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demergerprocess

demergerprocess

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Published by shakilaraju
India-Demerger
India-Demerger

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Published by: shakilaraju on Aug 21, 2009
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12/24/2010

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The Companies Act does not define "Demerger". However, the Income Tax Act has adefinition of "Demerger","Demerged Company" and "Resulting Company".These aredefined by Section 2(19AA), Section 2(19AAA), and Section 2(41A) respectively. Theapplicable provisions are Sections 390 to 396A of the Companies Act. Under theCompanies Act, Demerger would amount to "reconstruction".The procedure is as follows:1.Incorporate the company which will be the Resulting Company.2.Frame a scheme of Demerger 3.File a Judges Summons in the High Court praying for an Order conveningseparate meetings of the Creditors, Share-holders, or any class of them. Each suchJudges summons must be supported by anAffidavit and a copy of the Scheme must be annexed to the Affidavit. If all theCreditors agree to the Scheme, the meeting may be dispensed with. In the case of a Demerger, it would not be possible to dispense with a meeting of the share-holders, since under Section 293 (1)(a) of the Companies Act, a general meetingof the share-holders would be essential before any such Demerger can take place.4.Notice of the meeting must be given to the Creditors and /or members and sentindividually to each Share-holder/Creditor. Each notice must be accompanied by acopy of the scheme, explanatory statement as required by Section 393 of theCompanies Act and a proxy form.5.The notice of meeting must be advertised in such newspapers and in such manner as the judge may direct. The Advertisement must take place at least 21 clear days before the date of the meeting,i.e. 21 days notice must be given excluding the dateof advertising of the notice and the date of the meeting.6.The Chairman of the meeting or other person directed to issue the Advertisementand notices must file an Affidavit not less than 7 days before the date of themeeting showing that the directions reg: issue of notices and advertisements have been duly complied with.7.On the date of the meeting, the decisions of the meetings must be ascertained only be taking a poll.8.The Chairman of each meeting must file a report in the Court within that timefixed by the Judge or where no time has been fixed, within 7 days after theconclusion of the meeting. The report must state accurately the number of creditors or class of creditors or number of members or class of members as thecase may be who were present and who voted at the meeting either in person or  by proxy, their individual values and the way they voted. The report shall be inForm 39 annexed to the Companies (Court) Rules,1959.9.Where the proposed Demerger is approved by the various meetings with owithout modification, the company must present the petition to the Court, for confirmation of the Demerger within 7 days of the filing of the Chairman'sReport.10.The Court shall fix a date for hearing of the Petition and direct advertising in thesame newspapers in which the notices of the meetings were advertised or in such
 
other papers as the Court might direct. The notice must be given not less than 10days before the date of the hearing.11.If the Court sanctions the Demerger, it may give such directions as it considersnecessary for the proper working of the Demerger.The certified copy of the Order must be filed within 14 days from the date of the Order or such other time, as may be fixed by the Court.12.Applications for Orders in connection with the Demerger or for any variation, etc.shall be made under Section 394 by Judges Summons supported by an Affidavitfor directions as to the proceedings to be taken. Notice of the summons shall begiven in such manner and to such person as the Court may direct. On hearing theSummons, the Court may make such Order or Directions as may be necessary.13.The Company or any Creditor or Member thereof may at any time after the passing of the Order sanctioning Demerger, apply to the Court for determinationof any question relating to the working of the compromise or arrangement. Notices and Advertisements shall be as the Court may direct. The Court may passsuch Orders, give such Directions as it may think necessary.
 
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.
Demerger
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.

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