj Auto and Bajaj FinServ to dilute Earnings Per

Share (EPS);

Holding Company stake unlikely to get fair value;

Holding Company discount allows promoters to hike their stake cheaply.

Thank YouCA. Navin Dhanji Thakkar CA.Salil MishraCA. Rakhee Garg CA. Rohit Kr. ModaniCA. Pawan Kr. Gattani CA. Vikesh BansalCA. Bineet Sundriyal

demerger of bajaj auto

Economy & Finance

post shareholding

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