Demerger meaning:

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 Under Companies Act 2013 – Explained!
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.
Types of Demergers of a Company

 Spin-off

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.

 Split-up

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.

 Split off

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.

 Equity carve-out

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.

 Divestment

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.

 Divestiture

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.