Merger

Introduction
• The term ‘merger’ is not defined under the Companies Act, 2013 (“CA
2013”) or under Income Tax Act, 1961 (“ITA”).
• ‘merger’ is a combination of two or more entities into one; the desired effect
being not just the accumulation of assets and liabilities of the distinct
entities, but organization of such entity into one business.
• Generally, in a merger, the merging entities would cease to exist and would
merge into a single surviving entity.
 Introduction
• Amalgamation (Section 2(1B) of Income-tax Act, 1961): means merger of either
one or more companies with another company or merger of two or more
companies to form one company in such a manner that :
• All the property/liability of the amalgamating company/companies becomes the
property/liability of amalgamated company.
• Share holders holding minimum 75% of the value of shares in the amalgamating
company (other than shares already held therein immediately before the
amalgamation by, or by a nominee for, the amalgamated company or its subsidiary)
become share holders of the amalgamated company.
 objectives
• . The possible objectives of mergers are manifold:
• economies of scale
• acquisition of technologies
• access to varied sectors / markets etc. /to go global
• Reduce gestation period for new business
• To acquire new managerial skill
• Get tax benefits
 Types
• Horizontal Mergers Also referred to as a ‘horizontal integration’, this kind of merger takes place between entities engaged
in competing businesses which are at the same stage of the industrial process. A horizontal merger takes a company a step
closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits
of this form of merger are the advantages of economies of scale and economies of scope. These forms of merger are
heavily scrutinized by the Competition Commission of India (“CCI”).
• ii. Vertical Mergers Vertical mergers refer to the combination of two entities at different stages of the industrial or
production process. For example, the merger of a company engaged in construction business with a company engaged in
production of brick or steel would lead to vertical integration. Companies stand to gain on account of lower transaction
costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater
independence and self-sufficiency.
• iii. Congeneric Mergers A congeneric merger is a type of merger where two companies are in the same or related industries
or markets but do not offer the same products. In a congeneric merger, the companies may share similar distribution
channels, providing synergies for the merger. The acquiring company and the target company may have overlapping
technology or production systems, making for easy integration of the two entities. This type of merger is often resorted to
by entities who intend to increase their market shares or expand their product lines.
 Types
• iv. Conglomerate Mergers A conglomerate merger is a merger between two entities in unrelated industries. The
principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and
increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average
cost of capital. A merger with an unrelated business also helps the company to foray into diverse businesses without
having to incur large start-up costs normally associated with a new business.
• v. Cash Merger In a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one entity receives cash
instead of shares in the merged entity. This is effectively an exit for the cashed-out shareholders.
• vi. Triangular Merger A triangular merger is often resorted to, for regulatory and tax reasons. As the name suggests,
it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is
the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and
the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives).
Merger Activities
 Pre Merger Activities
• Formulating Business Objectives
• Identifying target company
• Due Diligence
• Valuation
• MOU and confidentiality agreement
• Meeting legal requirements (Companies Act and Competition Act)
• Preparation of scheme of amalgamation
 Case Laws
• Issue – Can a company enter into merger/amalgamation without such a
specific power mentioned in MOA of the Company?
• Held – Power to amalgamate is a statutory power given to a company
expressly under Companies Act, 2013 and this power can be exercised
notwithstanding the fact that no such power to amalgamate may be expressly
mentioned in MOA of the Company
• E.I.T.A. India Ltd. Vs. Narayan Prasad Lohia (2000)
• HK Lohia V Hoolungoree Tea Co. Ltd (1970)
 Companies Act, 2013 Provisions
• Chapter XV
• Section 230 - reorganisation of the company‘s share capital
• Section 232 - Merger and amalgamation of companies
• Section 233 - Merger or amalgamation of certain companies (fast track merger)

• Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

• A draft scheme of amalgamation shall be prepared for getting it approved in Board meeting of each company.
• the transferor and the transferee company shall make an application in the form of petition to the Tribunal (along with copy of
Scheme of Merger & Amalgamation, affidavit comprising of material facts, etc.)
section 230-232 of the Companies Act, 2013 for the purpose of sanctioning the scheme of amalgamation.
• Upon hearing of the application Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions /
order as it may think necessary in respect meeting of the creditors or class of creditors, or of the members or class of members, as
the case may be, to be called, held and conducted in such manner as prescribed.
• Notices (along with documents proposed scheme, valuation report, accounts statements) for the meeting shall be issued by the
applicants to the members/creditors (class), central government, RBI etc.
• The Tribunal, after satisfying itself that the requisite procedure has been complied with, may, by order, sanction the compromise or
arrangement or by a subsequent order make provisions for necessary transfer (allotment) of shares, assets, property, liability etc
• Exit opportunity may be provided by the Tribunal to the dissenting shareholders.
• Filing of necessary documentation
 Powers of the Tribunal
• To order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such
manner as the Tribunal may direct
• To issue order regarding sanction the compromise or arrangement
• To issue an order for making provisions regarding -
• the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company
• the allotment or appropriation by the transferee company of any shares, debentures, policies or other like instruments in the company which, under the
compromise or arrangement, are to be allotted or appropriated by that company to or for any person
• the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer;
• the transfer of the employees of the transferor company to the transferee company;
• such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried
out:
• To supervise/monitor the carrying out of the proposed scheme.
• To modify/amend the scheme to achieve the best result.
• To order winding up of Company, if it is deemed to the tribunal that the scheme is not workable in the interest of the Company or its member.
 Limitations on the powers of the
Tribunal/courts

• In Miheer H. Mafatlal vs. Mafatlal Industries Ltd. Supreme Court on 11.09.1996 JT 1996 (8) 205, held
that -
• The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom
exercised by the creditors and members of the company who have ratified the Scheme by the requisite
majority. Consequently, the Company Court's jurisdiction to that extent is peripheral and supervisory
and not appellate.
• The Court cannot, therefore, undertake the exercise of scrutinising the scheme placed for its sanction
with a view to finding out whether a better scheme could have been adopted by the parties. This
exercise remains only for the parties and is in the realm of commercial democracy permeating the
activities of the concerned creditors and members of the company who in their best commercial
economic interest by majority agree to give green signal to such a compromise or arrangement.
 Duties of the Tribunal
• The sanctioning Tribunal has to see to it that all the requisite statutory procedure for
supporting such a scheme has been complied with and that the requisite meeting as
contemplated by provisions of Companies Act 2013
• 2. That the scheme put up for sanction of the Tribunal is backed up by the requisite
majority vote as required by the Act
• 3. That the concerned meetings of the creditors or members or any class of them had the
relevant material to enable the voters to arrive at an informed decision for approving the
scheme in question. That the majority decision of the concerned class of voters is just fair
to the class as whole so as to legitimately blind even the dissenting members of that class.
• 4. That all the necessary material indicated is placed before the voters at the concerned
meetings as contemplated by the Act.
• 5. That all the requisite material contemplated by the provision of the Act is placed before the Court by the
concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.
• 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision
of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a
view to satisfy itself on this aspect, the Tribunal, if necessary, can pierce the veil of apparent corporate
purpose underlying the scheme and can judiciously X-ray the same.
• 7. That the Tribunal has also to satisfy itself that members or class of members or creditors or class of
creditors as the case may be, were acting bona fide and in good faith and were not coercing the minority in
order to promote any interest adverse to that of the latter comprising of the same class whom they
purported to represent.
• 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent
men of business taking a commercial decision beneficial to the class represented by them for whom the
scheme is meant.
 Fast Track Merger
• Section 233 provides for mergers/ amalgamations outside the
• Tribunal process & this facility is available to:
•   Small companies.
•   Between holding company and WOS.
•   Such other class of companies as Central Government may prescribe.
 Procedure
• A notice should be issued to ROC, OL, Persons affected by the scheme –
inviting any objection for the proposed scheme.
• Companies shall hold respective general meetings / class meetings in which:
• The objections received, if any, shall be considered and resolved.
• Shareholders holding at least 90% of shares / class of shares shall approve
the scheme.
• Companies shall file declaration of solvency with ROC;
• Creditors meeting - scheme shall be approved by at least 90%of the total
value of creditors;
• Approved copy of scheme shall be filed with ROC and Official Liquidator;
• If ROC or OL does not have any objection – CG shall register the scheme
and issue confirmation to the companies.
• The confirmation to be issued by CG regarding:
  Dissolution without winding up;
  Effectiveness for transfer of property, liability, litigation etc. from transferor to
transferee.
• The process is time-bound – ROC/OL to object within 30 days – no
communication – presumed that they do not have any objection.
• When ROC or OL or any other person has objection –Tribunal Route will be
followed.
Power to acquire shares of shareholders dissenting from scheme or
contract approved by majority (Section 235)

