“Explore the importance of ‘Leaning Out’ and ‘Leaning In’ for corporate restructuring. Learn about streamlining corporate structures, reducing costs, and enhancing efficiency. Discover the methods and benefits of schematization in consolidated corporate structures.”
The goal of every corporate body is to reduce cost, increase efficiency and to keep things simplified for planning and devising strategies to evolve towards a better corporate structure becomes an inherent requirement. In this article, we will explore the ways in which corporates and business enterprises can adopt the process of ‘Leaning Out’ and ‘Leaning In’ as a mode of corporate restructuring and why it is important to lean out of group consolidation in certain situations.
What is ‘Leaning Out’ and ‘Leaning In’?
In corporates leaning measures are employ to make a process or group structure more efficient. The term ‘Leaning in’ is the process of restructuring of corporates which involve various domestic and overseas incorporation, acquisition, Joint venture and mergers of entities for making it more profitable, or better organized for its present needs. Whereas ‘Leaning Out’ refers to streamlining the corporate structure of the group by eliminating any entities that have become irrelevant or whose purposes have been satisfied and which appear to place an undue load on the structure of corporations.
In such situation, we must determine why we have created so many entities, causing confusion and cost so much money in form of taxes, management fees, and other expenses. By way of demerger corporates doing restructure for reducing group’s entities cost, improving tax utilization, efficiency, focused on a particular segment, increasing shareholders & stakeholders value and future dividend distributions.
Structuring/layering of businesses can have big impact on corporates rather focusing on compliances one should focus on working and manage business synergies.
With every new JV, WOS, merger one has to enter share purchase agreements (SPAs) and other deal oriented documents to form a subset of company, adding a different product in product line and if they are not proven relevant & beneficial to group and just become only a cost center to company due to this negative impact it becomes a hurdle in attracting better deals and investments .
Investors prefer clean, and smooth corporate structure to do better due diligence analysis of corporate governance and controls it will consume a lot of time on corporate structure management then focusing on business issue. Government also do lots of initiative and make provisions to ease of business. there is various method to lean out (eliminate) burden of inefficient corporates by way of strike off, voluntarily winding up, demerger, merger to maintained a simplified and efficient structure
The factors which we need to consider to that –
(I) Whether we want a particular type of company in our group or not.
(II) Whether in context of taxation we could manage to use tax efficiently like carry forward MAT credits, Depreciations, NOC, exemptions, benefits etc.
In GST laws ITC carry forward will be allowed in case of restructuring of an (ongoing based entity) Also, there are various issues related to HR like department management, board of directors, information technology, platform related functions that it will operate and department heads.
Why corporate often form various business entity –
| 1 | SPVs & joint ventures |
| 2 | Tax savings reasons |
| 3 | Formed for a specific purpose |
| 4 | Hold IPR property |
| 5 | Ring fence the asset |
| 6 | From possible litigations |
| 7 | To avoid applicability of various labour laws, |
| 8 | Separate entities to get the benefit provided by state governments |
| 9 | To hide group identity |
| 10 | Legal compulsion |
| 11 | Regulatory reasons |
| 12 | Licensing raj land ceiling |
| 13 | To facilitate inter corporate loans and advances related party transactions. |
Why leaning out?
- To reduce multiplicity of administration responsibilities, legal and regulatory compliances.
- To reduce cross border holdings amongst the companies, simplify the control structure for ease of regulatory discloser.
- To simplify and rationalize the group structure.
- To element extra entities with no operational business and harness the asset and moneys blocked in them.
- To minimize administrative & managerial cost.
- The cost of non-compliance is very heavy under the companies act 2013.
- To take advantages of asset and net worth of all the entities and unblock the value.
How to do leaning out of group –
(i) Determine redundant /extra companies in the group.
(ii) Simplify the group holding structure, remove cross holding and multiple layers.
(iii) Unlock the lying-in companies not in major use
(iv) Strike off liquidate or merger / consolidation.
Isn’t it safer to have fewer, better maintained entities?
Mode of Leaning out –
| Voluntary liquidation |
| Strike off |
| Merger & Amalgamation |
Striking-Off of companies under section (248) of Companies Act 2013–
1. Striking-Off by a Company on its own accord
2.Striking-Off by ROC (Registrar of Companies)
Grounds on which provision of Strike-off could be applied (Section 248)
- Where the company hasn’t commenced its business within one year of it Incorporation; or
- Where the company hasn’t been pursuing any business or activity for the preceding two financial years, for which it hasn’t sought the status of Dormant Company under section 455 of the Act; and
- There is no Asset or Liability left with the Company
There are various restrictions on making the application for Strike-Off. Also-
- various companies are not qualified to file an application for Strike-Off, e.g. Listed Companies, Section 8 Companies etc.
- The liabilities if any, continues on every director, officer and members of the as if the company had not been dissolved.
VOLUNTARY LIQUIDATION-
- Either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation;
- The company should be solvent
- No objection of shareholders and creditors would be required
- The distribution of money or asset to the extent of accumulated profit, are considered deemed dividend, so not tax efficient;
- Process is now under IBC and takes around 6-12 months.
- There is no possibilities of carrying benefits of carry forward of losses, fee paid for authorised capital, IPRs etc.
Regulatory framework of M&A –
Applicability on all companies including listed companies
| Companies Act 2013 |
| Income Tax Act 1961 |
| RBI/FEMA laws |
| Accounting standards |
| Stamp Laws |
| Competition Act 2002 |
| industries specific laws |
Applicability on listed companies –
| SEBI (LODR) Regulation 2015 |
| SEBI Circular dated 10th march 2017 read along with 03rd January 2018 |
COMPANIES ACT, 2013
- Compliance with Section 230-232 or Section 233 of the Companies Act, 2013 read along with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
- Approval of Hon’ble National Company Law Tribunal/RD as the case may be.
- No Objection of Regulatory – ROC, OL, RD, IT & Other.
INCOME TAX ACT, 1961
- Amalgamation as defined under Section 2 (1B) of ITA.
- Section 47 of the ITA specifically exempts from capital gain tax.
- Section 72A of the ITA provides for the carry forward of accumulated losses and the unabsorbed depreciation of the Amalgamating Company
ACCOUNTING STANDARD
- AS 14 or IND AS 103 defines Business Combination.
- In Purchase Method, the Assets and Liabilities are transferred on fair value basis.
- Business Combination of entities under common control is accounted by pooling of interest method
SEBI LAWS
- Obtain No-Objection from the Stock Exchange (s) and SEBI before filing the Scheme with NCLT.
- SEBI Circular dated 10th March, 2017 and 03rd January, 2018 needs to be complied.
STAMP DUTY ASPECTS
- Stamp Duty is primarily State specific Subject;
- Some of the states have made specific law for stamp duty in case of mergers/amalgamations
- Others are applying Stamp Duty based on Landmark judgements
What are the benefits of amalgamation –
| 1 | Economic of scale |
| 2 | Synergies benefits |
| 3 | Utilization of tax benefits |
| 4 | Growth and expansion |
| 5 | Value enhancement |
- All licenses and benefits are transferred to post merger or amalgamated company as per going concern entity consolidation.
- A LLP can’t merge with company directly because there is no provision in latest companies act 2013 regarding it like earlier one i.e. CA 1956. if an LLP want to merged with a company then it must be first converted in company and then it would be possible to be merged.
Can we claim benefits of section (72) of income tax Act 1961 consolidation of group company in all cases?
Yes, we can but only condition is that business shall must be continuing for at least 5 years.
Author Bio
Very Informative. Thanks