GST benefits prompt firms to absorb unlisted units

The Economic Times By Rajesh Mascarenhas, ET Bureau Aug 15, 2018, 10.16 AM IST

Companies are of the view that merging subsidiaries will enable them to become more efficient.

Mumbai: Companies are increasingly absorbing their unlisted units to simplify their holding structure and benefit from the Goods and Services Tax (GST). In the past few weeks, several listed entities, such as Hindustan Unilever, LuxNSE -0.23 % Industries, Orient Refractories, and Hindustan Foods, have brought some of their unlisted businesses under their umbrellas, a move that analysts believe will benefit the companies’ shareholders.

“It is an encouraging trend because it will simplify their holding structure by bringing their common businesses at one place to reduce related-party transactions and remove potential conflicts of interest. It is a sign of good corporate governance,” said Ravi Sardana, EVP, ICICI Securities. “As promoter and non-promoter interests are aligned, markets have rewarded such restructurings and the shares have seen a rerating.”

Last month, India’s largest consumer goods company Hindustan Unilever merged its foods and refreshment subsidiary into the company on grounds that the move will help it drive synergies and make the parent company more consumer-centric.

Early in August, Orient Refractories, a supplier of high-grade refractory products, announced its plans to merge its two unlisted subsidiaries — RHI India and RHI Clasil — with itself for better operational efficiency and simple holding structure.

Analysts said the new tax regime had forced companies to streamline their businesses. “Partly, companies are consolidating their similar-products (businesses) under one roof for (GST) benefits,” said Sanjiv Bhasin, executive VP-markets, IIFL.

Last month, the board of hosiery major Lux Industries approved the merger of two promoter group firms — J M Hosiery and Ebell Fashions — with itself in a non-cash deal at a combined valuation of ?861 crore. This deal, according to the company, will help minority shareholders unlock value.

Recently, Hindustan Foods also announced the scheme of arrangement for demerger of contract manufacturing business of Avalon Cosmetics Pvt. Ltd into the company.

In August 2017, the domestic arm of German automotive and industrial major Schaeffler (formerly known as FAG Bearings India) merged its two arms — INA Bearings and LuK India — to improve cost and supply-side efficiencies. The stock has moved 30% since then.

Last year, capital market regulator Sebi had introduced more checks and balances for mergers and acquisitions involving unlisted companies to curb manipulation. The concept of reverse merger was stopped following complaints that mergers of various unlisted companies with small and unknown listed companies were suspicious.

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