There is a common misconception amongst the corporate world that demerger and hiving-off aresimilar as far as the Indian corporate scenario is concerned, and hence, undertaking corporaterestructuring using any one of the two modes for investment purposes, for raising capital or for increasing profits through cost-reduction, does not make any difference. This article takes thisview as its starting point and dispels the notion by undertaking analysis of "hiving off" and"demerger" concepts, both from the legal and taxation perspectives. The article further draws onthe various provisions of Indian company law, Indian tax law and judicial decisions to concludethat these two concepts are significantly different on various points such as how the considerationis to be paid and proportioned, how the assets would be valued, how the depreciation will becarried forward to the investing partner and what would be the cost of assets in the hands of theinvestor, depending on whether the transaction is a demerger, or hiving-off. The articlerecommends that corporations, both as sellers or as foreign direct investors, ought to be aware of the implication of both strategies, as choosing one over the other may have considerable financialadvantages as well as undertaking the correct required procedural compliances.
The expression ‘Demerger’ is not expressly defined in the Companies Act, 1956. However, it iscovered under the expression arrangement, as defined in clause (b) of Section 390 of CompaniesAct.Division of a company takes place when1. Part of its undertaking is transferred to a newly formed company or an existing company andthe remainder of the first company’s division/undertaking continues to be vested in it; and2. Shares are allotted to certain of the first company’s shareholders.A demerger is a form of restructure in which owners of interests in the head entity (for example,shareholders or unit-holders) gain direct ownership in an entity that they formerly ownedindirectly (the ‘demerged entity’). Underlying ownership of the companies and/or trusts thatformed part of the group does not change. The company or trust that ceases to own the entity isknown as the ‘demerging entity’.The entity that emerge have its own board of directors and, if listed on a stock exchange, haveseparate listings. The purpose of demerger is to revive a company's flagging commercial fortunes,or simply to lift its share price.
Mode Of Demerger:
Under the scheme of arrangement with approval of the court U/s 391 of the Companies Act.
Procedure For Demerger:
1. Demerger forms part of the scheme of arrangement or compromise within the ambit of Section390, 391, 392, 393, 394 besides Sec 394A2. Demerger is most likely to attract the other provisions of the companies Act, envisagingreduction of Share capital comprising Sec. 100 to 1053. The company is required to pass a special resolution which is subject to the confirmation by thecourt by making an application.