Demergers

INTRODUCTION

Today the economic dynamics of the world are changing at a mind boggling pace. In today’s economy, the path that majority of companies are preferring to take, so as to increase their profits and streamline their functioning is mergers and demergers.

The Prime Minister’s Council of Trade lists the process of merger and demerger as one of the keys to reinvigorate the ailing PSUs and energize the economy of the nation. This has been a conscious aim at this right from the time of the economic liberalization of our nation started way back in the early 1990s

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CONCEPT

There is a common misconception amongst the corporate world that demerger and hiving-off are similar as far as the Indian corporate scenario is concerned, and hence, undertaking corporate restructuring 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 this view 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 on the various provisions of Indian company law, Indian tax law and judicial decisions to conclude that these two concepts are significantly different on various points such as how the consideration is to be paid and proportioned, how the assets would be valued, how the depreciation will be carried forward to the investing partner and what would be the cost of assets in the hands of the investor, depending on whether the transaction is a demerger, or hiving-off. The article recommends 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 financial advantages as well as undertaking the correct required procedural compliances.

MEANING

Demerger is a form of corporate restructuring in which the an entity's business operations are segregated into one or more components.[1] It is the converse of a merger or acquisition.

A demerger can take place through a spin out by distributed or transferring the shares in a subsidiary holding the business to company shareholders carrying out the demerger. The demerger can also occur by transferring the relevant business to a new company or business to which then that company's shareholders are issued shares of.[1]

Demergers can be undertaken for various business and non-business reasons, such as government intervention, by way of anti-trust law, or through decartelization.[2]

 Demergers: overview

Resource type: Practice note: overview

Status: Maintained

Jurisdiction: United Kingdom

A demerger is the segregation of business activities into one or more companies or groups of companies. This note considers the following demerger structures: a direct demerger/straight dividend, an indirect or three cornered demerger, an indirect or three cornered reduction of capital, a section 110 liquidation scheme and a Part 26 scheme.

For summaries and comparisons of recent demergers, see What's Market: demergers.

Demerger: Executive SummaryBy a demerger, a (transferring) company assigns all of its assets and liabilities, or

a part thereof, to one or several (acquiring) companies. As a mandatory

consideration for this assignment, each shareholder or partner of the transferring

company receives a corresponding share (including voting rights) in the acquiring

company or companies. Conversely, the simple transfer of assets and liabilities

does not imply a transfer of voting rights in the acquiring company. And in

contrast to a merger, no compensation payment may be offered.

The Merger Act allows demergers for share corporations, corporations with

unlimited partners, limited liability companies (“GmbH”), as well as for

cooperatives. These legal entities may function as transferring as well as

acquiring companies. Companies of different legal forms may be involved: Thus,

a corporation may split, for example, into a limited liability company and a

cooperative. For all other forms of entities, a transfer of assets is the most suited

resource to fall back on when a demerger is legally not allowed.

Demergers are not simply the opposite of mergers, although the name might

imply it and although their explication is sometimes reduced to that term. In fact,

due to the many structuring forms demergers can take (see right below), they are

usually far more complex and can be very demanding in detail.

For setting up the demerger transaction, possible choices exist with respect to

three criteria (see a-c):

a) Future of the transferring company:

Split-up (“Aufspaltung”): The transferring company may split all its assets and liabilities into two or more parts and may transfer these to other companies, in which the shareholders or partners of the transferring company receive a corresponding share, including voting rights. At this stage, the transferring company is left without any assets and liabilities; it is dissolved (without being formally liquidated) and deleted from the Commercial Register.

Spin-off (“Abspaltung”): Alternatively, the transferring company may split only a part of its assets and liabilities to one or several other companies, in which the shareholders or partners of the transferring company receive a corresponding share including voting rights. The transferring company continues to exist with some of its original assets

and liabilities since not all assets and liabilities are disposed of.

b) Existing or newly established acquiring company:

The assets and liabilities may be transferred to already existing acquiring companies (so-called demerger for takeover).

