DEMERGER: A demerger is typically a situation where in an organization splits its assets, mostly

by pooling up the assets it is splitting out under a subsidiary/holding company in order to later
redistribute the shares of the new company to the already existing stakeholders of the parent
organization. Demerger is an act of splitting off a part of an existing company to become a new
company, which operates completely separate from the original company. Shareholders of the
original company are usually given an equivalent stake of ownership in the new company. The
entity that emerges has its own board of directors and, if listed on a stock exchange, have separate
listings. It does not result in a purchase or sale transaction but is just a division of an existing entity,
the demerged company. Demerger is essentially a scheme of arrangement under the Companies
Act, 2013 requiring approval by majority of shareholders holding shares representing three-fourths
value in meeting convened for the purpose, and sanction of NCLT. It refers to the splitting up of
a company into two or more business units, without a change in the financial position of the
stakeholders. It can be done in the following ways

Spin Off: It refers to the transfer of all assets or effectively all assets, liabilities and business of
one of the business units to another company. The purchasing company issues shares to the
shareholders of the transferor company proportionately. Such a transfer of assets and liabilities is
done on a going concern basis.

Split up: It refers to the sale of all assets or effectively all assets, liabilities and business to two or
more companies in exchange for shares of the purchasing company being issued to the
shareholders of the transferor company. However, the transferor company does not retain its
identity, unlike in the case of a spin off.

Split off: It refers to the sale of all assets or effectively all assets to two or more companies in
exchange for shares in the purchasing company. However, the shares in the purchasing company
are not given to all the shareholders of the transferor company. It is a method of realigning the
shareholdings of the promoters.

De-mergers can be partial or complete.

Partial De-merger: It refers to the transfer of only some of the undertakings of a business to the
purchasing (resulting) company. The transferor company does not cease to exist since only some
of the undertakings are transferred while some are retained.

Complete De-merger: In this case, all the undertakings of the transferor company are transferred
to the resulting company and as a result, the transferor company loses its existence.

Rationale of Demerger:

1. Improve valuation:-In case of Dabur, demerger was done to create a global presence for
Dabur’s pharmaceuticals business and provide focus to maximize penetration in global markets.
The FMCG business including personal care, health care also benefited from this move as it lead
to better and more efficient management of its resources and facilitated more accurate
benchmarking with industry which leads to improvement in valuation of both businesses.

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2. Focus on core business: - Demerger helps to separate less recognized investment out of core
business. The company can then focuses on core business and exploit the benefits of core
competencies to the maximum extent and utilize surplus cash in productive way. E.g. Demerger
of cement business of Larsen & Toubro Ltd into Ultra tech cement co ltd (Aditya Birla group co.)
which enabled L & T to become a focused engineering company.

3. Attract investors:- Demerger of company can attract specific institutional investors having
interest in particular sectors. E.g. retail company Pantaloon was attracting only retail investors. By
spinning off a private equity fund Kshitij, it attracted a different set of investors.

4. Family settlement:- Split among family members can be a reason for demerger. E.g. Demerger
of Reliance Industries Ltd in which the business was divided between two brothers as in Mr.Anil
Dhirubhai Ambani would lead financial services, power and telecom businesses and Mr.Mukesh
Dhirubhai Ambani would continue to lead the other businesses including petrochemicals, oil and
gas exploration and production, refining and other businesses comprising the remaining
undertaking. ( Demerger of Bajaj Auto Limited )

Thus, demerger also occur due to reasons almost the same as mergers i.e. the desire to perform
better and strengthen efficiency, business interest and to curb losses, wastage and competition.
Undertakings demerge to set down businesses and fix responsibility, liability and management so
as to ensure improved results from each of the demerged unit. The Rationale of Successful
Demerger is that: Sum of the separate entities is greater than the combined entity. One of the
prime reasons why large corporate houses go in for demerger is to increase the role of
specialization in the particular segment. In case of large conglomerates, demerging entities often
are the departments which are growing at an impressive rate and have substantial potential. A part
from core competencies being main reason for demerging companies, in some cases, restructuring
in the form of demerger was undertaken for splitting up the family owned large business empires
into smaller companies. After the enactment of comprehensive provisions under the Income Tax
Act 1961 dealing with demerger, many corporate embarked on focusing business plans by splitting
the unrelated business by way of demerger and there are also other reasons for demerger like family
split which occurred in Reliance.

The Companies Act is covering the expression arrangement, as defined in clause (b) of Section
390 of Companies Act. Division of a company takes place when:

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 Shares are
allotted to certain of the first company's shareholders.”

