Notes

Outline

A Presentation on Merger Rationale UNITED PHOSPHORUS LTD AND SEARCH CHEM INDUSTRIES LTD

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United Phosphorus Limited United Phosphorus Limited (UPL) is the largest producer in India of crop protection products Wide range of products that include fumigants, fungicides, insecticides, rodenticides and herbicides.  The company ranks fourth amongst the generic agrochemical companies in the world It is the world's largest producer of Aluminium Phosphide, and Napropamide Through acquisitions, strategic alliances and subsidiaries, UPL has built a network across the globe -- in Europe, America, Asia Pacific, CIS, Africa and Australia Fully  owned subsidiaries in Argentina, Australia, Bangladesh, China, Cuba, Denmark, Honduras, HongKong, Japan, Mauritius, Mexico, Poland, Russia, South Africa, USA, UK, Zambia, Zimbabwe and representative offices in Sri Lanka & Vietnam.

The Growth Strategy... UPL has pursued a strategy of continuous expansion, backward and forward integration, branded product development, thrust on registration and aggressive marketing. UPL has been managing change and making most of the opportunities that opened with liberalization and globalization. the driving forces of the company A focus on its core competence, a vision of being a global player and a commitment to provide cost effective quality solutions in crop protection for farmers, Operates across seven manufacturing sites, six in India and one in Europe.

…Growth Strategy Integration is the core strength of UPL. This approach secures reliable raw materials for multi-site manufacturing through an extensive downstream range of products and services. UPL pioneered 'backward integration' in agrochemicals and is one of the world's few companies to manufacture complex organo-phosphorus compounds starting from the basic raw material, rock phosphate ore as in  SCIL, a subsidiary of UPL

Search Chem Industries Limited Search Chem (SCIL) is a subsidiary of UPL. UPL owns about 53.1% of SCIL’s equity Its core focus lies in chlorine molecules and Phosphorus based products. Runs a state of art, integrated Caustic Chlorine and Value-added Specialty Chemical Complex at Jhagadia, Gujarat, India. Exports more than 20% of its total production. Incurred huge losses in the past. Presently on a turnaround path However, net worth substantially  eroded

Key Financials of UPL and SCIL

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Rationale of consolidation Synergies between the operations of SCIL and UPL Income-tax advantage Overall value enhancement for shareholders of both the companies SCIL has turnaround Consolidation based on independent valuation Interdependent financial operations

Synergy Scale Integration of operations Enhanced financial strength and flexibility Cost efficiencies and savings in administration costs Removal of transfer pricing issues

The Income-tax advantage UPL likely to have huge tax liability on back of substantial profits Section 80HHC and 80IA benefit will cease by 2004 SCIL has huge tax losses of Rs. 219 crores (as on March 31, 2002) Hence, tax losses of SCIL can be optimally utilised by the consolidated entity Only MAT  payable till tax losses utilised

Shareholder value enhancement SCIL has started turning around Loss for 2001- 2002 - Rs 50 cr Last quarter (December) SCIL posted a Net profit of Rs 4.55 cr and cash profit of Rs 8.9 cr Expected to make a profit around Rs 7 crore for 2002-03 Financial operations of both companies interdependent SCIL funded by UPL to the extent of Rs 300 cr External loans of SCIL guaranteed by UPL to the extent of Rs.105 crores

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The Broad Proposal Reverse Demerger of the Manufacturing division of UPL into SCIL Shareholders of UPL to receive shares in SCIL as consideration SCIL to renamed as “UPL” to retain goodwill, brand equity etc. Demerger to be implemented under a Scheme of Arrangement under Sections 391 to 394 of the Companies Act, 1956 Scheme to require the approval of shareholders, creditors, and the Gujarat High Court

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Reverse demerger of UPL into SCIL Section 72A of IT  Act not required to be invoked in case of Reverse merger Hence conditions stipulated in Section 72A not required to be complied with  to hold assets of SCIL for a period of 5 years to continue business of SCIL attain a particular level of capacity utilisation Flexibility retained to divest SCIL’s operations at a future date Without losing the benefit of tax losses

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Salient Features of the Scheme Appointed Date - March 1, 2003 Demerger of the Manufacturing Division of UPL into SCIL Entitlement Ratio - 1:12 However, this will result in SCIL having a bloated share capital The Remedy Capital Reduction of SCIL by 91.67% against accumulated losses Resultant Swap ratio 1:1 Cancellation of Preference capital of SCIL held by UPL

Entitlement ratio Methodology used for UPL Net Asset Value method Profit Earning Capacity Value method Market value method Appropriate weights assigned to each method Discounting Cash Flow  - used as a supporting approach Methodology used for SCIL Market price Fair to minority shareholders of SCIL Other methods not considered appropriate Swap ratio - 12 shares of SCIL for 1 share of UPL

The Preference Share Option Shareholders to be given an exit option Such exit combined with the demerger through the Preference Share route The scheme to provide for an option to issue Preference shares in the merged entity to the equity shareholders of UPL 14 preference shares of SCIL will be issued for one equity share of UPL  The Preference shares will be redeemable after 3 years carry a coupon rate of 7%

Post - demerger shareholding pattern of SCIL Post-demerger Pre UPL    7.56% 53.10% Other Promoters   35.41% 16.61% Public   25.75% 21.85% Institutions and others  31.28% 8.44%

SCIL “Post-demerger”Balance Sheet

Important “post-demerger” ratios Debt Equity ratio - 1.13:1 ROCE - 14.35% * RONW - 8.49%  **

Steps - SCIL perspective Equity Share capital to be reduced to 8.33% Pre reduction - Rs 4561.83 lacs(fully paid-up) Post-reduction - Rs 380.00 lacs Shares to be issued to shareholders of UPL in the ratio of 1:1 Shares issued - Rs 2547.46 lacs Post-demererger capital of SCIL - Rs 2927.46 lacs

UPL post - demerger Name will change to ‘Uniphos Trading Limited’ Will continue to carry on its trading operations to hold investments (including equity shares in SCIL) and Khar administrative office property Truncation of operations would lead to truncation of Balance Sheet Capital Reduction of UPL to the extent of 80% envisaged under the Scheme

UPL “Post Demerger” Balance Sheet

Steps - UPL perspective Share capital to be reduced to 20% Pre reduction - Rs 2547.46 lacs Post-reduction - Rs 509.49 lacs Face value to be reduced to Rs 2

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Impact on shareholder of UPL Shareholder holds say 100 shares of UPL In UPL He will continue to hold 100 shares Face value reduced to Rs 2 (due to capital reduction) In SCIL In case he exercises Preference share option He receives 1400 Preference shares of SCIL 7% coupon rate (tax-free) redeemable on expiry of 3 years In case he exercises Equity share option He receives 100 equity shares of SCIL

Impact on shareholder of SCIL Shareholder holds say 100 shares of SCIL In SCIL He will now hold 8 shares As capital being reduced to 8.33% In respect of the fractional entitlement of 0.33 shares All fractional entitlements to be consolidated and held in Trust by a Director Shares to be sold at an opportune time and cash to be distributed to the shareholder in proportion to his fractional entitlement

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The Costs Stamp Duty (Reasonable) Payable in Gujarat Stamp duty  payable at 0.75 % of  higher of the following: the value of shares issued by SCIL to the shareholders of UPL; or Value of immovable property of UPL in Gujarat Tentative stamp duty estimate based on value of shares issued - Rs 2.9 cr Sales Tax (NIL) No Sale as transfer of the undertaking of UPL as a going concern Coromandal Fertilisers Limited v. State of A. P. (112 STC 7) (A.P.)