The assets and liabilities may be transferred to companies newly established in the demerger (so-called demerger with establishment of a new company). In doing so, the specific provisions regulating the formation in the company law must be observed.

c) Allocation of the shares, including voting rights:

Upon symmetric (pro rata) demerger, the shareholders or partners of the transferring company receive shares, including voting rights, in the acquiring company that correspond to their prior participation in the transferring company.

Upon asymmetric (non-pro-rata) demerger, the shareholders or partners of the transferring company receive a share, including voting rights, in all acquiring companies or only in a single acquiring company, changing their proportional ownership interests. Here, their share and voting rights may be modified and thus will no longer correspond to their prior participation in the transferring company. An extreme case is an asymmetric (non-pro-rata) demerger in which only certain members of the transferring legal entity receive shares in the acquiring company and then surrender their shares in the transferring legal entity.

All these options can be combined and varied. There can be made, for example, an asymmetric spin-off for takeover. Based on this variety, a demerger may be designed according to the individual needs of the parties, keeping in mind the structural adjustments of the involved company or companies.

Upon entry into the Commercial Register, the demerger becomes legally effective, and the transferred assets and liabilities automatically pass to the acquiring company. The specific regulations for the transfer of single assets or liabilities (such as notarised registration of the sale of real estate) do not apply. As a matter of practicality and to facilitate the structural adjustments intended by the Merger Act, one may assume an automatic transfer of all the company’s other legal relationships, including contracts with third parties.

Unlike the transfer of assets and liabilities, the demerger includes a transfer of not only pecuniary, but also of membership rights: The shareholders or partners of the transferring company receive from the acquiring companies corresponding shares and voting rights. As opposed to mergers, the acquiring company, in a

demerger transaction, may not make a compensation payment instead of granting a share and voting rights. Equalization payments not to exceed 10% of the actual value of the shares issued, however, are allowed. Upon asymmetric demergers, the membership continuity is limited since it allows an allocation of shares or voting rights, which may not correspond to the pre-existing allotment in the transferring company. Thus, the shareholders or partners may receive shares and voting rights in acquiring companies, which, however, may differ from their relative share and voting power in the transferring company.

As a rule, the demerger is connected with a capital reduction of the transferring company. Upon demerger for takeover, the acquiring companies will very often have to increase the capital, whereas during the demerger with establishment of a new company, the formal requirements to establish the company form chosen by the parties shall always be observed.

Procedurally, a demerger requires the following documents and decrees:

Based on the most recent financial reports, the executive bodies of the involved companies – as basis of the demerger – shall establish in writing a demerger agreement or a demerger plan. Demerger with establishment of a new company is an unilateral legal act of the executive body of the transferring company, since there does not yet exist a counterparty. Therefore, a demerger plan is different from a bilateral demerger agreement to which the executive body (or bodies) of the acquiring company (or companies) shall agree. The content of the demerger agreement or demerger plan is, to a large extent, legally stipulated.

The assets and liabilities to be transferred shall be listed and specified in an inventory. The items being transferred must be described so that they can be clearly allocated. Real estate, securities, and intangible assets must always be itemised. The assets being transferred need not qualify as a business; individual assets, for example a patent, can also be transferred. Particular default rules govern the distribution of unallocated assets and liabilities.

The employment contracts being transferred with the demerger shall be specified in a list. The primary weight of this list lies with the allocation of employment contract liabilities among the demerger parties and not with the significance for the employees, since the merger act refers quite generally to art. 333 CO regarding transfers of employment relationships.

In a common or in separately edited and written demerger report(s), the executive bodies of the involved companies shall explain and clearly state the reasons for the planned transaction. Here again, the minimum contents of the report are legally stated. The legal entities may prepare a joint

report.

