Monday 20 October 2014

Tunneling and Propping (5)


145 comments:

  1. Looking at this picture we can say that since the interest rate is lower than the fair market condition this transaction is detrimental for Targetti North America. However we cannot state that this transaction is harmful for the minority shareholders of Targetti north america because this company is wholly owned by the holding Targetti. In fact, we have to say that this transaction may be ordered by the parent company in order to demage the Targetti north america's creditors.

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    1. Yes Giulia, of course set a lower interest rate below the market condition is detrimental for Targetti North America. But since Targetti owns the 100% of Targetti North America, this conduct is not injurious for the minority shareholders, so this action will damage only the creditors.

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    2. Giovanni Campisi20 October 2014 at 21:23

      and also other stakeholders

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    3. We have to consider all stakeholders not only shareholders so in this case the transactions is detrimental for Targetti North America creditors.

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    4. I agree with you guys, here we have a case where the stakeholders of Targetti north America are damaged like the creditors.

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    5. Yes Giulia. In this case transactions are detrimental for Targetti N. A. creditors.

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    6. This transaction would be a tipical example of tunneling in case of different cash flow rights in the subsidiaries,but since Targetti owns 100% of shares in both subsidiaries,this sell is just detrimental to creditors. If for example the sell was made to Esedra,it could be a case of tunneling.

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    7. I agree with the idea that stakeholder are damaged by this operation. Basically we can think about the opportunity cost of this transaction for Targhetti North America. The resources could be used for other investments.

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    8. Since the cash flow rights are equal in both Targetti North America and in Neri, we cannot say that the transaction is detrimental for Targetti North America minority shareholders. However, since the interest rate applied to the loan is favourable, with respect to market conditions, this transaction could damage Targetti North America creditors.

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    9. Alberto Bonaventura22 October 2014 at 19:02

      Under Conflict of Interest Perspective minority shareholders are not affected since the ownership is fully held by the holding company. Nevertheless other stakeholders should have been affected (creditors, US government).

      Adopting the Business Group Perspective we might interpret this transaction as merely aimed at easing the financial condition of Neri by means of saving in borrowing money.

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    10. yes i agree with Alberto, always consider the double POV. because on one hand, shareholders can be negatively affected, but on the other hand, the group saves money and this is also good for them (even for the targetti north america's shareholders)

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    11. also in my opinion in general the stakeholder are damaged byt his types 0of operations.This types of operation are not the unique one way of investments.I totally agree with Emilio.

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    12. We cannot talk about tunnelling in this case, since the controlling party owns equal cash flow rights in both companies. In an hypotetical situation in which Neri is in economic difficulty this could be a case of propping, meaning allowing advantageous conditions for firms of the group facing a distress for the future benefits of the overall business system.

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    13. In this case are not negatively affected the minority of shareholders, but only creditors.

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    14. it's tunneling in case of different cash flow rights in the subsidiaries,but since Targetti owns 100% of shares, this sell is detrimental just to creditors.

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    15. Considering the Conflict of Interest Perspective minority shareholders are not influenced, anyway some stakeholders are influenced..

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    16. This transaction may be consider as tunneling because different cash flow rights in the subsidiaries,but since Targetti owns 100% of shares in all subsidiaries,this sell is just for creditors.

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    17. I think this transaction may is tunneling because Targetti North America (100%) has damages while Neri (100%) has benefits

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    18. @luca:why in this case are affected only the creditors?

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    19. Hi Francesco! If subsidiaries are owned at 100% by Targetti, minority shareholders couldn't be negatively affected. So, we have only stakeholders of Targetti North America (especially creditors) as damaged party, due to the fact that the interest rate applied is lower than the market one (this means that Targetti North America could invest the same amount of money on the market and get an higher margin)

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    20. I agree with many guys, who says that this kind of operation is detrimental only for creditors because of law interest rate. As the ownership system here is widely spread, there is no demage for minority shareholders. So, this kind of operation is aimed to support Neri in its financial targets.

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    21. Well since both subsidiaries have 100% of shares then this will be detrimental to the creditors mainly. Of course it is benefitial for Neri and the minority shareholders are not affected.

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    22. this transaction is detrimental for firm in this case...

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    23. It will be detrimental to the creditors since both firms have 100% of shares.

