DEMERGERS

In compliance to the partial fulfilment of the marking scheme, for Trimester III
of 2014-15, in the subject of Principles of Accountancy I.

Submitted to,
Prof. Mr.Naveen Tyagi

Arnav Das (A026)

Adarsh Himatsinghka (A032)
Rananjay Talwar (A055)
Mudit Singh (A061)

1 | DEMERGERS

INDEX:
SR. NO.

TOPIC

Abbreviations

Research Methodology

Introduction

Legal Provisions

11

5.

Case Studies

15

Conclusion

18

Suggestions

20

References

21

2 | DEMERGERS

PAGE NO

ABBREVIATIONS:

Imp.
Art.
US
IPC
SC
Edn.
Pg.
Para
.Org
ICA

: Important
: Article
: United States
: Indian Penal Code
: Supreme Court
: Edition
: Page
: paragraph
: organization
: Indian Companies Act

1
RESEARCH METHODOLOGY

1.1

RELEVANCE:

A demerger is the opposite of a merger, involving the splitting up of one entity into two or
more entities. An entity which has more than one business, may decide to hive off or spin
off one of its businesses into a new entity. The shareholders of the original Provided upon
request only entity would generally receive shares of the new entity. If one of the businesses
of a company is financially sick and the other business is financially sound, the sick business
may be demerged from the company. This facilitates the restructuring or sale of the sick
business, without affecting the assets of the healthy business. Conversely, a demerger may
also be undertaken for situating a lucrative business in a separate entity. A demerger, may be
completed through a court process under the Merger Provisions, but could also be structured
in a manner to avoid attracting the Merger Provisions.

3 | DEMERGERS

1.2

OBJECTIVES OF THE STUDY:

To understand the meaning of Demergers and to analyse its working in India

To analyse different types of demergers

To analyse the legal provisions related to demergers in India

1.3

LIMITATION OF THE STUDY:

The research is restricted to secondary research. Due to the constraints of time and

scope of the project it was not possible to conduct a primary research. The study being
critical in nature, doctrinal methods have been adopted for the purpose of research because it
is not possible to study the subject by experimental method.

INTRODUCTION

2.1

MEANING:

Demerger as the name suggest converse of Merger/Acquisition, where the shareholders or

owner of the parent company gains direct ownership of the demerged entity .Or in other
words Demerger refer to the process of the separation of companies or Business units which
are operating under one single umbrella. In simple words when one company, say X Ltd.
having 10 undertakings, transfers one or more of its undertakings to a new company, say Y
Ltd., it is a case of demerger. X Ltd. is the demerged.

4 | DEMERGERS

Demerger is a form of corporate restructuring. One of the prime reasons why large corporate
houses go in for demerger is to increase the role of specialisation 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. Demerger is the converse of a merger or
acquisition. It describes a form of restructure in which shareholders or unit holders in the
parent company gain direct ownership of the demerged entity or the subsidiary entity.
Underlying ownership of the shares of the company/ trusts that formed part of the group does
not change. The company or entity that ceases to own the entity is called the demerging
entity. If the parent entity holds a majority stake in the demerged entity, the resulting
company is referred to as the subsidiary.1
De-merger is undertaken basically for two reasons. The first as an exercise in corporate
restructuring and the second is to give effect to kind of family partitions in case of family
owned enterprises. A de-merger is also done to help each of the segments operate more
smoothly, as they can now focus on a more specific task. Examples of Mergers & Demergers:

1. Demerger An Indian Legal Perspective - Dipen Chatterjee, Advocate, APJ-SLG Law Offices, New
Delhi

5 | DEMERGERS

Split-up Demergers
In case of the split-up demergers, the company is split into two or more than two independent
companies. In this case no trace of the parent company as a corporate entity is left and its
place is taken by two or more independent companies.
Spin-off Demergers
In case of the spin-off demergers, a unit or a division of the company is spun off into another
independent company.
Following the spin-off demerger, the spun off company and the parent company form two
different corporate entities. Both the split-up demergers and spin-off demergers are
considered as the measures to improve the corporate value of the parent and new companies
by raising performance and efficiency.
The two prime reasons for gaining efficiency and improving performance by the demergers
are - improved incentives and accountability and sharper focus. When a company goes for
spin offs, it actually make the managerial incentives stronger and this raises the
accountability. While, after going for a spin-off demerger, the parent company may focus on
the business more effectively by removing the poor fit unit.
Equity carve-out (ECO), also known as a split-off IPO or a partial spin-off, is a type of
corporate reorganization, in which a company creates a new subsidiary and subsequently
IPOs it, while retaining management control.2 Only part of the shares is offered to the public,
so the parent company retains an equity stake in the subsidiary. Typically, up to 20% of
subsidiary shares is offered to the public.
The transaction creates two separate legal entities, the parent company and Daughter
Company each with their own boards, management teams, financials, and CEOs. Equity
carve-outs increase the access to capital markets, enabling carved-out subsidiary strong
growth opportunities, while avoiding the negative signalling associated with a seasoned
offering (SEO) of the parent equity
2

"Equity carve-out - Business Definition". Your Dictionary. Retrieved September

1, 2013.Jump up^ Investment Dictionary: Carve-out

6 | DEMERGERS

Reasons for demergers

Demerger is undertaken basically for two reasons. The first one as an exercise in corporate
restructuring and the second one is to give effect to a kind of family partitions in the case of
family owned/controlled companies essentially to give effect to informal family partitions[7].
Where demerger is an exercise of corporate restructuring the undertaking sought to be
demerged is transferred from a transferor company to an existing transferee company. But
where demerger is an exercise in family partition the different undertakings of a company is
transferred to a newly incorporated transferee companies to facilitate family partitions[8].
In a scheme of arrangement two groups in a family shall be allotted specific assets to their
respective transferee companies from the parent transferor company where they are
shareholders. Ordinarily all the shareholders of the transferor company receive shares in one
or the other of the two transferee companies. As this mode of effecting transfer is not objected
to by the Central Government and no provision of law which it can be said to violate has been
brought to the notice of the Court it can be sanctioned. After the distribution of the assets in
the manner provided in the scheme, no assets will be left with the transferor company and it
is therefore sought to be dissolved, the same forming part of the scheme.[9]

RATIONALE AND BENEFITS OF DEMERGER

To focus on core business Companies which have more than one business and the
smaller business is not recognized in valuations of these companies, demerger helps to
separate this investment out of the core business. They can focus on core business and exploit
the benefits of core competencies and utilize surplus cash in a productive way.
To attract investors Demerger of a company can attract specific institutional investors
having interest in particular sectors.

7 | DEMERGERS

For example, retail company Pantaloon was attracting only retail investors. By spinning off
a private equity fund, Kshitij, it attracted a different set of investors.
A demerger generates cash for the parent company that can be used to pay off its debt. This
saves the interest on the debt and increases the cash flow to equity holders. The prospect of
getting a higher dividend pushes up the share price of the parent company. This gives
investors a chance to exit at a higher price.
To improve valuation The benefits of a greater focus to each of the businesses do get
reflected in the market and it is possible to realize the actual value of each business.

Examples:
1. The combined market capitalization of Sun Pharma and its demerged R&D firm SPARC
has been 10 to 15 per cent higher than the market capitalization of Sun Pharma since SPARC
listed in July 2007
2. Demerger of Dabur India into two segments comprising of the FMCG business including
personal care, healthcare and ayurvedic speciality products and pharmaceuticals business
which include allopathic, oncology formulations and bulk drugs.
Demerger was done to create a global presence for Daburs pharmaceuticals business and
provide focus to maximise penetration in global markets. The FMCG business 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 lead to improvement in
valuations for both businesses.

Family Settlement - Split among family members can be reason for demerger.
Example: Reliance split into Reliance Capital Ventures, Reliance Communication Ventures,
Reliance Energy Ventures and the Global Fuel Management Services.
Corporate attempt to adjust to changing economic and political environment of the country
through demergers.

8 | DEMERGERS

 Strategy to enable others to exploit opportunity effectively to optimize returns when the
parent company is unable to do so.
To correct the previous investment decisions where the company moved into the operational
field having no expertise or experience to run the show on a profitable basis.
To help finance an acquisition.
To realize capital gains from the assets acquired at the time when they were under
performing and on no better performance, capital gain can be realized.
To make financial and managerial resources available for developing other more profitable
opportunities.
Selling unwanted and surplus or unconnected parts in the business as a restructuring strategy
to get rid of sick part of the company.