• where the scheme or contract involving the transfer of a set number of shares to another
company has within 4 months of making that offer, been approved by at least 9/10th of the
shareholders, then the acquiring company needs to give a notice (Form CAA 14 Rule 26 of
CAA Rules, 2016) to the dissenting shareholders within 2 months after the expired 4 months.
• After this notice has been delivered, and the shareholder has failed to send an application to
the tribunal within 1 month of receiving that notice, then the acquiring company legally has
the right to forcefully acquire the shares of the dissenting shareholder. It shall send a copy of
the notice to the target company along with an instrument of transfer which is to be executed
on behalf of the dissenting shareholder and also pay the consideration for the same. However,
if the tribunal feels that the dissenting shareholder has a right to retain those shares, then
further proceedings will take place and the acquiring company will not be allowed to forcefully
acquire those shares.
• If the tribunal does not find substance in the dissenting shareholder’s pleadings, then it may
pronounce its judgement and allow the takeover by the acquiring company.
 Squeeze Out of Minority Shareholders
• Companies Act 2013 granted legal recognition to concept of Squeezing out Minority Shareholders
under Section 236 which is notified by Ministry of Corporate Affairs with effect from 15th December 2016.
• An acquirer entity or a person acting in concert with such acquirer holding at least 90% of the issued
equity share capital(by way of an amalgamation, share exchange, conversion of securities or any other
reason), shall notify the company of their intention to buy the remaining equity shares;
• Majority shareholders shall offer to the minority shareholders of the company for buying the equity shares
held by such shareholders at a price determined on the basis of valuation by a registered valuer;
• The section also gives opportunity to the minority shareholders to offer their holding to the majority
shareholders.
• The majority shareholders are required to deposit an amount equal to the value of shares to be acquired
by them , in a separate bank account which shall be operated by the company for payment to the
minority shareholders, however, such amount shall be disbursed to the entitled shareholders within sixty
days;
 Capital Restructuring
• Capital Restructuring as part of growth plans:
• Change in share capital by issue of shares
• Change in capital employed by issue of debentures or bonds
• Change in share capital as part of issue of sweat equity
• Change in share capital as incentive to employees by issue of stock options
• Change in share capital as part of buy-back of shares
• Restructure as part of reconstruction
 Section 23
• A public company may issue securities— (a) to public through prospectus
(herein referred to as "public offer") by complying with the provisions of
this Part; or (b) through private placement by complying with the provisions
of Part II of this Chapter; or (c) through a rights issue or a bonus issue in
accordance with the provisions of this Act and in case of a listed company
or a company which intends to get its securities listed also with the
provisions of the Securities and Exchange Board of India Act, 1992 (15 of
1992) and the rules and regulations made thereunder.
 Section 23
• (2) A private company may issue securities— (a) by way of rights issue or
bonus issue in accordance with the provisions of this Act; or (b) through
private placement by complying with the provisions of Part II of this
Chapter. Explanation.—For the purposes of this Chapter, "public offer"
includes initial public offer or further public offer of securities to the public
by a company, or an offer for sale of securities to the public by an existing
shareholder, through issue of a prospectus
 Change in share capital by issue of shares

