Merger and Demerger

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Demerger

Under Sec.2(19AA) of Income Tax Act, 1961, demerger means transfer, pursuant to a scheme of arrangement under S. 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company.


Synonymous with the terms : split-off, division or spin off


Transfer is of property & liabilities at values appearing in its (demerged company) books of accounts immediately before the demerger


The shareholders are issued shares from the resulting company on a proportionate basis


Shareholders holding not less than 3/4th in value of shares in the demerged company become shareholders of the resulting company


Transfer of the undertaking is on a going concern basis


Demerged company is also called Transferor company and the resulting company is called Transferee company



Demerger should be in accordance with conditions, if any, notified under Sec.72A (5) of IT Act, 1961 by the Central Government in this behalf



Any change in value of assets due to revaluation shall be ignored for computing value of property



Demerged Company (Sec. 2(19AAA) :

It is the company whose undertaking is transferred, pursuant to a demerger, to a resulting company


Resulting company : (Sec. 2(41A))

It means one or more companies(including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and the resulting company in consideration issues shares to shareholders of the demerged company



It can include any authority or body or local authority or public sector company or company established, consituted or formed as a result of demerger


Difference between Reconstruction and Demerger


One of the methods of achieving Demerger is through a scheme of reconstruction


Should not be equated with “slump sale” since such a sale is only for sale of undertaking


Modes of Demerger

Demerger By Agreement

Demerger Under Scheme Of Arrangement
(As per Chapter V of Companies Act)

Demerger And Voluntary Winding Up
(in accordance with the sec.484 to 498 of the Companies Act, 1956)



Procedural Aspects
Scheme must be within company’s power

Res judicata

Rules & Forms in respect of Scheme of Demerger


Steps for Demerger
Preparation of scheme of demerger

Application to court for direction to hold meetings of members/creditors

Obtaining court’s order for holding meetings of members/creditors

Notice of the meetings of members/creditors

Holding meetings of members/creditors


Reporting the result by chairman to the court


Petition to the court for sanctioning the Scheme of Demerger


Obtaining the order of the court sanctioning the scheme


Court’s order on petition sanctioning the scheme



Legal aspects of Demerger



Provisions of Sec. 395 for protection of shareholder’s interest who dissent from the scheme approved by the majority


Should comply with provisions of Sec.100 to 104 of Companies Act if it envisages reduction of share capital


If Original company gets wound up then provisions of Sec. 484 to 498 of the Companies Act have to be followed



Tax Reliefs

To the Demerged Company


Capital Gains not attracted


Relief to a foreign demerged company


To the shareholders of the demerged company



Cost of acquisition



 
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