A demerger under Companies Act 2013, can be defined as corporate restructuring in which a business breaks into components. These components can operate as a separate unit or can be sold or can be liquidated. It allows a large company to split into various business units.
Demerger of a company can be defined as a division or split of a company in a number of small companies. The new company may not necessarily be a subsidiary of the parent company after the split.
In other words, demerger is a corporate partition of a company into smaller undertakings, where one separated undertaking is retained by the parent company while others are either acquired by other, work independently, liquidated, or are sold.
This type of demerger means creating a subsidiary of the firm with some proportion of its shares. The holding of the spin-off subsidiary and the main company is in the same proportion. This demerger is generally carried to give freedom to the subsidiary to take its own decision and devise its own strategy for a specific product. The subsidiary gains control of the business related to that product.
In this type of demerger, a single holding company and some of its subsidiaries are created from one parent company. The holding company has only Financial assets and doesn’t operate physically. It only has the holdings of all the shares of its subsidiaries. Its shareholding pattern could vary among subsidiaries.
This type of demerger is done for companies with diversified businesses where single central management can’t manage all the different areas. Thus, separate subsidiaries are created with different management with the power of taking decisions for their sectors. There is no interference from one subsidiary to the other in business decisions and each can operate independently.
In this way of demerger, a business vertical of the main company sold off to a different company. It is simply a business transfer done by the company. The vertical is first separated into a different company and sold off to the other company. It is done when a firm wants to move out of production or services related to a certain market, product, or area.
In this procedure, the parent company reduces its holding in one of its subsidiaries by a small fraction. It earns huge income from this and thus, it is also termed as an investment. If a company wants to reduce its workload of maintaining compliance for a subsidiary due to its large shareholding, it takes this way of the demerger. Although this independence from meeting compliance norms comes at the financial cost of losing shareholding in the subsidiary.
This type of demerger is carried out by the government. It reduces its holdings in a Public Sector Undertaking (PSU) by releasing a tender to sell its stakes. This generally happens when the government wants to exit a certain business sector or wants to raise funds to lower down its fiscal deficit.
The process is similar to divestment. However, it can be carried out for any public or private limited company. The process is carried out purely for financial reasons (to raise money). This is generally carried out when an organisation wants to change its investment strategy and move to a different sector or company.
Companies opt for demergers mainly due to the following reasons:
1) Preparation of the Arrangement Scheme
After consulting the interesting parties and the stakeholders, the scheme of arrangement is prepared. The arrangement is proved by the board of directors. The share exchange ratio is also decided that would be in the interest of all the parties. A Board resolution should be passed approving the prepared arrangement scheme.
2) Application to the court for holding a meeting of members/creditors
An application is filed in the concerned high court through Form 33 accompanied by an affidavit along with Form 34. Scheme of arrangement should also be annexed along with these documents. Some other documents that are to be attached along with the forms submitted before the high court are:
3) Obtaining a court’s order for a meeting of member/creditors
The court examines the scheme to validate its fairness and then issues a summons in form 35 of the court rules. Before issuing summons the court has to be absolutely sure that the scheme is capable of being implemented.
4) Notice of meeting of members/creditors
A notice through Form 36 is sent to the interested parties that are authorized by the courts at least 21 days before the
date of the meeting. The copy of the proposed scheme has to be attached with the notice. Such notice has to be
advertised in newspapers that are circulated among the interested parties through form 38.
5) Holding meeting of members/creditors
A meeting is held with all the members and creditors according to the directions of the court. The result of this
meeting is decided by separately counting votes in favour and against the motion. A report in Form 39 is to be
submitted by the chairperson of each meeting within the prescribed time of the court.
6) Petition to the court to sanction the scheme of demerger
A petition in form 40 is submitted to the court to get the scheme of demerger sanctioned. To file the petition, it has to be approved by three-fourths of the members/creditors that attend the meeting.
7) Court’s order on sanctioning the scheme of demerger received
After getting satisfied with the scheme, the court may pass an order approving the same in the newspaper in which the notice of the meeting was advertised.
We have seen demergers in both private and public sectors. The demerger of Reliance Group has been the biggest example in our country. The most effective answer to combat with the present economic situation in India today is the equipment of Demergers.
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