|
| |
| Home >> General Public User>>Mergers and Acquisitions>>India>>Demergers |
Demergers |
Demerger denotes the division of corporate entities into and among separate companies. It includes divestitutures, spin offs and splitting up of corporate conglomerates.
Earlier the trend was towards diversification of companies into new areas for spreading out the business risks. Thereby companies drifted away from their core competency areas into unrelated ones, which led to diseconomies. With the obsession for larger size many mergers were pushed through resulting in multilocational and multidivisional companies, which turned out to be unwieldy. The solution in such situations is demerger.
Family owned group of companies are also split up and partitioned by and between different branches of the family along product lines or territorial divisions.
Under Section 391 of the Companies Act for such demergers also an application has to be made to the jurisdictional High Court for ordering separate meetings of members and affected creditors of the concerned companies, to consider the proposal.
If a majority in number of, however, at least 3/4th in value of such creditors or members of each of the concerned companies, present and voting either in person or by proxy agree at the respective meetings, such demerger shall be binding and enforceable, if sanctioned by the Court.
On an application to the Court under Section 391 of the said Act for a demerger, by virtue of Section 394 of the said Act the Court may while sanctioning the scheme or thereafter provide for the following matters: -
- transfer to the transferee companies the whole or part of the undertaking, assets or liabilities of the transferor company
- the allotment of shares, debentures, policies or like interests by the transferee companies to any person
- the continuation by or against the transferee companies of any legal proceedings pending by or against the transferor company
- the provision for any person dissenting from the scheme, within the specified time in the specified manner
- any such incidental matters necessary for carrying out the demerger
According to Section 394A of the said Act the Court shall give notice to the Central Government on receiving an application for demerger under Section 394 and shall consider the representations of the Central Government before making an order on such application.
There are instances of different parts of a single scheme being approved by different High Courts to complete restructuring.
Schemes of demerger can include the following:-
- Division of the business operations, assets, liabilities of the demerging company by and between transferee companies
- Allotment of shares, debentures or similar benefits in the transferee companies to the shareholders of the demerging company
- Reduction of share capital of the demerging company to reflect such transfer of a part of its asset base, which is usually followed by reorganization or consolidation of its share capital
- Permission to the transferee companies to use specified assets of the demerging company on leave and license basis without any outright transfer of ownership thereof, in order to protect tax benefits of depreciation and investment allowance/ deposit in the hands of the transferor company.
- Leasing out unrelated product division instead of outright transfer
- Induction of foreign collaborator by allotment of shares to it in the focused company under joint venture agreement for technological up gradation
- From the appointed date to the effective date of the approval of the scheme, the profits and losses of the transferred divisions shall be of the transferee companies, since during such transition period the demerging company would be carrying on the business of the transferee companies in ‘trust’ for them and on their account.
After demerger the companies, focused on their core competency areas by shedding off unrelated business lines, have grown adding value to their shares.
|
|
|