Modes of Demerger
1. Demerger by agreement It may be effected by agreement where under the demerged
company spins off its specific undertaking to a resulting company, formed with another
names in such a manner that all the property and all the liabilities of the undertaking, being
transferred by the demerged company immediately before the demerger, becomes the
property and liabilities of the resulting company by virtue of demerger. The resulting
company issues, in consideration of the demerger, its shares to the shareholders of the
demerged company on a proportionate basis.
2. Demerger under scheme of arrangement It requires the approval by Tribunal u/s
391 of the Companies Act.
3. Demerger and Voluntary Winding up A Company, which has split into several
companies after division, can be wound up voluntarily pursuant to Section 484 to 498 of the
Companies Act. Where a the transferor company is proposed to be, or is in course of being
wound-up altogether voluntarily the liquidator of the transferor company may, with the
sanction of a special resolution of that company conferring on the liquidator either a general
authority or an authority in respect of any particular arrangement receive, by way of
compensation or part compensation for the transfer or sale, shares, policies, or other like
interest in the transferee company, for distribution among the members of the transferor
9 | DEMERGERS

company or enter into any other arrangement whereby the members of the transferor
company may, in lieu of receiving cash, shares, policies, or other like interests or in addition
thereto, participate in the profits of, or receive any other benefit from, the transferee
company.

Demerger Importance of Appointed Date

Appointed Date means the date for identification of assets and liabilities of the existing
company for transfer to new company. The Appointed Date has been taken for identification
and qualification of the assets and liabilities of the existing company and new company
consequent upon proposed spin off. This identification is done on the basis of the audited
balance sheet of the existing company for the financial year.
Appointed date is different from Effective Date which was the date on which all consents
and approvals required under the scheme were to be obtained and transfer effected.

2 LEGAL PROVISIONS
. STUDY IN THE LIGHT OF THE LEGAL FRAMEWORK:

Merger Regime Under The Companies Act, 2013 Introduction Merger is a restructuring tool
available to Indian conglomerates aiming to expand and diversify their businesses for various
reasons whether it is to gain competitive advantage, reduce costs or unlock values. In
commercial parlance, merger essentially means an arrangement whereby one or more existing
companies merge their identity into another existing company or form a distinct new entity.
Company law in India is undergoing a complete overhaul and a new law was finally passed in
10 | D E M E R G E R S

2013. However, only 98 sections of the new Companies Act, 2013 (2013 Act) have been
brought into force and the provisions relating to mergers covered in Sections 230 to 240 are
yet to be notified. Until then, this court driven process will continue to be governed by
Section 391-396A of the Companies Act, 1956 and the Companies (Court) Rules, 1959
(collectively referred to as 1956 Act). This describes selective key changes introduced by
the 2013 Act in relation to mergers, which term, in common parlance, is used interchangeably
with amalgamations under Indian law. Additionally, it aims to compare those changes with
the 1956 Act.
1. The Framework
Chapter XV of the 2013 Act deals with Compromises, Arrangements and Amalgamations.
In this chapter, the Act consolidates the applicable provisions and related issues of
compromises, arrangements and amalgamations; however, other provisions are also attracted
at different stages of the process. Amalgamation means an amalgamation pursuant to the
provisions of the Act. In an amalgamation the undertaking comprising of property, assets and
liabilities, of one (or more) company are absorbed by and transferred either to an existing
company or a new company. Simply put, the transferor integrates with the transferee and the
former loses its entity and dissolves without winding-up. The 2013 Act creates a new
regulator, the National Law Company Tribunal (Tribunal) who, upon its constitution, will
assume jurisdiction (the High Courts will no longer have any jurisdiction) of the court for
sanctioning mergers. Once the Tribunal is constituted, expected to be formed sometime this
year, and related rules finalized, the provisions under the 2013 Act would be implemented.
Before detailing the key changes under the new law, a brief overview of the existing process
will be useful. Under the 1956 Act, companies which have reached a consensus to merge
must prepare a scheme of amalgamation/merger (Scheme). The lenders (financial
institutions or banks) of the transferor and the transferee must approve1 the Scheme
inprinciple, followed by the subsequent approval of the respective Board of Directors of the
merging entities. If the merging entities are listed companies, then the listing agreements
executed with the stock-exchanges require the company to communicate price-sensitive
information to the stock exchange immediately, to seek an approval from the capital. This
essentially happens after the approval of the Board to the Scheme. The next step is to apply2
to the High Court having jurisdiction over the registered office of the company seeking an
order to convene shareholders and creditors meeting. Without getting into further details of
the process, the key point is that any objector amongst the stakeholders can object to the
11 | D E M E R G E R S

