DEMERGER

DEMERGER

Demerger, in corporate terms, refers to the division or splitting of a company into several smaller entities. It's important to note that the newly formed companies may not necessarily become subsidiaries of the parent company post-split.

In simpler terms, a demerger entails the corporate partitioning of a company into smaller entities. One entity remains under the parent company's ownership, while others may operate independently, be acquired by other entities, liquidated, or sold off.

Types of Company Demergers

1. Spin-off:
   • Involves creating a subsidiary with a portion of the parent company's shares.
   • Allows the subsidiary to make independent decisions and strategies for specific products, enhancing control over related business operations.
2. Split-up:
   • Results in the creation of a single holding company and subsidiaries from the parent company.
   • Each subsidiary operates independently under different management to manage diversified business areas effectively.
3. Split off:
   • Involves selling a business vertical of the parent company to a separate entity.
   • Done when a company wants to divest from specific markets, products, or areas.
4. Equity carve-out:
   • Involves the parent company reducing its holding in one of its subsidiaries.
   • Provides financial gains but reduces the parent company's shareholding in the subsidiary.
5. Divestment:
   • Conducted by the government, reducing its holdings in Public Sector Undertakings (PSUs) by selling its stakes.
   • A strategic move to exit certain business sectors or raise funds to reduce fiscal deficit.
6. Divestiture:
   • Similar to divestment but can be executed for any public or private limited company.
   • Aimed at financial gain and may occur when an organization seeks to change its investment strategy.

Companies opt for demergers due to various reasons:

• Restructuring to adapt to changing political and economic environments.
• Optimizing resource utilization and exploiting opportunities effectively.
• Exiting unprofitable business ventures or sectors.
• Generating resources for acquisitions or financial stability.
• Capitalizing on profitable opportunities through financial and managerial restructuring.

Process of Demerger: Key Steps

• Preparation of Arrangement Scheme
• Application to Court for Meeting of Members/Creditors
• Obtaining Court's Order for Meeting of Members/Creditors
• Notice of Meeting of Members/Creditors
• Holding Meeting of Members/Creditors
• Petition to Court to Sanction Demerger Scheme
• Court's Order on Sanctioning Demerger Scheme

Demergers have been observed in both private and public sectors, with the Reliance Group demerger being a notable example. As India's economic landscape evolves, demergers prove to be effective strategies to navigate the changing business environment.