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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