Case II – Related party numbers and merger/de merger stories
This company is into supplying capital goods to various industries. Their factory, biggest in Asia on some parameters and being covered by a prominent international news channel on their documentary.
This business had two parts – one pure material supply and another material supply+installation+other services. They decided to separate these businesses and have each company focus on one part. So the more profitable and less working capital intensive one starts supporting the other.
How does this support system work?
- Loans and investments
- Receivables on sales with relaxed credit period.
Converting those receivables into loans and investments as receivables don’t get realized only.
- Then post three years of separation they decide that being together was worth more.
- So finally those receivables which has been stuck for ages gets place in the combined balance sheet.
- And right timing. Come INDas implementation and fair valuation. They take credit loss and revalue the assets, net effect on overall balance sheet negligible.
- At the same time to keep this business of ever increasing receivables to keep going advantage of stock market is taken. With a minimal free float the prices keep moving in either direction now or then.
- No major casualties so far other than the employees who faced two major layoffs in last one decade.
Note: These are personal views and in no way represent the organization(s) I am (was) part of.