Scheme in the court proceedings. The element of preparing the Scheme has been retained
under the 2013 Act. Unlike the 1956 Act, the new regime (a) recognizes cross border
mergers, (b) sets out separate procedure for merger of small companies and those of holding
with wholly-owned, (c) prescribes thresholds for objections, and (d) describes mandatory
filings to ensure legal compliance.

2. The Changes to the process

(a) Regulatory/Third party approvals:
As shareholders and creditors consents are essential, the 1956 Act, therefore, contemplates
issue of a notice to them. The 2013 Act requires service of the notice of the merger along with
documents (such as copy of the Scheme and valuation report) not only upon the shareholders
and creditors but also on various regulators including the Ministry of Corporate Affairs
(through Regional Director, Registrar of Companies and Official Liquidator),4 Reserve Bank
of India (RBI) (where non-resident investors are involved), SEBI (only for listed
companies), Competition Commission of India (where the prescribed fiscal thresholds are
crossed and the proposed merger could have an adverse effect on competition), Stock
Exchanges (only for listed companies), Income Tax authorities and other sector regulators or
authorities which are likely to be affected by the merger.5 This ensures compliance of the
Scheme with other regulatory requirements imposed on the merging entities. In fact, under
the 1956 Act the courts have made mergers subject to approval of the regulators. The 2013
Act prescribes a 30 day time frame for the regulators to make representations, failing which
the right would cease to exist. This is a positive step because in the 1956 Act no such time
frame was provided leading to considerable delays in the court proceedings.
2. The New Kinds of Mergers

Apart from the aforesaid changes, the 2013 Act provides for separate provisions for cross
border mergers, merger of two small companies and that of holding with wholly-owned
subsidiaries. These are described briefly below.

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(a) Cross-border mergers:

The 1956 Act permits cross-border mergers only where the transferor is a foreign company.
In contrast, the 2013 Act permits in-principle mergers between an Indian and a foreign
company located in a jurisdiction notified by the central government in periodic consultation
with RBI. Such a merger would be subject to RBI approval and Scheme may provide
payment in cash or depository receipts or both. The payment in cash or depository receipts
would facilitate exit to the shareholders of the merging entity who do not want to be a part of
the merged entity. These changes reflect the legislatures intent to facilitate cross-border
business. The Income Tax Act presently grants tax exemptions15 on mergers if the transferee
is an Indian company and does not recognize a situation where the transferee will be a foreign
company, as contemplated under the 2013 Act. The introduction of cross-border mergers
under the 2013 Act may, therefore, require corresponding changes in other laws, including
foreign exchange and tax.

Thus, the following points may be considered to analyse the concept of

Demerger, from a legal standpoint:3

De-merger would fall within the ambit of Section 391 to 394 of the

Companies Act, 1956 requiring approval by;

i

majority of shareholders (holding shares representing three-fourths value in

meeting convened for the purpose), and;

ii

sanction of the High Court.

De-merger would necessarily involve transfer of one or more

undertakings.

The transfer of undertakings is by the demerged company, which

is otherwise known as Transferor Company. While the company to which the

undertaking is transferred is known as the resulting company or the
transferee company.

3. companies act, 1956 [section 391-394]

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CASE STUDIES

WIPRO:
To focus on core IT Business, it demerged its non-IT businesses into a separate company
named Wipro Enterprises Limited with effect from 31 March 2013.[9] The demerged
companies are consumer care, lighting, healthcare and infrastructure engineering which
contributed approximately 10% of the revenues of Wipro Limited in previous financial year.
[10][11]

Recently Wipro has also identified Brazil, Canada & Australia as rapidly growing

markets globally and has committed to strengthen the presence in the respective countries
over the next 5 years.
The demerger move will help Wipro to meet SEBIs minimum public shareholding norm of
25 per cent by June. Wipros promoter held 78.29 per cent in the company as on December
31, 2012.
The stock of Wipro Ltd plummeted 12.3 per cent on Tuesday, after the IT major de-merged its
non-IT business into an unlisted entity. The non IT-businesses consumer care and lighting,
medical equipment and infrastructure engineering have been transferred to Wipro
Enterprises, which will not be listed.