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    24. Let's look first, at the percentage. From the conflict of interest prespective, since both firms have 100 % cash flow,
      Neri takes the advantage from low interest rate. This transaction doesn't demage only Targetti North America but also other stakeholder like creditors! On the other hand, we have also to consider the business group prespective.

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    25. Thats true, as the parent company owns 100% shares of both subsidiaries - it means that it acts in the interests of the whole business group. We can assume that here propping takes place , as the lower lending rate can help Neri to cope with some insight problems. But, nevertheless, we also should consider the creditors here, as they are represented by the State and can be harmed by this action.

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    26. Because Targetti owns 100% of shares in both subsidiaries, this transaction is not tunnelling. However it can damage creditor

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    27. It seems to me that it can be propping because company owns the same percentage of shares in both subsidiaries so Targetti wants to help Neri.But it can damage just creditors.

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  2. How should we interpret such transaction if Neri was located not in Italy (like targetti north america) but in a tax heaven?

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    1. Giovanni Campisi20 October 2014 at 21:24

      in this case this transaction would be detrimental for the Italian State

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    2. Do you mean that both companies were incorporated abroad? we could have a flow of money from Usa to the tax heaven. I do not think that the Italian State is anymore concerned. But the italian Government should be worried if the money start to move from italian subsidiarie to subsiadiries incorporated abroad.

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    3. If Neri was located in a tax heaven, Neri would receive benefit from such transaction. However, the creditor (in this case is the State) would be damaged

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    4. In this case Neri would receive benefit and the state would been damaged.

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    5. The state could be damaged. We can consider it a tax fraud.

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    6. I agree with my colleagues: this action is likely to count against the Italian State.

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    7. Federica Brunetti21 October 2014 at 11:14

      I totally agree with you guys, this action can be consider detrimental for the italian state.

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    8. Looking at the shareholders in this case Italy is damaged because it can not collect taxes.

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    9. In this case the only damaged party would be Italy.

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    10. Italian fiscal authorities are, for sure, damaged party...but to me, there are not clear laws that should regulate this kind of transactions. Maybe they don't want to simplify norms for lobbies interest (like multinational or lawyers associations)... In other words 'chi è causa del suo mal, pianga se stesso!'

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    11. I agree with you Silvia and you all guys. In this case Italian state and italian taxpayes would be damaged. Many examples of such case exist in reality.

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    12. Against the opinion of many of you, I agree with Marco F. At the end, a gain (or a loss) obtained from this international transaction (no matter from where to where) is going to Targetti, incorporated in Italy. The only thing that will change is the reason behind the transaction (barely deductible from the picture above) and maybe (I say maybe) USA are the damaged party as they are watching a huge amount of money flowing out from their taxation at a lower rate to a fiscal paradise.. it would barely legal btw.

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    13. I agree with all of you,in this case Italy would be the damaged part.

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    14. Alberto Bonaventura22 October 2014 at 08:48

      In this case the transaction would not only be detrimental for creditors but also for the State.

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    15. Italian State is of course damaged by this transaction.

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    16. guardia di finanza will knock at their door

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    17. I totally agree with you guys, In this case the Italy would be damaged by these transaction and Neri would receive benefit from such transaction.

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    18. Giovanni could you explain me better in wich sense this transaction would be detrimental for the italian state?As you know i'm studing from abroad,and I would like to understand better this part.Thanks!

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    19. I agree with you, the Italian state would suffer from this transaction.

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    20. I agree with all of you are right, the only damaged party will be the Italian state.

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    21. I agree with all of you, this case shows Italy damaging party

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    22. Of course in this situation Neri will enjoy its position and the Italian State will be damaged

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    23. I agree with all of you, in this case the transaction would be detrimental for the Italian State.

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    24. Neri will benifit at the expenses of The italian state that is damaged since there is a flow of money transferred ouside the country.

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    25. The transaction will be probably detrimental for the Italin state.

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    26. I agree with Serena, in this case Italin state will be probably detrimental

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    27. I agree with my colleagues, the party damaged by this transaction would be the Italian state.

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    28. I agree with Gianmarco. Who lends money to Neri (located in the Cayman Islands as an example) is Targetti North America (located in the USA) which of course will have the revenues from the financial service they provided.
      As a consequence, the damaged party would be the american State. Furthermore, we have to consider the particular regulation on loan contracts that has a different taxation regime compared to others.