• For raising funds shares may be issued –

• By way of a rights issue or a bonus issue by an existing company
• By private placement
• Through prospectus by a public company as public offer (For the first time
by private company desiring to be listed by conversion into public company)
 private placement through issue of a private
placement offer letter (sec 42)
• the offer of securities or invitation to subscribe securities, shall be made to such number of persons
not exceeding fifty or such higher number as may be prescribed (not more than 200 in aggregate in a
financial year) [excluding qualified institutional buyers and employees of the company being offered
securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1)
of section 62], in a financial year and on such conditions (including the form and manner of private
placement) as may be prescribed.
• All offers covered under this section shall be made only to such persons whose names are recorded by
the company prior to the invitation to subscribe, and that such persons shall receive the offer by name,
and that a complete record of such offers shall be kept by the company in such manner as may be
prescribed and complete information about such offer shall be filed with the Registrar within a period
of thirty days of circulation of relevant private placement offer letter.
The subscription money should be received only through cheque/demand draft / other
banking channels

The money received by the company against the issue of shares through private placement
should be kept in a separate bank account.

The offer value of the private placement per person should not be less than 20,000 rupees
(face value of securities) and the amount can be utilised only for allotment of the securities

Allotment of shares has to be made within a period 60 days from the date of receipt of the
application form. If the company fails to repay the application money within 15 days, interest
@12% per annum needs to be paid along with the application money.

No company offering securities under this section shall release any public advertisements or
utilise any media, marketing or distribution channels or agents to inform the public at large
about such an offer.
 Issue of sweat equity shares.—(sec 54)
• . 1) A company may issue sweat equity shares of a class of shares already issued, if the following
conditions are fulfilled, namely:— (a) the issue is authorised by a special resolution passed by the
company; (b) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to whom such equity
shares are to be issued; (c) not less than one year has, at the date of such issue, elapsed since the
date on which the company had commenced business; and (d) where the equity shares of the
company are listed on a recognised stock exchange, the sweat equity shares are issued in
accordance with the regulations made by the Securities and Exchange Board in this behalf and if
they are not so listed, the sweat equity shares are issued in accordance with such rules as may be
prescribed.
• (2) The rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares issued under this section and the
holders of such shares shall rank pari passu with other equity shareholders.
 Further issue of share capital (sec 62)
• Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue
of further shares, such shares shall be offered— (a) to persons who, at the date of the offer, are holders of
equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on
those shares by sending a letter of offer subject to the following conditions, namely:—
• the offer shall be made by notice specifying the number of shares offered and limiting a time not being less
than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not
accepted, shall be deemed to have been declined;
• unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right
exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any
other person; a
• after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the
person to whom such notice is given that he declines to accept the shares offered, the Board of Directors
may dispose of them in such manner which is not disadvantageous to the shareholders and the company
 Sec 62(1)(b)&(c )
• Where at any time, a company having a share capital proposes to increase its
subscribed capital by the issue of further shares, such shares shall be offered—
• to employees under a scheme of employees‘ stock option, subject to special
resolution passed by company and subject to such conditions as may be prescribed;
• to any persons, if it is authorised by a special resolution, whether or not those
persons include the persons referred to in clause (a) or clause (b), either for cash or
for a consideration other than cash, if the price of such shares is determined by the
valuation report of a registered valuer subject to such conditions as may be
prescribed.
 Issue of bonus shares (sec 63)
• A company may issue fully paid-up bonus shares to its members, in any manner whatsoever,
out of— (i) its free reserves; (ii) the securities premium account; or (iii) the capital
redemption reserve account: Provided that no issue of bonus shares shall be made by
capitalising reserves created by the revaluation of assets. (2) No company shall capitalise its
profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section
(1), unless— (a) it is authorised by its articles; 52 (b) it has, on the recommendation of the
Board, been authorised in the general meeting of the company; (c) it has not defaulted in
payment of interest or principal in respect of fixed deposits or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees, such
as, contribution to provident fund, gratuity and bonus; (e) the partly paid-up shares, if any
outstanding on the date of allotment, are made fully paid-up; (f) it complies with such
conditions as may be prescribed. (3) The bonus shares shall not be issued in lieu of
dividend.
 Buyback(section 68)
• Buy-Back of shares is a process by which the company purchase
it’s shares from the existing shareholders usually at a price higher
than the market price. It is the option available to the shareholders
to take exit from the company’s business.