Balance sheet(s), demerger agreement (or demerger plan), and demerger report(s) shall be audited by a specially qualified auditor. The legal entities involved may appoint a joint auditor. The auditor is required to issue a report expressing an opinion on various matters, for example: whether the exchange ratio is reasonable, whether the methods used to arrive at the exchange ratio are sound, and why the specific method is applied. The auditor, however, does not have to confirm that the transaction and specifically the exchange ratio is “right or wrong.”

The demerger agreement or demerger plan, demerger report(s), and audit report(s) shall then be disclosed and made available to the shareholders’ inspection at the corporate domiciles of the involved companies. The shareholders are entitled to inspect the demerger documents for 2 months (30 days longer than with a merger or a transformation). The right of inspection shall allow an informed decision of the shareholders on the demerger and, therefore, must take place before the general meeting passes a resolution on the demerger.

Finally, the general meeting shall resolve all issues regarding the demerger. The supreme governing and administrative bodies involved, however, may not submit the demerger agreement (or demerger plan) to the general meeting for a resolution until the creditor protection procedure (see below) has been completed. The demerger resolution must be notarised. The necessary majorities/quorums are stipulated in the Merger Act; they notably depend on whether there will be additional duties imposed on the shareholders (which requires their unanimous consent). Because an asymmetric merger breaches, or at least endangers the principle of membership continuity, 90% of the members of the transferring entity must approve such form of demerger.

The demerger takes legal effect with the entry into the Commercial Register. Upon split-up, the transferring company is simultaneously deleted. At this moment, all the assets contained in the inventory are automatically and legally transferred by universal succession to the receiving entity.

Unlike mergers, demergers deprive the transferring company’s creditors of a part of the hitherto existing assets to cover the liabilities. Because of this increased risk for the creditors, the legal validity of the demerger is partly subject to protective measures, part of which are pre-transaction safeguards:

The creditors shall be informed about the planned demerger by notification, published three times in the Swiss Commercial Bulletin (call to the creditors for the filing of claims). This is a prerequisite for the

shareholders’ demerger resolution, which can only take place two months after the last one of the three publications.

The creditors may ask for security collateral prior to the resolution of the general meeting. Security need not be provided if evidence can be presented to show that a claim is not compromised.

In addition, all companies participating in the demerger are subject to a secondary, joint and several liability. Moreover, all personally liable partners of the transferring company remain liable for claims which may have been reallocated by the demerger itself. Analogous protection provisions also exist for the employees’ claims. In addition, the transfer of employees is subject to special rules.

Finally, the Merger Act provides the possibility of simplified procedures for small and medium-sized enterprises (SME): such enterprises may opt to neither prepare a demerger report, appoint an auditor nor grant a right of document inspection. This dispensation, however, is conditional on the approval of all members.

The provisions regulating demergers can be found in articles 29 – 52

Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the ‘demerging entity’.

The entity that emerge have its own board of directors and, if listed on a stock exchange, have separate listings. The purpose DemergerThe expression ‘Demerger’ is not expressly defined in the Companies Act, 1956. However, it is covered under the expression arrangement, as defined in clause (b) of Section 390 of Companies Act.Division of a company takes place when1. Part of its undertaking is transferred to a newly formed company or an existing company and the 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 owned indirectly (the ‘demerged entity’). 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.

Tax Aspect:Definition of demerger U/s Section 2(19AA) of the Income Tax Act:The definition of 'demerger' as given under Section 2(19AA) of the Income Tax Act is unduly restrictive, and subject to various conditions. Some of the conditions mentioned are: 1. The first condition is that all the property of the undertaking should become the property of the resulting company. 2. Conditions of Sec 391 to Sec.394 should be satisfied.3. Similarly, all the liabilities relating to the undertaking immediately before the demerger should become the liabilities of the resulting company.

4. Explanation 2 provides that not only identified liabilities should be transferred to the resulting company, but also general borrowings in the ratio of the value of the assets transferred to the total value of the assets of the demerged company. 5. Assets and liabilities have to be transferred at book value.

