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 when
1. 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; and
2. 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’). 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 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 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.
Definition of demerger U/s Section 2(19AA) of the Income Tax ActThe 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 Undertaking
The 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 and Bonds;
Capital 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.
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.
The author can be reached at: email@example.com / Print This Article
How To Submit Your Article:
Follow the Procedure Below To Submit Your Articles
Submit your Article by using our online form
Note* we only accept Original Articles, we will not accept Articles Already Published in other websites.
For Further Details Contact: firstname.lastname@example.org
File Your Copyright - Right Now!
Online Copyright Registration in India
Call us at: 9891244487 / or email at: email@example.com
Lawyers in India - Search By City