Split-off a company (demerge) in India
A demerger may be chosen by a company as a strategic maneuver to shift some or all of its business operations to another entity. In essence, a demerger happens when a company splits its current operations into distinct parts, establishing a new standalone entity, or selling off/disbanding the separated unit. The company that transfers its operations is called the demerged entity, while the acquiring company is referred to as the resulting company.
Types of demergers
In India, there are three main choices for demerging a company, and each option has its own tax benefits.
Statutory demerger
A “statutory demerger” is when a new company is created and shares are given to the parent company’s shareholders. In a “three-cornered” demerger, the parent company transfers the new subsidiary to another company, which then gives shares in the new company to the shareholders of the parent company in exchange for the distribution. Another option is for the parent company to pay a direct dividend to its shareholders on the new shares.
Share capital reduction demerger
Another method to separate a company is by reducing the parent company’s share capital. This is done in conjunction with a decrease in the capital of the company being transferred, as the trading operation is then transferred to new shareholders or holding companies controlled by those shareholders. A reduction of capital demerger can be advantageous in this situation.
- When a statutory demerger or liquidation demerger isn’t an option
- There are non-member state parties
- The entities aren’t trading companies
- None of the enterprises in the mix should be liquidated
- You intend to sell some group members or float them
- The distributing firm does not have sufficient distributable reserves
Liquidation demerger
When a company is dissolved and its assets are moved to new entities through a liquidation demerger, the previous shareholders receive shares in the new companies in return for their interests in the winding up process. In cases where shareholders have different perspectives on the company’s future and wish to pursue distinct paths, a demerger may be undertaken. This decision enables each shareholder to independently determine their own direction.
Benefits of demerging
One of the primary reasons corporations choose to demerge is to increase value for shareholders. After a demerger, new company shares are typically given to shareholders. If the demerger results in the expected advantages, profits and share prices for the two resulting companies will go up. The separation of management teams post-demerger allows for a clearer focus on individual gains and losses without interference from the main board. With a better understanding of accountability, there is enhanced motivation for teams to meet financial goals. Additionally, division of management teams allows CEOs to concentrate on their specific areas of expertise. Demerging enables each new business to independently raise capital instead of relying on centralized budgets. An added benefit is that if a joint venture or acquisition doesn’t work out, each partner has the opportunity to reduce losses and continue running their own separate company.
Considerations before demerging a company
A comprehensive assessment of different factors is necessary before carrying out a demerger in India to guarantee a seamless and effective transition. This involves evaluating the company’s assets, liabilities, and operations, along with comprehending the legal and regulatory obligations. Taking into account the consequences on stakeholders such as shareholders, employees, customers, and suppliers is also vital to minimize possible risks or interruptions. In general, careful planning and consideration of these factors are crucial for a prosperous demerger procedure in India.
Contact us
If you are thinking about separating your company in India, our team is available to help you throughout the process. We have extensive knowledge in corporate law and business deals, allowing us to offer personalized advice to make sure the demerger goes smoothly and successfully. Whether you require help with following legal regulations, financial assessment, or communicating with stakeholders, we are dedicated to aiding you in reaching your objectives efficiently. Get in touch with us now to arrange a meeting and discover how we can assist your company with its demerger process.