Compliance With SEBI  RegulationsThe SEBI (Disclosure and Investor Protection) Guidelines do provide certain disclosures needed for protecting the investors. No specific guidelines are presently there. However, in SEBI Press Release 311-2003 dated December 17, 2003, it has been proposed by SEBI to enforce appropriate disclosures in case of demerger as in the case of amalgamation.

Hiving Off The Business/Sale Of UndertakingThe term ‘Undertaking’ as interpreted in the present context means a unit, a project or a business as a going concern. It does not include individual assets and liabilities or any combination thereof not constituting a business activity.

Under a sale as a going concern, the rights, liabilities and obligations of all the affected parties (eg. debtors, creditors, employees etc.) are protected. It provides for the continuation of the running of the undertaking without any interruption.

Precautions to be taken by buyer: in a going concern principle the buyer inherits both benefits and liabilities from the ongoing contracts that may arise at a later date even with respect to past transactions. There should be clear provisions in the sale agreements fixing the responsibilities of the parties in this behalf

Legal Aspects Of Hiving Off:Memorandum of Association:Transferor Company: The MOA of the company shall contain a provision empowering the company “to sell or dispose off the whole or any part of the undertaking, or of any of the undertaking of the company”. If there is no provision in that regard, then the MOA can be amended under section 17 of the Companies Act by passing a special resolution.

Transferee Company: The objects clause of the transferee company shall also contain such a provision for carrying on the business that it seeks to acquire. However it is not necessary that the objects of the two companies should be in unison.

Consent of the Creditors:The company needs to take consent of high value creditors in writing, if the assets on which the loans were raised are transferred (as a part of the industrial undertaking). Only then the loans can be transferred or the assets can be released from the charge.

Mode of payment of consideration:The consideration for the transfer of the business/undertaking can take any one of the following forms:# Shares;# Shares and Bonds;# Cash.

Tax ImplicationsCapital Gains in the hands of transferor:The provisions of Section 50B of the Income Tax Act, 1961 provide for the computation of Capital Gains in case of slump sale.

If the undertaking or division has been held by the transferee for more than 36 months: Any profits or gains arising from the slump sale effected in the previous year shall be chargeable as long term capital gains and shall be deemed to be the income of the previous year in which the transfer took place.

If the undertaking has been owned and held by the transferor for not more than a period of 36 months, the capital gain arising out of such a slump sale shall be treated as short term capital gains.

Accumulated loss/Depreciation:In case of slump sale the unabsorbed depreciation or losses can be carried forward only in the hands of the transferor and unlike in the hands of the transferee in case of demerger.

Depreciation post slump sale:The purchaser can claim depreciation on the basis of fair apportionment of total consideration as described earlier.

Demerger Vs. Hiving - Off1. Consideration:In case of Hiving- off, the payment of a lump sum sale consideration is required in respect of transfer of an undertaking by slump sale in demerger the resulting Co. issues, in consideration of the demerger, it shares to the shareholder of the demerged Co. on a proportionate basis

2. Valuation Of Asset:In Hiving- off values are not assigned to individual assets and liabilities of the undertaking, whereas in case of demerger, the assets and liabilities of the demerged Co. are transferred at the value appearing at the books of accounts immediately before the demerger to the resulting Co.

3. Carry Forward Of Depreciation: In Hiving- off unabsorbed depreciation/loss can be carried forward only by a transferor Co, whereas in the case of demerger, the resulting Co. avails the benefit of such depreciation/loss.

4. Cost of Assets in Hands of the Transferee:In a slump sale, to determine the actual cost of assets transferred, the lump sum consideration received is apportioned in fair and reasonable manner among the assets, whereas in the case of demerger the assets are valued at the book value as appearing in the books of transferor.

