According to the merger plan announced on Wednesday, the investment business of TCFC will be demerged into TCFC Finance Ltd -- an existing wholly owned subsidiary of TCFC -- while the operating business will be merged with CBL. With this, the 35 per cent stake of TCFC in CBL will be transferred to TCFC Finance.

The merger plan, which was approved by the boards of TCFC and CBL, stipulates that shareholders of TCFC will receive six fully paid-up equity shares of Rs 10 each in TCFC Finance for every 10 equity shares held by them. In addition, shareholders will get one equity share of Rs 10 each in CBL for every one share of TCFC held by them. In effect, CBLwill be issuing equity shares of Rs 17.47 crore to the shareholders of TCFC. TCFC itself will cease to exist after the whole merger exercise is complete.

TCFC's shareholding of 99.98 per cent in its subsidiary, TCFC Finance, would stand cancelled with immediate effect. Since shareholders will be issued six shares of TCFC Finance for every 10 shares of TCFC held by them, the capital base of TCFC Finance after the demerger would stand at Rs 10.48 crore, ie, 60 per cent of the Rs 17.47 crore paid-up capital of TCFC.

The Reserve Bank of India has conveyed its "in-principle" approval to Centurion Bank for taking over the operating business of TCFC. As a result of the merger, CBL will be acquiring the entire corporate, lease and hire-purchase portfolio as well as consumer finance business of TCFC. All assets and liabilities, branches, manpower and technology infrastructure will also be taken over by the bank.

Centurion Bank had, in August, announced that it would take over the operating business of TCFC aftergetting approval from the concerned authorities.

According to leasing industry sources, a major portion of TCFC's assets are doubtful in nature owing to its large exposure to equipment leasing. Of the total leased asset portfolio of Rs 517 crore as on December, 1997, leased plant and machinery accounted for more than 50 per cent at Rs 321 crore.

Although official estimates of non-performing assets (NPAs) in TCFC may be low, industry insiders say that any stringent valuation may reveal a much eroded net worth.

Insight

No exit option for shareholders: The merger move is obviously intended to bail out the 20th Century management which was beginning to face funding problems. If the company had adopted a route similar to the one used by ITC Classic Finance or Anagram Finance, it would have involved a greater level of financial commitment on the part of TCFC. This would not have been entirely to the liking of TCFC shareholders. The present move, however, will benefit them as they will begetting a share of Centurion Bank. But they will still be stuck with the investment company, which has mostly illiquid assets.

TCFC shareholders may not have any exit option for some time after the court approval comes through since neither TCFC Finance nor Centurion Bank are listed at the moment. Keeping that in mind the promoters of TCFC should offer to buy back the entire public shareholding similar to what the Lalbhais had done prior to the merger of Anagram's business with ICICI.