The Income Tax Act: Demerger has been defined in Sub-section (19AA) of Section 2 of the
Income-tax Act, 1961. According to the said Sub-section, demerger in relation to companies,
means transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies
Act, 1956, by a demerged company of its one or more undertakings to any resulting company in
such a manner that:

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i. All the property of the undertaking being transferred by the demerged company, immediately
before the demerger, becomes the property of the resulting company.

ii. All the liabilities relatable to the undertaking, being transferred by the demerged company,
immediately before the demerger, become the liabilities of resulting company of virtue of the
demerger.

iii. The property and the liabilities of the undertaking, being transferred by the demerged company
are transferred at values appearing in its books of account immediately before the demerger;

iv. The resulting company issues, in consideration of the demerger, its shares to the shareholders
of the demerged company on a proportionate basis;

v. The shareholders holding not less than three fourths in value of the share in the demerged
company (other than shares already held therein immediately before the demerger or by a nominee
for, the resulting company or, its subsidiary) become shareholders of the resulting company or
companies by virtue of the demerger.

vi. The transfer of the undertaking is on a going concern basis;

vii. The demerger is in accordance with the conditions, if any, notified under Sub section (5) of
Section 72A of the Income Tax Act 1961 by the Central Government in this behalf.”

SWOT analysis of Demerger:

To analyze the concept of demerger from various angles researcher has listed various strengths,
weakness, opportunities and threats related to demerger. The summarized results of SWOT
analysis are presented below.

Table 3.1 SWOT analysis of demerger Weakness

Strengths
i) Unlock the full potential of the i) Anxiety amongst employees in course
business by creating different companies of creating departments.
ii) Increase the valuation of wealth of ii) Delay in finalization of deals
shareholders iii) Sometime sudden change in
iii) Attract the investors management and organization vision
creates a gap leaving certain capacity
idle and promoting inefficiency in
utilization of resources.
Opportunities Threats
i) Restructuring is an attempt to relax i) Difficult to tap credit / funds
some or all of the short run constraints ii) Losing the synergy
which is concerned with changing iii) Misconception in the minds of
structure in pursuit of long run strategy. investors about the stability of resulting
ii) Can focus on core business company
iii) Scope for independent collaboration
and expansion

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Example 1 Following is the Balance sheet of Aarti Industries Limited which is having two Divisions 1.Sugar
Division and 2. Fruit Juice Product Division. Sugar division is not doing very well and most of the loans in
the Balance sheet are taken for this division. On the other hand fruit juice business is doing very well and
company’s brand “ Madhur “ is very popular in fruit juice segment. Management want to unlock the value
of both the divisions and decided to demerge its fruit juice division into a separate company named
Madhur Fruits Limited.

Balance sheet as on 31st March, 2021 ( Rs.in crore )

PPE 250
Capital Work in Progress 32
Intangible Assets 16
Deferred Tax Assets 12
Current Assets Inventories 67
Trade Receivables 35
Cash & Bank Balances 10
Other Current Assets 28
Total Assets 450
Equity Share Capital 70
Reserves & Surplus 110
Borrowings 123
Long Term Provisions 21
Current Liabilities- Short Term Borrowings 46
Trade Payables 60
Short Term Provisions 8
Other Current liabilities 12
Total Liabilities 450
Following assets and liabilities are transferred at their book values to Madhur Fruits Ltd

PPE 60
Capital Work in Progress 12
Intangible Assets 6
Deferred Tax Assets 8
Current Assets Inventories 15
Trade Receivables 9
Cash & Bank balances 3
Other Current Assets 14
Borrowings 25
Long Term Provisions 8
Current Liabilities- short term borrowings 10
Trade payables 12
Short term provisions 3
Other Current liabilities 4
Madhur Fruits Ltd issued 1 Equity share of Rs.10 each for every equity share held in Aarti Industries to
the shareholders of Aarti Industries Ltd. Prepare Balance sheet of both the Companies after demerger

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Example 2 Sarita Chemicals Limited is having two divisions, Cement and Fertilizers. Following is the
Balance Sheet of the Company as on 31st March, 2021. ( Rs.in crore )

Particulars Cement Fertilizers Total

Division Division
Fixed Assets less Depreciation 515.00 168.00 683.00
Investments ---- -------- 97.00
Current Assets 445.00 585.00 1030.00
Total 1810.00

Equity Capital ---- ------- 345.00

Reserves & Surplus ---- ------- 685.00
Loans ----- 15.00 417.00
Current Liabilities 270.00 93.00 363.00
Total 1810.00
Loan of Rs.15 crore is specifically taken for Fertilizer Division. Company Management want to focus more
on Cement division and decided demerger of its Fertilizers divisions. However before starting those
activities, Company sold investments for Rs.102 crore and repaid the debentures of Rs.125 crore in full
which are included in the loans.