• Sections 68 to Section 70 of the Companies Act, 2013 and Rule 17

of the Companies (Share Capital and Debentures) Rules, 2014
deals with buy-back of shares.
The sources of Buy-Back of shares are as follows:
•Proceeds of any specified security
•Securities Premium Account
•Free Reserves

•It must be authorised by articles if not then alter the articles accordingly.

•If the buy-back is equal or less than 10℅ of total paid up equity capital and free reserves, then it must
be authorised by Board Resolution and in case it is equal to or less than 25℅ of total paid up capital
and free reserves then pass special resolution for it.

•No further buy-back can be made for a period of 1 year from preceding buy-back.

•Buy-back of equity shares in any financial year should not exceed 25℅ of the total paid-up equity
capital of the company. A company can buy-back its entire securities other than equity shares as may
be notified by the CG, in a financial year, subject to the overall limit of 25℅ of the total paid up capital
and free reserves of the company.
• the ratio of the aggregate of secured and unsecured debts owed by
the company after buy-back is not more than twice the paid-up capital and
its free reserves.
•Bought back share should be fully paid up else first make it fully paid and then buy-back.
•A declaration of solvency is required to be filed by the company in Form No. 4A with ROC
and SEBI.
•The bought back securities should be physically destroyed within 7 days of completion of
buy-back.
•The company shall not issue share of the same class after making such buy back for 6
months unless in case of bonus issue, in discharge of already existing obligation, conversion
of warrants, sweat equity or of preference shares or debentures into equity shares.
•Register of bought back securities should be maintained in form SH-10.

•File the return of bought back securities in form SH-11 with ROC

•In case of default in complying with the provisions of Sec 68 the company or any officer in
default shall be punishable with imprisonment extends to maximum 3years or fine of
₹100000 to ₹500000 or both.
 Prohibition on Insider Trading
It involves the abuse of unpublished price sensitive information possessed by key managerial
persons or directors of a company, or any other person who has such information and indulges in
buying, selling or trading in securities based on such unpublished price sensitive information.

SEBI Act also explicitly prohibits Insider trading in securities of listed companies as provides in
Section 12-A.
Penalty is imposed under Section 15 G of the SEBI Act, 1992 on any person who violates or
contravenes provisions of Section 12-A (twenty-five crore rupees or three times the amount of profits
made out of insider trading, whichever is higher.)

SEBI exercised the power vested in it under Section 30 of the Act and framed the SEBI (Prohibition
of Insider Trading) Regulations, 1992. It provided more comprehensive regulations and manner for
dealing with the menace of insider trading.
 Cross Border Merger
A cross border merger explained in simplistic terms is a merger of two companies which are
located in different countries resulting in a third company

Cross border merger and acquisitions are of two types Inward and Outward.
Inward cross border M&A’s involve an inward capital movement due to the sale of an
domestic firm to a foreign investor (Daichii Acquiring Ranbaxy)

Outward cross border M&A’s involves outward capital movement due to purchase of a
foreign firm (Tata steel Acquires Corus)
The state where the origin of the companies that makes an acquisition is also termed as
the acquiring company (In other countries, it is referred to as the Home Country).
The country where the company to be acquired or where the target company is situated is
referred to as Host country.
 Inbound Merger

For inbound merger, the resultant company can transfer any security including a foreign security
to a person resident outside India in accordance with the provisions of FEMA (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2017.