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    29. For sure, creditors (italian government) are in disadvantage in this case, meanwhile for Neri this transaction is benefit

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    30. Of course, it will be detrimental for the Italian state.

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    31. As you said this transaction is detrimental fot the Italian state.

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    32. Good for Neri, but detrimental for Italy as a state.

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    33. Italian state would be damaged...

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    34. Actually, I do not know if the Italian State would be damaged. We should look at which firm will benefit most by this transaction: Neri or the holding company Targetti.

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    35. This transaction is detrimental for an italian creditor, which in this case is represented by the State. Therefore Neri is always the beneficiant:

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    36. What does mean a tax heaven?

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    37. A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all. For example Andorra, Ireland, Luxembourg, Monaco...

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    38. Federica Brunetti25 October 2014 at 22:12

      I agree with all my colleagues. It is detrimental for the state.

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    39. Edoardo Petrilli25 October 2014 at 22:23

      It will be detrimental for the iatlian state

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    40. I agree with guys ,that if Neri was located abroad, Neri would receive benefit from this transaction. However, the creditor (State would be damaged)

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  3. In this case Neri benefits from this transaction but since both companies are wholly owned by Targetti the only ones that are demaged by this situation, are the creditors of Targetti North America.

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  4. This operation can be viewed as simple propping but, taking into consideration the Business Group Perspective we need to consider the system effect. It's true that North America could have invested that money in a more profitable investment, but considering the business of the overall group that investment could be the best one at that time. I agree with my colleagues in affirming that the only damaged parties might be the creditors of North America.

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  5. In this chart, we can see that both Targetti North America and Neri are wholly owned by Targetti. Then, even if Neri takes advantage of this transaction, we cannot say that this loan counts against the minority shareholders of Targetti North America. However, this can be detrimental for the creditors of the the company that lends money at a "favourable" terms.

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  6. At first glance we can say that due to the low interest rate this is a detrimental transaction for Targetti North America, while we are benefiting Neri. However we have to consider that this company is totally owned by the holding Targetti, so we cannot affirm that this transaction is harmful for the minority shareholders. We are just detrimenting the interest of the creditors (bank/s) art. 2497.

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  7. It is like they want to benefit Neri with this transaction; since Targetti owns the 100% of Targetti North America, this transaction doesn't hurt the minority shareholders, so I think it is detrimental only for creditors of Targetti North America

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    1. pierpaolo can you explain me why this transaction doesn't affect the minority shareholders?

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    2. Sorry, are there minority shareholders in a company 100% owned by another? Are we referring on the holding Targetti minority shareholders?

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    3. @Francesco because there are not minority shareholders because Targetti is the only one owner of Targetti North America.

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    4. @Francesco as Saverio said,in the chart it seems that there are no minority shareholders, that's why.

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  8. Creditors can be damaged as this transaction can erode the value of the firm, expecially if this kind of transactions are made repeatedly.

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  9. when we consider a situation in which there are transactions between firms totally owned by controlling party it is easy to understand that there will not be problems related to minority shareholders are not going to be damaged. The main issue here is related to creditors and the state.

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  10. how many kinds of related party transaction we can define looking at this picture?

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    1. there could be two kinds of RPTs.
      RPTs with related parties INTERNAL to the group (among the subsidiaries or between the subsidiaries and the holding) and RPTs with related parties EXTERNAL to the group. In this case the related parties external to the group are the owners of the parent Targetti

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    2. I agree with you. There could be 2 kinds of related party transactions in this figure. The first type is between subsidiries and/or the holding, and it is called internal transaction. The second type, which is called external transaction, occurs with related parties which are outside the group!

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    3. Can we define some external rpts as elements bringing a positive effect to the group as a whole?

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    4. I think that the business group perspective (RPTs that can be justified for the positive effects on the group as a whole) can be used only if the parties involved in the transaction belong to the same group

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    5. i agree with Francesco that RPT are two types , the first one in internal which determines by subsidiaries and holding , and the second type is external which determines by parties outside the company

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    6. For example, Fiat, as a group that mainly produces vehicles, concludes a transaction with Toro Assicurazioni for an insurance package specific for its products. Could it be positive for the entire group?