14 | D E M E R G E R S

Wipro crashed 12.3 per cent to Rs. 393.60 on the NSE. According to analysts, the sharp fall
in the share price is the adjustment for the new stock to be issued to the existing shareholders.
Wipro shares traded without the benefit of entitlement of new shares in Wipro Enterprises, as
the company has set April 11 as the record date for the scheme of arrangement. It takes two
trading days for a purchase to be reflected in a shareholders account.
The demerger move will help Wipro to meet SEBIs minimum public shareholding norm of
25 per cent by June. Wipros promoter held 78.29 per cent in the company as on December
31, 2012.
Public shareholders in Wipro are entitled to receive one share in Wipro Enterprises for every
five shares they hold in Wipro. They can also choose to receive a 7-per cent preference share
(redeemable after 12 months, at a price of Rs. 235.2) in WEL for every five shares in Wipro.
The third option is to convert their WEL shares into Wipro shares by receiving one share in
Wipro for every 1.65 shares in WEL. Shareholders of Wipro on December 28 had approved
the demerger and the process is expected to be completed in 4-5 months.
BANGALORE: IT company Wipro today said the demerger of three non-IT business
divisions, including consumer products segment, into a privately-held company Wipro
Enterprises is effective from March 31.
"...the scheme of arrangement for the demerger of 'Diversified Business' of the company
approved by the board of director on November 1, 2012 is effective from March 31,
2013," Wipro Limited said in a filing at BSE.
The Scheme of Arrangement has been approved by the High Court of Karnataka and its order
filed with the Registrar of Companies, Wipro said in a statement.
Wipro said that April 11, 2013, has been fixed as the record date for the purpose of
determining the members of the company to whom Securities of the Resulting Company will
be allotted and who will be entitled to the Exchange Right pursuant to the Scheme of
Arrangement (Election and Exchange Notice).

15 | D E M E R G E R S

It is likely to take about six weeks from the record date for the whole process to be
completed, the statement added.
The company had announced it will hive off Wipro Consumer Care and Lighting (including
furniture business), Wipro Infrastructure Engineering (hydraulics and water businesses) and
Medical Diagnostic Product and Services business under the unlisted firm.
Wipro Ltd will remain a publicly listed company that will focus exclusively on information
technology, while Wipro Enterprises will be an unlisted company.

ADANI ENTERPRISES:
Diversified conglomerate Adani Group announced a wide-ranging restructuring to streamline
its various businesses and unlock their potential. The $9.4-billion Group said its holding
company, Adani Enterprises Ltd, will demerge its port, power and transmission undertakings
but absorb its wholly-owned mining subsidiary.
The Adani Enterprises board unanimously approved the scheme of demerger of the
diversified businesses of the flagship company together with its subsidiaries Adani Ports and
Special Economic Zone Ltd (APSEZL) and Adani Power Ltd, according to a company
statement here.
The composite scheme of arrangement for the demerger of Adani Enterprises port
undertaking into APSEZL and that of power undertaking into Adani Power also involves
demerger of the flagships transmission undertaking into Adani Transmissions Ltd, a whollyowned subsidiary of Adani Enterprises, and its subsequent listing.
Further, Adani Mining Private Ltd, a wholly-owned subsidiary of Adani Enterprises, is to be
merged into it. The arrangement will simplify the corporate structure providing shareholders
of Adani Enterprises direct shareholding in the respective operating companies, listing of one
of the largest private sector transmission companies (Adani Transmissions) with over 5,000
circuit km of transmission lines across western, northern and central India and increase free
float at Adani Power and APSEZL.

16 | D E M E R G E R S

This transaction is expected to unlock value for the shareholders of Adani Enterprises by
eliminating holding company discount. The boards, including the independent directors of
Adani Enterprises, APSEZL, and Adani Power, approved the proposed scheme and
recommended the same in the interest of their respective shareholders, the statement said.
Detailing the process involved in evolving the scheme of arrangement, the company said that
BSR & Associates provided to the boards of Adani Enterprises, APSEZL and Adani Power
their recommendation on the each of the Demerger Share Entitlement Ratio (DSER).