The resultant company is allowed to open a bank account in foreign currency in the overseas
jurisdiction for a maximum period of 2 years in order to carry out transactions pertinent to the
cross-border merger.

An office/branch outside India of the foreign company shall be deemed to be the resultant
company’s office outside India for in accordance with the Foreign Exchange Management
(Foreign Currency Accounts by a person resident in India) Regulations, 2015.
 Outbound Merger

For outbound merger, for the securities being issued to persons resident in India, the acquisition
should be compliant with the Overseas Direct Investment Regulations. Securities in the resultant
company may be acquired provided that the fair market value of such securities is within the limits
prescribed under the Liberalized Remittance Scheme.

The resulting foreign company can now open a Special Non-Resident Rupee Account in terms of
the FEMA (Deposit) Regulations, 2016 for a period of 2 years to facilitate the outbound merger.

An office of the Indian company in India may be treated as the branch office of the resultant
company in India in accordance with the Foreign Exchange Management (Establishment in India of
a branch office or a liaison office or a project office or any other place of business) Regulations,
2016.
 Procedure Section 234
• The provisions of this Cross border merger unless otherwise provided under any
other law for the time being in force, shall apply mutatis mutandis to schemes of
mergers and amalgamations between companies registered under this Act.
• Subject to the provisions of any other law for the time being in force, a foreign
company may with the prior approval of the Reserve Bank of India, merge into a
company registered under this Act or vice versa.
• And, the terms and conditions of the scheme of merger may provide, among other
things, for the payment of consideration to the shareholders of the merging company
in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts,
as the case may be, as per the scheme to be drawn up for the purpose.
 ADR/GDR
• ADR and GDR are commonly used by the Indian companies to
raise funds from the foreign capital market. The principal
difference between ADR and GDR is in the market; they are issued
and in the exchange, they are listed. While ADR is traded on US
stock exchanges, GDR is traded on European stock exchanges.
• Depository Receipt is a mechanism through which a domestic
company can raise finance from the international equity market.
Indian companies are allowed to raise capital in the international market through the issue of
ADRs/GDRs. They can issue ADRs/GDRs without obtaining prior approval from RBI if it is eligible
to issue ADRs/GDRs in terms of the Scheme for Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent
guidelines issued by Ministry of Finance, Government of India.

An ADR is quoted in US dollars and one ADR represents a certain number of equity shares in the
Indian company. The foreign investors can then directly buy and sell the ADRs as if they were the
shares of a foreign corporation. If the investor wants he can convert the ADR into the equivalent
number of underlying equity shares. The ADR would then be cancelled as it would be converted
into the equity shares.
The issues and challenges in cross
border merger
The issues and challenges are discussed below:
 Demerger

• A demerger can be defined as the transfer of a company’s business undertakings to

another company. The source company, i.e., the company whose undertakings are
being transferred is called the demerged company. The other company is often
known as the resulting company.
• As per Section 2(19AA) of the Income Tax Act, 1961 means the transfer, by a demerged
company of its one or more undertakings to any resulting company in such a manner that-
• (i) 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;
• (ii) all the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the resulting
company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at values appearing in its books of account immediately
before the demerger;

(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders
of the demerged company on a proportionate basis except where the resulting company itself is a
shareholder of the demerged company;

(v) the shareholders holding not less than three-fourths in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by a
nominee for, the resulting company or, its subsidiary) become shareholders of the resulting
company or companies by virtue of the demerger, otherwise than as a result of the acquisition of
the property or assets of the demerged company or any undertaking thereof by the resulting
company;

vi) the transfer of the undertaking is on a going concern basis;

 Modes of Demerger
• Demerger May Be Partial Or Complete.
Partial demerger results when a part/department/division of
company is separated and transferred to one or more new
company/companies formed with the same shareholders allotted
shares in new company in same proportion as held by them in the
demerged company. 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.
Demerger could be effected by either of the three ways, viz.