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    7. yes, the types of RTPs are Internal and External. In the first one refers to the transactions with the parent company and subsidiaries, the second one refers instead to those transactions with exteranal actors.

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    8. We may have two types of RPTs: internal and external. Internal transactions are those that involve the members of the Group (for example subholdings and subsidiaries), while the external ones are those made with the owners of the holding.

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    9. The related party transactions could be internal or external. Internal transaction are among members of the group, instead external transaction are among with actors external to the group, so, in this case, the owners of Targetti

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    10. Rpt can be internal, basically among subsidiaries and/or the holding. But could be also external. Those take place with external entities of persons, sometimes close to the owners of the holding (Targetti in this case).

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    11. I agree with Guilia, there could be two kinds of RPTs.
      RPTs with related parties INTERNAL to the group and RPTs with related parties EXTERNAL to the group, and In this case the related parties external to the group are the owners of the parent Targetti

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    12. Which of the 2 Rpts can be considered as the rickier one?

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    13. In comparison, the external ones are surely the riskiest.

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    14. for sure the external is the riskiest.

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    15. We have 2 related party transactions; internal ones and external ones. The internal ones are within the susidaries and the holding company.

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    16. Internal and External transactions... In holding companies and subsidiaries, we have internal transactions

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    17. External rpts might be riscky since they are hard to be "covered" by the compensatory advantages rule.

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    18. 2 related party transactions, the internal ones and the external ones. The external ones are more risky.

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    19. All organizations can possibly have two kinds of RPT- internal and external. Internal are all the transactions regarding the business group ( between the subsidiaries for ex.) And the external are the transactions of the corporation with the external players, such as firms, banks, directors..etc.

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    20. I agree with all you guys, The related party transactions can be divided into 2 main types: internal RPT and external RPT

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    21. Edoardo Petrilli25 October 2014 at 22:26

      Two type of RPT: external and internal

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    22. The RPT could be internal and external. Internal transaction are among members of the group, but external transaction are among with actors external to the group, in this case, the owners of Targetti.

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  11. Using the conflict of interest theory we can say that this transaction is detrimental for the minority shareholders of Targetti North America since the price is below the fair market price. However, due to the fact that Targetti North America declares to be directed by its parent company, we could use also the business group perspective. Therefore, we shouldn't consider this transaction in isolation and it means that Targetti North America could receive a compensation for this detrimental transaction, given by the belonging to the group.

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    1. I completely agree with you. I add that, in my opinion. applying the conflict of interest theory in this particular case sounds a forcing. The business group perspective seems to be the right key to be used in order to understand a transaction among two 100% controlled firms incorporated in two different countries, none of which is a fiscal paradise.

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  12. Both companies are wholly owned by Targetti. One party is surely threatened by this transaction: TNA creditors. The nature of the transaction, by the way, let us think that it could represent an exchange of services by the two, so not to be detrimental for our company (TNA). I wonder how the fiscal regime component influenced this transaction.

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  13. In this case, asumming that Targetti North America is dirrected by the holding company to lend money to Esedra at the interest rate of 2%. This interest is lower than market fair condition.
    Is it Tunnelling or Propping?

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    1. Federica Brunetti21 October 2014 at 22:54

      it is propping since Targetti own in Targetti North America a 100% of cash flow rights and the price that it charges for lending money to esedra is lower than the market price. So, Targetti does not gain any benefits.

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    2. yes it is propping, indeed Esedra (66%) is assumed to be in financial distress and Targetti does not receive advantages from the transaction. It is made solely in order to save firms from failure during negative economic shock periods!

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    3. Looking at the cash flow righst we are in the propping situation. It is not done for the interests of the distress company only, but for overall future benefits that could affect the entire group:therefore there should be a huge probability that the firm will be profitable again to take the risk.

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    4. @Nguyen: I think here we can't talk about tunnelling, because the controlling party owns the same percentage of cash flows rights in both companies. If i think at a situation in which Neri has financial difficulties, I believe this case can be propping.

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    5. It will be a situation of propping, The company that will benefit from this transaction indeed will be Esedra, in which Targetti owns an amount of cash flow rights lower than those owned in Targetti North America.

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    6. It is a case of propping. The fact that the controlling party has an equal percentage of cash flows rights in both companies reject the hypothesis of tunnelling..