Mergers And Demergers:

 

Integration decisions are often justified by the synergies they create. Synergies exist when assets are worth more when used in conjunction with each other than separately. Synergies of some form are essential for integration to be successful. Integration offers little or no benefit when they do not exist.[ [Hitt et al (2001); 47]

 DEMERGER is the exact opposite of the concept of merger.The definition of the term is provided in the IT Act, 1961 and it refers to the sections 391 and 394 of the Companies Act, 1956. As per the section 2(19AA) of the IT Act, it is a compromise restructuring process by which one or more undertakings of  a company are transferred to another, usually the subsidiary of the demerging company.  All the property as well as the liability of the demerging company, becomes the property of the resulting company and are transferred at values appearing in its books of account just before the demerger. The shareholders who hold not less than three fourth

of the shares of the demerged company become the shareholders of the resulting company

REASONS OF DEMERGER

This occurs in cases where dissimilar business are carried on within the same company, thus becoming unwieldy and cyclical almost resulting in a loss situation. Corporate restructuring in such situation in the form of demerger becomes inevitable. Merger of SG chemical and Dyes Ltd. with Ambalal Sarabhai enterprises Ltd. (ASE) has made ASE big conglomerate which had become unwieldy and cyclic, so demerger of ASE was done.

A part from core competencies being main reason for demerging companies according to their nature of business, in some cases, restructuring in the form of demerger was undertaken for splitting up the family owned large business empires into smaller companies.

The historical demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units splitting through demergers. Such demergers are accordingly, more in the nature of family settlements and are affected through the courts order.

Thus, demerger also occur due to reasons almost the same as mergers i.e. the desire to perform better and strengthen efficiency, business interest and longevity and to curb losses, wastage and competition. Undertakings demerge to delineate businesses and fix responsibility, liability and management so as to ensure improved results from each of the demerged unit.

 

LEGALITIES OF DEMERGERS:

 The courts also have a certain limit to their powers to exercise their jurisdiction which have essentially evolved from their own rulings. For example, the courts will not allow the merger to come through the intervention of the courts, if the same can be effected through some other provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if there was something that the parties themselves could not agree to; also, if the merger, if allowed, would be in contravention of certain conditions laid down by the law, such a merger also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of writs to entertain an appeal over a matter that is otherwise “final ,conclusive and binding” as per the section 391 of the above act.

 

 

demergers and the jurisdiction of the court :

The courts have the power to order or sanction for  the demerger of a company as per the section 394(1)(b)(i) of the Companies Act, 1956. The scheme of arrangements can bring before a court the scheme of arrangements that can be termed as a demerger. The application of chapter V of part VI of the Companies Act has all the advantages of a merger and the transferor company is allowed to sell the property but without having to bear the brunt of stamp duty, capital gains etc. Demergers are also dealt with under the sections 391 to 394 of the Companies Act.

TYPES OF DEMERGERS

 The demergers may be of two types - split-up and spin-off. Though, technically the split-ups and spin-offs are different, the economic substance of the two is same.

Split-up DemergersIn case of the split-up demergers, the company is split into two or more than two independent companies. In this case no trace of the parent company as a corporate entity is left and its place is taken by two or more independent companies.

Spin-off Demergers

In case of the spin-off demergers, a unit or a division of the company is spun off into another independent company. Following the spin-off demerger, the spun off company and the parent company form two different corporate entities. Both the split-up demergers and spin-off demergers are considered as the measures to improve the corporate value of the parent and new companies by raising performance and efficiency.

SCHEME OF DEMERGER:

The demerger of a company follows almost the same rules as are applicable to the merger of a company. A demerger is also an arrangement under the section 390 of the Act as it defines the demerger of the company in terms of the division of the shares of the company.The framing of the scheme for the demerger of the company  derives from the sections 390 to 396A of the Companies Act, 1956. The demerger must have the approval of the court apart from the approval of all the people concerned with the company.

 

PROCEDURE OF DEMERGER:

As per the companies act, the sale of the whole or the part of a company follows a two pronged process for the demerger of the said company  the first step of which would entail the approval of the entire process by the company’s board of directors and then by obtaining the necessary approval of the shareholders at a general meeting of the company by passing a special resolution and the resulting company has to ensure that the objects it now has include the carrying on of the business that it sought to prior to the demerger of the company. This process  of the company’s demerger should confirm to the provisions of either the section 293(1)(a) or sections 391 to 393 of the Companies Act.