(i) Demerger by agreement between promoters; (It may be effected by agreement where
under the demerged company spins off its specific undertaking to a resulting company, formed
with another names in such a manner that all the property and all the liabilities of the undertaking,
being transferred by the demerged company immediately before the demerger, becomes the
property and liabilities of the resulting company by virtue of demerger. The resulting company
issues, in consideration of the demerger, its shares to the shareholders of the demerged
company on a proportionate basis)or

(ii) Demerger under the scheme of arrangement with approval by the court under section
230 of the Companies Act, 2013;

(iii) Demerger under voluntary winding up and the power of liquidator- A Company, which
has split into several companies after division, can be wound up voluntarily pursuant to the
provisions of Companies Act, 2013.
 Types of Demerger
• Spin off: When a division or a line of business of a conglomerate company ends up becoming a
separate entity. Under a spin-off, shareholders of the parent companies are offered direct holding in
the subsidiary and the parent company ceases to hold any shares in the new entity. 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: when a conglomerate may want to split its businesses into separate companies. 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: when 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

• Equity Carve out: when a company may sell some portion of its equity stake in a subsidiary
company to a third party or to a strategic investor.

While spin-offs and splits do not constitute a sale to an external party, an equity carve-out
results in the infusion of cash but spinoffs and splits do not.

Secondly, the carved out unit becomes part of another company i.e. it does not remain an
independent unit under the aegis of the parent company.
• Divestment/ Divesture : Divestment is the process of selling subsidiary
assets, investments, or divisions of a company in order to maximize the
value of the parent company. Also known as divestiture, divestment is
effectively the opposite of an investment and is usually done when that
subsidiary asset or division is not performing up to expectations.
• Slump Sale: Slump sale is the transfer of a business undertaking or some
division of a company or entity to another entity as a going concern basis
on an as-is-where-is basis for a lump sum amount as consideration. A
going concern basis basically means that an entity will remain in
business in the near future.
 Reasons for Demerger
• To focus on core competencies
• To separate loss making entities
• To unlock the potential of a growing and self sufficient unit (Marico Ltd demerged
the skin care business, as it had grown considerably and was becoming an important
vertical for group interests distinct from the core business of the Marico that is
FMCG)
• To create value for shareholders
• To undergo debt restructuring
• to leverage idle capacity and in streamline operations.
• Listing of subsequent company
 Tax implications

• If a demerger satisfies the conditions laid down by the IT Act then the whole
demerger transaction is tax neutral.
• By the virtue of Section 47(vib) of the Income Tax Act, any transfer in a demerger
of a capital asset by the demerged company to the resulting Indian company is not
regarded as a transfer and therefore does not attract capital gains tax.
• Section 2(22)(v) of the Income Tax Act states that any distribution of shares
pursuant to a demerger by the resulting company to the shareholders of the
demerged company is not considered as the dividend.
• By the virtue of Section 72A loss and unabsorbed depreciation of the demerged
company can be carried forward by the resulting company in case it is directly
related to the undertakings transferred in the demerger.
 Process of Demerger
• Preparation of the Arrangement Scheme
• Application to the court for holding a meeting
of members/creditors
• Obtaining a Tribunal’s order for a meeting of member/creditors
• Holding meeting of members/creditors after due compliances
• Petition to the Tribunal to sanction the scheme of demerger
• Tribunal’s order on sanctioning the scheme of demerger received
 Corporate Debt Restructuring

• Corporate debt restructuring is the reorganization of a distressed company's

outstanding obligations to restore its liquidity and keep it in business. It is often
achieved by way of negotiation between distressed companies and
their creditors, such as banks and other financial institutions, by reducing the
total amount of debt the company has, and also by decreasing the interest rate
it pays while increasing the period of time it has to pay the obligation back.
• Occasionally, some of a company's debt may be forgiven by creditors in
exchange for an equity position in the company. Such arrangements, which
often are the final opportunity for a distressed company, are preferable to a
more complicated and expensive bankruptcy.