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    7. Propping! In fact this transaction damages the subsidiary where Targetty holds a higher percentage of cash flow rights. This decision may be due to a financial distress of Esedra.

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    8. I think in the case, Targetti North America is dirrected by the holding company to lend money to Esedra at the interest rate is lower than market fair condition. then this is propping because Targetti North America (100%) has damages while Esedra (66%) has benefits

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    9. I agree with my colleagues, it is propping, in that Targetti's cash flow right on Targetti North America, which would be damaged by the transaction, are higher than those on Esedra.

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    10. Surely propping. You have to look at the percentages of cash flow rights owned by Targetti in those subsidiaries.

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    11. It is propping because Targetti has less cash flow rights in Esedra than in Targetti North America that instead it is totally owned.

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    12. Propping because Targetti North America owns 100% while Esdera owns 66%.

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    13. Looking at the percentage, it is propping.

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    14. As I was saying before, its a propping, as by these actions the company probably allows Neri to go out from difficult situation.

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    15. Edoardo Petrilli25 October 2014 at 22:28

      It is propping since Targetti owns in Targetti North America a 100% of cash flow rights and the price for lending money to Esedra is lower than the market price.

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    16. It is a case of propping.Because Targetti has less cash flow rights in Esedra than in Targetti North America.

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  14. Here we have 100% in the same companies. In this case Neri is benefiting from the transaction due to the lower interest rate.

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  15. How can we interpret internal transactions which have Duratel as subject supposing that it is a "captive" entity?

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  16. It is propping! Targetti owns Targetti North America at 100% of cash flow rights but the transaction is not favourable because the price is lower than the market one.

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    1. Good observation serena!i perfectly agree with you!

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    2. I agree with all of you that company trying to help out Neri to go out from financial distress.In this case Neri get profits from such transaction.

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  17. hii guys, if Targetti orders Victoria MLE Srl to lend money to Targetti Licht Gmbh (Germania) the interest rate is equal the fair market conditions. How do you interpret such transaction?

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    1. As we usually answer in this subject, it depends. If we approach this situation from an agency theory persoective, this transaction is certainly tunneling. On the contrary, if we use a group perspective, the situation could be interpreted as beneficiary to the stability of the group.

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    2. Victoria MLE Srl (94%)
      Targettu Licht (100%)
      We need more information to interpret such transaction. If the money can be used in a better way, for example investing in a project which has ROI > current interest rate, The minority shareholders of Victoria MLE Srl may complain about it. This transaction can be considered as a tunneling.

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    3. I agree with Nguyen, only in that particular situation, the transaction could be interpreted as tunelling.

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    4. Yes guys, this transaction con be seen as tunneling only if this money can be invested in a more profitable way that allow the firm to gain more than the current interest rate.

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    5. Well it depends, if we are talking about the conflict of interest approach, its tunnelling but if we are talking from the business perspective approach, this is propping.

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    6. Who is damaged by this transaction since it is in-line with the market conditions? I mean, Targetti Licht would have the same interest rate, even if it would ask for a loan in the market.

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    7. It depends, if we are relating to conflict of interest, its tunnelling but regarding the business perspective, it is propping for sure.

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    8. It depends. It is tunneling approaching the agency theory prespective. it's beneficiary for the group approaching a business group prespective.

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    9. @ Wissam Deghaily. You cannot say that from a business prespective it's propping, because propping is "par excellence" a concept of conflict of interest prespective.

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    10. Generally, it;s tunnelling, I agree with Natali, because the percentage of owned shares of Victoria MLE Srl is less thanTargettu Licht so, this transaction could be considered like conflict of interest and could be detrimental for minority shareholders of Victoria MLE Srl, but if the proect is profitable and investors can gain more than spend, it could be positive transaction in this case.

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    11. Its rather difficult to give a definite answer without knowing the details and the reasons of the transaction. But, to my mind, it seems more like propping. ( it was maybe made in order to avoid difficulties in one of the subsidiaries). And the percentage of the ownership of the 2 companies is almost the same. (94 % and 100%)

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    12. hii guys, now if Targetti orders Victoria MLE Srl to lend money to A2 Srl the interest rate is lower the fair market conditions. How do you interpret such transaction?

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    13. It depends. It may be tunneling approaching from the agency theory prespective. it's beneficiary for the group approaching a business group prespective.

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