De-Merger means split or division of a business or any undertaking of a company making them a separate unit or undertaking. In short, De-Merger means separation of a large company into one or more small companies.
Meaning of De-Merger: De-Merger means split or division of a business or any undertaking of a company making them a separate unit or undertaking. In short, De-Merger means separation of a large company into one or more small companies.
Section 232 of Chapter XV of the Companies Act 2013 deals with mergers and amalgamation including demergers.
A demerger is a form of corporate restructuring which is undertaken by companies to promote specialization. Companies have started practising demerger because of the many benefits it offers. Demerger allows a company to expand its operations in a very systematic manner. It allows a specific division or unit to grow as a separate and a focused entity, thereby increasing its efficiency and effectiveness. It benefits the shareholders by providing them better opportunities to participate in the management, operations, decision-making process and profits of the applicant company as well as the resulting company.
Demerger may take place by agreement between promoters of the demerging company. In such a scenario, the principal company may spin off its specific undertakings to the resulting company. All the property, liabilities and issues of the principal company, transferred to the resulting company immediately before the demerger, becomes the property, liabilities and issues of the resulting company.
To affect a demerger, there must be a provision in the Memorandum of understanding of the principal company. The scheme of such arrangement has to be submitted in the respective Tribunal having jurisdiction.
Process for Demerger: Whenever a company plans to de-merge one of its undertakings from main business, then the most adaptable process is De-Merger of the company. A demerger is a corporate partition of a company into two or more undertakings, thereby retaining one undertaking with it and by transferring the other undertaking to the resulting company or companies. It is a scheme of business reorganization. De-merger is not defined specifically in the Companies Act, 2013. However, an explanation is given to section 230(1) of the said Act prescribes it as an arrangement for the reorganization of the company’s share capital by:
A demerger is mentioned in section 2(19AA) of the Income Tax Act, 1961, subject to fulfilling the conditions stipulated in section 2(19AA) of the Income Tax Act and shares have been allotted by the ‘resulting company’ to the shareholders of the ‘demerged company’ against the transfer of assets and liabilities.