However, the procedure as per the above act cannot be considered as a demerger as per the provisions of the IT Act in a holistic and definite manner. The section 2(19AA) applies to the process of demerger as per which the it is a compromise restructuring process by which one or more undertakings of  a company are transferred to another, usually the subsidiary of the demerging company.  All the property as well as the liability of the demerging company, becomes the property of the resulting company and are transferred at values appearing in the former’s books of account just before the demerger. The shareholders who hold not less than

three fourth of the shares of the demerged company become the shareholders of the resulting company 

 STEPS For Demerger:1. Demerger forms part of the scheme of arrangement or compromise within the ambit of Section 390, 391, 392, 393, 394 besides Sec 394A

2. Demerger is most likely to attract the other provisions of the companies Act, envisaging reduction of Share capital comprising Sec. 100 to 105

3. The company is required to pass a special resolution which is subject to the confirmation by the court by making an application.

4. The notice to the shareholders convening the meeting for the approval will usually consist of the following detail:(a) Full Details of the scheme(b) Effect of the scheme on shareholders, creditors employee(c) Details of the valuation Report

5. An application has to be made for approval of the High Court for the scheme of arrangement

6. It is necessary that the Articles of Association should have the provision of reduction of it’s Share Capital in any way, and its MOA should provide for demerger, Division or split of the Company in any way. Demerger thus, resulting into reduction of Companies share capital would also require the Co. to amend its MOA.

SIGNIFICANCE: Why Firms take the demerger route

India Inc has been bitten by a demerger bug. A large number of listed companies have announced plans to hive off a part of their business to unlock value, attract investors and take tax benefits ahead of proposed changes in taxation rules.

According to stock exchange data, companies that have announced demerger plans since the beginning of this year include Transport Corporation of India, Triveni Engineering & Industries, Dalmia Cement Bharat, Texmaco, Bilpower, Harrisons Malayalam, ETC Networks and Rain Commodities. Demergers are a form of corporate restructuring in which a business segment within the group is hived off and made into a separate legal entity. It is often opted for by diversified business conglomerates that would like to have each business operate as a separate legal entity. Companies opting for this avenue cite reasons such as increased management focus,

flexibility in fund-raising and creating value for shareholders that want to bet on individual businesses of the group.

Pankaj Kapoor, managing director, Harrisons Malayalam, said demerged units gave investors an option to invest in operational companies rather than purely holding ones. “Many old listed entities are only holding companies created to ensure the promoter holding remains at comfortable levels. Investors of such companies are dependant on dividend income. Demergers help companies create operational entities wherein potential investors can invest,” said Kapoor. Harrisons Malayalam plans to demerge its investment undertaking into Sentinel Tea and Exports.

Another reason for a surge in such instances is the proposed changes to Section 56 of the Income Tax Act which, once implemented, will make the consideration received in kind by a company from its parent or a subsidiary taxable as income from other sources. One view held by tax experts is that this may cover demergers, although this is debatable. Market participants are quick to point out the advantages of demergers from a tax perspective and also from an investor point of view.

“Demerger is a very tax-efficient manner of separating business,” said Girish Nadkarni, executive director, Avendus Capital. “If you sell or transfer your business, the capital gains tax comes into play. Demergers also help expand independent businesses of the group,” said Nadkarni.

Also, “demergers typically happen when investors are interested in investing in a business unit of a company, but not in the company as a whole”, said Akil Hirani, managing partner, Majmudar & Co.

