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. demerger of a companyThis 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

S.no.

Activities

1

Intimation in Stock Exchange of Board Meeting date for considering Demerger

2

Board Approval for the Scheme

3

Informing Stock Exchange of Board’s Decision

4

Consent from shareholders to the scheme of Resulting Companies(in case of Closely held unlisted companies

5

Filing Scheme with Stock Exchanges

6

NOC/Approval from stock exchanges (BSE/NSE)

7

Filing of application under section 391(1) with High Court along with Judge’s summons, of affidavit in support of summons and draft minutes of order)

8

Finalising the Notice/Explanatory Statement for Meeting of the Shareholders/Secured and Unsecured Creditors

9

Hearing of Company’s Application

10

Hearing Resulting Company’s application

11

Receiving authenticated copy if order for holding/dispensing with the Meeting of Shareholders/Secured and unsecured Creditors

12

Obtaining Certified copy of order of High Court for court convened Meetings

13

Commencement of Printing of Notice for court convened meetings

14

Completion of dispatch of notices for meeting Under Certificate of Posting

15

Advertisement of Notice of Meetings

16

Filing of Notice- Advertisement of meeting with stock Exchange(s)

17

Filing of advertisement of meeting with court

18

Filing of affidavit signed by Chairman of the Meeting or other person directed by Court verifying that the directions regarding the issue of notices and the advertisements have been duly complied with.

19

Meeting of Creditors and Members

20

Reporting the decision of the poll to the High Court

21

Filing of petition with the Court along with relevant documents

22

Admission of the Petition

23

Minutes of order by judge fixing the date of hearing of petition and advertisement of notice of hearing

24

Advertising the notice of hearing in newspaper

25

Obtaining Certified Copy of an order on admission of Petition

26

Filing of Copy of Petition with annexures with RD/ROC through FORM 61(eform)

27

Filing of affidavit confirming Service of notice of petition and publication in newspaper

28

Follow Up with RD/ROC

29

Receipt of letter, queries etc from RD & ROC

30

Follow Up with RD/ROC/Legal Counsel to resolve issues if any

31

Initial date of hearing of petition

32 Adjoined hearing if any
33 Filing of amended petition if any
34 Final date of hearing of petition
35 Obtaining certified copy of order on petition
36 Payment of Stamp Duty, if required
37 Filing of certified order with RD/ROC along with Form 21

Activities from Court Order till Record Date

 

38 Acknowledgement of receipt from ROC and certified true copy of court order to be filed with the Stock Exchange
39 Notice to Stock Exchange for Record Date to determine eligibility to receive shares of the Resulting Companies and voluntarily give advertisement of the Record Date in National Dailies (30 days Notice)
40 Agreement with CDSL and NSDL for admitting its securities
41 Printing of stationery – Allotment Advice, Share certificate, Envelopes
42 Application seeking exemption for relaxation of Rule 19(2)(b) from SEBI through the designated Stock Exchange
43 Application to Stock exchange for in-principle approval for listing of shares
44 Designated Stock Exchange to forward the application to SEBI for approval under Rule 19(2)(b) of SCRA Rules
45 Prepare Information Memorandum (IM)
46 Compliance with Clause 49 – Prerequisite for listing
47 File Information Memorandum with Stock Exchanges
48 Stock Exchange to receive SEBI Approval and give in-principle approval for listing of shares of the resulting companies
49 Keep share certificates, covering letter, envelope of the resulting companies ready for printing
50 Keep text and stationery ready for intimation of corporate actions for the Resulting Companies
51 Letter relating to cost of Acquisition to be sent to shareholders
52 Ex date for Stock Exchange for F & O
53 Record Date

Activities from Record Date till Listing

54 Procure details of Register of Members from R&T agent as on Record Date
55 Prepare list of eligible shareholders of the resulting companies, including details of the shareholding
56 Hold Board Meeting of Resulting Companies for allotment of shares
57 File Form 2 with ROC
58 Resulting Companies to submit the Corporate Action Forms to depositories and pay fee for the same
59 Over printing of share certificates, cover letter, envelope and dispatch of share certificates or demat credit of equity shares of the resulting companies
60 Dispatching share certificates
61 Send intimation to the shareholders of each of the resulting companies regarding the corporate Action
62 Application to stock exchange, attaching  dispatch certificate/demat credit certifcate and copy of advertisement, for trading permission
63 Publication of the Advertisement (as per Schedule 28 of SEBI DIP Guidelines) in one English daily, Hindi Daily and Regional Daily
64 Trading of shares at Stock Exchange

 

 Sources:

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

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

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

By Richa Shrivastava on September 7, 2012 · Posted in Corporate Law

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