Mergers,
Acquisitions And
Corporate
Restructuring
Prasad G. Godbole
Copyright © 2009 Prasad G. Godbole. All rights reserved.
Chapter 20
Demerger of Tower Business of RCOM and RTL
into RITL
Copyright © 2009 Prasad G. Godbole. All rights reserved.
CHAPTER 20
The Transaction
In April 2007, Reliance Communications Limited
(RCOM) and its 100 per cent subsidiary Reliance
Telecom Limited (RTL) transferred their passive
infrastructure assets to Reliance Infratel Limited (RITL).
Reliance Infratel Limited then, was a 100 per cent
subsidiary of Reliance Communications Infrastructure
Limited (RCIL), which in turn was a 100 per cent
subsidiary of RCOM.
CHAPTER 20
The Strategy
The strategy behind this
move, as explained by the
RCOM chairman Mr Anil
Ambani, was
✓ to keep RCOM asset-light
✓ to enhance its
competitiveness,
✓ to unlock further value for the
benefit of its nearly 2 million
shareholders.
CHAPTER 20
The Strategy
The move was expected to benefit RCOM shareholders
on account of
➠ RCOM would achieve enhanced financial flexibility and cost
efficiency due to reduced set-up and operating costs.
➠ All new towers and related infrastructure would be set up by
RITL, with independent financing, thereby reducing capital
expenditure requirements and leveraging on RCOM’s own
balance sheet.
➠ The move would promote high value stand-alone business
by conversion of cost-centric assets to revenue-centric ones by
sharing passive infrastructure of RITL with other wireless
service providers.
CHAPTER 20
Accounting And Taxation
The scheme of arrangement under was approved by the
Honourable High Court of Mumbai, with the effective date as
10 April,2007.
Upon the scheme becoming effective, RCOM transferred to
RITL, assets having book value of Rs 3200.74 crore in
RCOM’s balance sheet to RITL.
These assets of Rs 3200.74 crore were written off by RCOM
in its books through the P & L account for the year 2007-08.
Even after writing off Rs 3200.74 crore, RCOM was left with
Rs 1287.10 crore in the reserve for business restructuring
account.
CHAPTER 20
Accounting And Taxation
In case of RTL, the passive infrastructure assets having book
value of Rs 866.80 crore that were transferred to RITL were
written off in its P&L account by the year 2007-08.
In this case, the impact on P&L account was nullified by
drawing equivalent amount from general reserves.
CHAPTER 20
A unique feature of this demerger was that no
consideration was paid by RITL to either RCOM or RTL or
RCIL or to the shareholders of RCOM.
This was so because the transfer of assets between RCOM
and RTIL was taking place between a holding company and
its 100 per cent step down subsidiary, whereas the transfer
between RTL and RITL was between two, 100 per cent
subsidiaries of RCOM.
CHAPTER 20
Accounting And Taxation
Considering that neither the shares of the resulting
company were issued nor any consideration for the
transfer of assets was charged, there was no need for
the RITL demerger to be tax neutral.
Hence, neither of the companies had to bother about
tax neutrality.
Thus, taking advantage of the lack of accounting
standard for demergers, the above creative
accounting was done.
CHAPTER 20
One wonders if RCOM would be able to set off the
capital losses of Rs 3200.74 crore against the other
capital gains. If it would, then the whole demerger
exercise would in fact become tax positive than tax
neutral.
CHAPTER 20
Future Plans
✓ RITL has become an independent wireless
telecommunications infrastructure company in India, engaged
in the business of building, owning and operating
communications towers and related assets which it would
lease to wireless operators under long-term contracts.
✓It is the exclusive provider of passive telecom infrastructure to
RCOM and RTL.
✓ Additional tenants in the form of external wireless operators
on RITL’s towers would provide incremental growth for RITL
and thus provide significant operating leverage.
CHAPTER 20
Did The Strategy Work?
It indeed did
• In July 2007, RCOM issued a press release announcing
the sale of 5 per cent equity stake in RITL to a group of
institutional investors across the USA, Europe and Asia
for US $337.5 million (1400 crore). This sale resulted in
the capital gains of 1200 crore.
• Further it translated into Rs 135 per RCOM share, nearly
25 per cent of the market price of Rs 565 per share of
RCOM in July 2007.
• The demerger indeed created a significant value for the
shareholders of RCOM.
CHAPTER 20
What better example of ‘Karlo Duniya
Mutthi Mein’.
