Procedural aspects of De-merger of a Company

Demerger is a mode of industrial restructuring. Demerger is often used to describe division or separation of different undertakings of a business. The companies act does not contain the concept of de-merger as such but indirectly it does recognize it in-

Sec 391/394 (scheme of compromise, arrangement or reconstruction) and

Sec 293(1) (a)(sale, lease or otherwise dispose of)

A scheme of demerger is in effect a corporate partition of a company into 2 undertakings, thereby retaining one undertaking to the resulting company. It is a scheme of business reorganization.

Demerger has been defined in sub section 19AA of section 2 of the Income Tax Act 1961.

Procedure of Demerger:

As per the companies act, the sale of the whole or the part of a company follows a two pronged process for the demerger of the said company  the first step of which would entail the approval of the entire process by the company’s board of directors and then by obtaining the necessary approval of the shareholders at a general meeting of the company by passing a special resolution and the resulting company has to ensure that the objects it now has include the carrying on of the business that it sought to prior to the demerger of the company. This process of the company’s demerger should confirm to the provisions of either the section 293(1)(a) or sections 391 to 393 of the Companies Act.

Modes of de-merger

 There are various modes of de-merger

(1) Partial demerger- A partial demerger means that the parent company retains a stake (sometimes a majority stake) in the demerged business. The motive for a partial demerger is sometimes to force the market to separately value the business that is demerged, in the expectation that this will lead to a higher sum of parts valuation of the parent company.

(2) Complete demerger- Complete demerger results when the whole of the business/undertaking of the existing company is transferred to one or more new company/companies formed for the purpose and the demerged company is dissolved by passing special resolution by its shareholders. Such company is wound up voluntarily and disappears. The shareholders of the dissolved company are issued and allotted shares in the new company/Companies as per the share exchange ratio sanctioned under the demerged scheme.

(3) Demerger by agreement- A demerger may be effected by agreement where under the demerged company spins off its specific undertaking to a resulting company, formed with another name in such a manner that-

a. All the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger

b. All the liabilities relatable to the said undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of resulting company by virtue of the demerger;

c. The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis;

(4) Demerger under scheme of arrangement- demerger under scheme of arrangement On the basis of the powers a company has in its memorandum, it can carry out division or split of its entity in the same manner as it could accomplish amalgamation through a scheme of arrangement under the provisions of the Companies Act, 1956. The procedure laid down in Chapter-V under the Companies Act, 1956 regarding Arbitration, Compromises, Arrangements and Reconstruction would be followed in the case of division of the company.

(5) Demerger and voluntary winding up- The original company which has split into several companies after division could be wound up voluntarily pursuant to the provisions of Sections 484 to 498 of the Companies Act, 1956

Activities from Board Meeting for Approval of Demerger Scheme to Court Order

 Sources:

1.) A. Ramaiya; Guide to the Company Law; 2010; 17^th Edition

2.) M.C Bhandari; Guide to Company Law procedures; 2009; 21^st Edition

3) Seth Dua Associates; Joint Ventures and Mergers And Aquisitions In India: Legal And Tax Aspects; 2006; 1^st Edition