“The demerged entity becomes the subsidiary of the company, and a demerger, if it complies with the provisions of income tax laws, will be tax-neutral. The investor then buys the shares of the demerged subsidiary from the company. Subject to compliance of income tax provisions, the demerged entity may be eligible to carry forward losses from previous years,’ said Hirani. Triveni Engineering says demerger of Triveni Turbine will lead to “focused management orientation, opportunities for strategic partnerships, flexibility for fund-raising, capability for future growth and expansion.” Rain Commodities said hiving off the cement business would enable “possible induction of joint venture partners in the future and to pursue value-accretive acquisitions”.

demerger should confirm to the provisions of either the section 293(1)(a) or sections 391 to 393 of the Companies Act.

However, the procedure as per the above act cannot be considered as a demerger as per the provisions of the IT Act in a holistic and definite manner. The section 2(19AA) applies to the process of demerger as per which the it is a compromise restructuring process by which one or more undertakings of  a company are transferred to another, usually the subsidiary of the demerging company.  All the property as well as the liability of the demerging company,

becomes the property of the resulting company and are transferred at values appearing in the former’s books of account just before the demerger. The shareholders who hold not less than three fourth of the shares of the demerged company become the shareholders of the resulting company

 

ECONOMIC ASPECTS WITH SOME EXAMPLES:

Indian – Air India merger that was mulled by the government was with the view to consolidate the position of the Indian state run aviation behemoths so that they compete in the highly competitive global markets. The aim was “one company, one culture.”  The purpose behind the

DEMERGERS IN THE PRIVATE SECTOR:

The demerger of the Reliance group is by far the biggest corporate restructure story in the private sector. The split in the group led to the formation of the two independent entities Reliance Industries ltd. led by Mr. Mukesh Ambani and  the Anil dhirubhai Ambani Group led by the younger brother Mr. Anil Ambani  

.

 RIL has proposed the demerger “in order to enable distinct focus of investors to invest in some of the key businesses and to lend greater focus to the operation of each of its diverse businesses”. The explanatory statement says that “with a view to achieve greater management focus and keeping in mind the paramount and overall interests of the shareholders” of RIL…, the board of directors “believe that Shri Anil D. Ambani… will provide such focused management attention and leadership to the financial services, power and telecom businesses… and Shri Mukesh D. Ambani… will continue to lead the other businesses including petrochemicals, oil and gas exploration and production, refining and textiles and other businesses comprising the Remaining undertaking…”

In the past several body corporates have opted for the demerger route. Eveready Industries separated its tea business into McLeod Russell; Auto ancillary company Rane Madras transferred its investments into separate company and the investment company was also listed. The demerger list also includes Vardhman Spinning and Morarjee Realities. GTL is demerging its IT infrastructure business to GTL Infrastructure.

 

DEMERGERS IN THE PUBLIC SECTOR:

Though it is one of the fundamental pillars of the government’s policy to streamline the entire economy, this mode of corporate restructure has not however been exploited the way it ideally should have been. It prominently features on the government’s plans and visions for the

restructuring of the economy. Therefore, when fully exploited, the concept of demergers will help reshape the PSUs by allowing them to shed their excess

staff strength and loss making assets.

1. whether there exists the requisite market for the product and the scale of operation of the technology is pertinent and optimum for the market;

2. whether the technology is market tested and fit for commercial exploitation or has become redundant in the present scenario and hence requires further research and development; and,

3.whether the technology is suitable with respect to the existing infrastructure that is in place.

 

CONCLUSION:

With the rise of new regional economic powers in the world, there has been a  rise in what has been termed as economic patriotism. The recent controversy that erupted with the vehement opposition to the Mittal Arcellor deal by the European powers is a case in point.