A New Company named Samruddhi Fertilizers Limited is formed . All assets and liabilities of Fertilizer
division were transferred to the new company. Samriddhi Fertilizers Limited allotting to shareholders of
Sarita Chemicals 2 fully paid equity shares of Rs.10 each for every 1 share held in discharge of
consideration for the division take over.

Samruddhi Fertilizers Limited recorded in their books Fixed Assets at Rs.218 crore and all other assets and
liabilities at the same values at which they appeared in the books of Sarita Chemicals Limited.

You are required to 1.Prepare Balance sheet of Sarita Chemicals Limited after demerger of Fertilizer unit
.2. Prepare Balance Sheet of Samruddhi Fertilizers after demerger

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The Scheme of Demerger between Kesoram Industries Limited and Birla Tyres Limited (“Resulting
Company”) and their respective shareholders and creditors (“Scheme”) was approved by the Hon’ble
National Company Law Tribunal (‘NCLT’) on 8th November, 2019 and on filing of the scheme with Registrar
of Companies, the Scheme became effective on 4th December, 2019. Pursuant to the Scheme becoming
effective, the Tyre business undertaking is demerged from the Company and transferred to and vested in
the Resulting Company with effect from 1st January, 2019 i.e. the Appointed Date. The details of assets
and liabilities transferred to the Resulting Company are as under (Amount in Rs.Crore )

PPE 560.79
Capital Work in Progress 770.50
Intangible Assets 0.03
Financial Assets 7.97
Deferred Tax Assets 71.10
Current Assets Inventories 200.42
Trade Receivables 213.86
Cash & Bank Balances 33.85
Other Current Assets 68.31
Total Assets 1936.94
Less: Liabilities
Borrowings 726.03
Other Financial Borrowings 162.28
Long Term Provisions 6.40
Current Liabilities- Short Term Borrowings 266.75
Trade Payables 548.60
Other Financial Liabilities 25.16
Employee Benefit Obligations 8.92
Short Term Provisions 58.95
Other Current liabilities 52.09
Total Liabilities 1855.18
Net Assets Transferred to Birla Tyres Ltd 81.76

The Company has recognised the effect of demerger and the difference of Rs 81.76 crores i.e. excess of
the value of transferred assets over the transferred liabilities pertaining to the demerged undertaking
pursuant to the Scheme has been debited to the Retained earnings of the Company. Further, general or
multipurpose borrowings of the Company transferred to the Resulting Company in the ratio of the value
of assets transferred bears to the total value of the assets of the Company immediately before the
appointed date in terms of the said scheme. The operations of the Tyre business (demerged undertaking)
has been re-presented for all previous periods as discontinued operations.

Upon the effectiveness of this Scheme, the Resulting Company has issued and allotted to each shareholder
of the Company, whose name is recorded in the register of members of the Company, on the Record
Date, (1) one equity share of Rs 10 (Rupees Ten) each of the Resulting Company credited as fully paid up
for every equity share of Rs.10 (Rupees Ten) each held by such shareholder in the Company such that the

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shareholding in the Resulting Company on such issuance of shares is the mirror image of the shareholding
in the Company.

The Company transferred its assets and liabilities to Birla Tyres Limited pursuant to scheme of
arrangement. The appointed date of the scheme is 1st January, 2019 as approved by the NCLT. Therefore,
all transactions from 1st January, 2019 to 31st March, 2019 of the Tyre division were carried on behalf of
Birla Tyres Limited and the same is recorded as receivable or payable on account of demerger from Birla
Tyres Limited as at 1st April, 2019. Further the losses for the period 1st January to 31st March, 2019 of
the Tyre division has been transferred to Birla Tyres Limited amounting to Rs. 75.80 crores.

Further, general or multipurpose borrowings of the Company transferred to the Resulting Company in the
ratio of the value of assets transferred bears to the total value of the assets of the Company immediately
before the appointed date in terms of the said scheme. The amount of borrowings transferred has been
given in the above table. The banks are in the process of splitting the loan as per the order.

In the books of Birla Tyres Limited ( Rs.in crore )

Assets Taken over 1936.95

Liabilities Taken over 1855.22
Net Assets transferred 81.73
Shares issued 142.59
Amount transferred to Reserves & Surplus (60.86)

The difference i.e. the excess or shortfall, as the case may be, of the value of the assets and the liabilities
pertaining to the Demerged Undertaking and received from the Demerged Company pursuant to the
Scheme after taking into account the face value of the shares issued by the Resulting Company shall be
credited or debited to the reserves of the Resulting Company.

Further, general or multipurpose borrowings of the Company, amounting to Rs. 984.68 crore is included
in the above table, transferred from the Demerged Company in the ratio of the value of assets transferred
bears to the total value of the assets of the Demerged Company immediately before the appointed date
in terms of the NCLT approved scheme. The banks are in the process of splitting the loan as per the order.

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