Unlocking Capital in Corporate Business Groups

Cutting the Corporate Fat

Introduction

Over the course of my discussions with business groups and promoters of closely held or private companies in recent times, I have realized that one of the biggest pain points of any large or growing business group, is the increasing number of entities under its umbrella. There have been cases where a group has had 20 inoperative companies which have stopped business some years back but possess substantial reserves or in some cases it may have 10 companies solely holding real estate without having any real business. There have also been cases where companies raised capital but did not commence business and as such a lot of much-needed capital has become trapped in these companies, without a clear exit plan.

The promoters increasingly feel their hands tied and being locked out of their own money. This scenario has turned even more difficult due to income tax amendments in recent times, which have stopped the practice of share transfer at face value and only allows transfer at fair value calculated after considering market values of the assets leading to the shares becoming very difficult to transfer. Add to all this, the ever-increasing compliance cost as well as the risk of non-compliance of stringent provisions under Companies Act, 2013, this problem has become a bane in the management of mostly all business groups.

Through this write-up, I have attempted to touch upon practical issues and roadblocks present in existing structures of closely held companies and more importantly discussed some possible solutions which could help answer the burning question “How to unlock my money out of the company?”

Practical issues and roadblocks faced by Business Groups

Clearly, any solution of exiting or closing a business involves either selling its assets or selling the shares i.e. your ownership in the business to another person. However, the current legal structure around our businesses makes this exit route very difficult. Here’s how:

The above chart clearly shows how there are multip;e taxation as well as operational problems that make transfer of funds as well as transfer of shares very difficult for a closely held family business group.

Solutions

Having discussed the problems in existing structure, I have listed out certain solutions which I believe can greatly help in easier transfer of assets at lower costs and quicker distribution of funds to shareholders:

These solutions are neither exhaustive and nor are all solutions applicable to each kind of group structure in all cases but I believe it is enough to start a discussion which has never been more relevant than now. The future of corporate growth is going to be hugely dependent on how efficiently we Make Money Work.