But, despite the challenges, mergers and demergers are the two tools that hold an answer to the Indian corporate community’s thirst and relentless enterprise for a global presence today. Today, as the waves of globalization are lashing at the doors of an ever prospering Indian economy and drowning it in an insatiable appetite to develop and become an economic superpower, mergers

and demergers could well be the magical talisman for IndiaInc. to achBibliography:

 

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6. Singh, Avtar, COMPANY LAW, Eastern Book Company, Lucknow, 14th Edition, 2004

Hitt, A. Michael et all, MERGERS AND ACQUISITIONS-A GUIDE TO CREATING VALUE FOR STAKEHOLDERS, Oxford University Press, New York, 1st Edition, 2001

S. D. Naik, Decade of Corporate Churning and Change, (visited on 13.12.06)

<http://www.hinduonnet.com/businessline/2001/07/31/stories/043120ma.htm>

How to get Disinvestment Going: Building India’s Future-Report of the Special Subject Group, (visited on 11.12.06)

<http://indiaimage.nic.in/pmcouncils/reports/disinvest/disinvest.html>

Government of India (Ministry of Industries), Statement on Industrial Policy, (visited on 11.12.06)

<http://siadipp.nic.in/publicat/mip0796.htm>

 

 

Seth Dua and Associates (2006); 220

Singh, Avtar, (2004); 551

Sampath (2005); 599

Ibid;  600.

Re Madras High Court decision in the W.A. Beardsell & co P Ltd. Case, (1968) 38 Comp Case 197

Sampath (2005); 602

 

GESTATION PERIOD: The time that a new business enterprise takes to establish itself in the market by creating a niche for itself. By the process of mergers, the new enterprise will have the benefit of avoiding the teething trouble period and can thus venture into new area and markets with comfortable ease,Sampath (2005); 603

Seth Dua and Associates (2006); 223

Sampath (2005); 605

Mitra, Datta in the Business Line April 12 2006

Re Bihari mills ltd (1985) 58 Comp Cas 6 (Guj): here the reverse merger led to huge tax savings for the financially strong parent company and also helped in the loss offset of the loss making subsidiary

 

Seth Dua and Associates (2006); 226

There is no definite definition of the term demerger as it is a mode of arrangement for the company. There is little difference between demerger and spin-off as concepts. The section 2(19AA) of the IT Act defines demerger as an mechanism of corporate arrangement with strings attached to claim tax incentives; therefore, demerger under the IT Act and the Companies Act, 1956 may be different depending upon the conditions of compliance. When the consideration for the transfer of undertaking is in the form of shares, the process of demerger complies with the sections 391 and 394 of the Companies Act; but, where the consideration is otherwise than in the form of shares of the transferee company, the provisions of section 293(1)(A) Companies Act apply.

chandratre (2005); 865

Sampath (2005); 768-769

Seth Dua and Associates (2006); 236, Also Re section 584 of the Companies Act, 1956 which relates to the judicial formalities for the companies registered outside India which had been till then working in India but decide to stall their work. Section 584 of the Companies Act, 1956 when read in conjunction with the section 390(a), will imply that a foreign company can merge with an Indian company Seth Dua and Associates (2006); 236, Also see, Moschip semiconductor company ltd (2004) 59 CLA 354 where the courts ruled that a foreign company can merge only when the statute governing the said company provides for such a merger.[Seth Dua and Associates (2006); 236]

Seth Dua and Associates (2006); 239.

Ibid  236

ieve its dreams.

e operation of each of its diverse businesses”. The explanatory statement says that “with a view to achieve greater management focus and keeping in mind the paramount and overall interests of the shareholders” of RIL…, the board of directors “believe that Shri Anil D. Ambani… will provide such focused management attention and leadership to the financial services, power and telecom businesses… and Shri Mukesh D. Ambani… will continue to lead the other businesses including petrochemicals, oil and gas exploration and production, refining and textiles and other businesses comprising the Remaining undertaking…”

In the past several body corporates have opted for the demerger route. Eveready Industries separated its tea business into McLeod Russell; Auto ancillary company Rane Madras transferred its investments into separate company and the investment company was also listed. The demerger list also includes Vardhman Spinning and Morarjee Realities. GTL is demerging its IT infrastructure business to GTL Infrastructure.

http://www.mondigroup.com/PortalData/1/Resources/investor_relations/reports_presentations/Mondi_Group_overview_presentation_July_2007.pdf