ULTRATECH CEMENT:
Takeover battle between Grasim and L&T lead to demerger. This battle had its roots from
earlier 1980s takeover battle of L&T & RIL. It may be sufficient to say that RIL could not
manage to get support from the government, public at large and financial institutions. The
largest shareholders of L&T were financial institutions which collectively held 40 percent
stake in L&T. LIC and UTI held approx. 27 percent and the rest was held by other FIs. FIs
backed L&T management and RIL had to step back. On November 18, 2001, RIL sold its
stake of 10.05% to Grasim, an A.V.Birla Group for Rs. 766.5 crores. Grasim paid Rs. 306.6
per share which was 46% higher than its original market price. Thereafter an investment
company subsidiary to Grasim acquired another 4.48% stake which lead to 14.53% stake of
Grasim in L&T. On October 13, 2002, Grasim made an open offer to acquire 20% stake in
L&T at Rs. 190 per share. This offer miserably failed after few legal allegations against
Grasim. It could only collect only 0.38% stake. In December 2002 L&T carved out its cement
business into a subsidiary company. With 15.73% stake in L&T, Grasim & L&T hammered
out a deal to carry out a structured de-merger of cement business of L&T in June 2003. With
effect from April 1, 2003, the cement business of L&T was vested in a separate company
(Ultratech Cement Limited). It was decided that post de-merger, Grasim will acquire the
control of the resultant cement company. However, L&T managed to retain certain key assets
like L&T brand, ready mix cement (RMC) business, the gas power plant in Andhra Pradesh,
and the entire residential and office property of the cement division. As per the demerger
deal, the stake of L&T would be 11.5%, while that of Grasim would be 21%. Remaining was
17 | D E M E R G E R S

allotted to the shareholders of L&T for every 5 of 2 shares of Ultratech cement ltd. Grasim
would then make an open offer for 30 percent of the Ultratech equity at the same price and
would take its stake to 51 per cent. The open offer by Grasim was meant for not only taking
control of Ultratech, but to give a chance to FIs to bring down their stake, in the process
making hefty capital gains. In subsequent developments, Grasim bought L&Ts stake actually
at Rs. 342.60 per share and made an open offer at the same price. Grasim, thus, had to shell
out Rs. 362 crores to L&T and Rs. 1298 crores in the open offer. As on 31st March 2003, the
total cement capacity in India was approx. 135 mn tonnes. L&T had the largest capacity of
18mn tonnes, followed by ACC at 15 nm tonnes, Grasim at 13 mn tonnes and Gujarat
Ambuja at 12.5 mn tonnes. In acquiring L&Ts cement business, Birlas had a simple motive
of growth through acquisition. After acquisition the combined capacity of Grasim and
Ultratech went up to 31 mn tonnes, making Grasim the largest producer in India and the
eighth largest in the world. L&T was also considered as a premium brand and used to fetch
higher price. Though this brand would not be available to Grasim in the long run, L&T
allowed Grasim to use it for more than a year post acquisition. Grasim managed to transfer
brand equity of L&T cement to Ultratech cement. While Grasim was strong in the
Southern markets, L&T was strong in the rest of India. L&Ts strong distribution network
was very vital to Grasim to push its own brands also. The first and foremost reason was
survival. At the time RIL tried to takeover L&T, FIs had backed L&T management to control
over L&T. Birlas had succeeded in convincing FIs about the structured vertical de-merger
and about FIs selling their shares in the resultant cement company either directly or through
open offer. Also, now Birlas could up their stake in L&T through either creeping acquisition
or through another open offer. So in order to keep their control over L&T, which by then was
a ten thousand crore empire even sans cement, L&T management had no choice but to agree
to give away the cement business. L&T management also used de-merger to strengthen L&T
balance sheet. In de-merger, L&Ts paid up capital was reduced to 10 percent of what it was
prior to de-merger. The number of equity shares was reduced to half and face value to one
fifth. This resulted into EPS shooting up.

18 | D E M E R G E R S

CONCLUSION

It is now a just and proper statement to state that, demergers are a fairly common term
involved with corporate restructuring nowadays. They provide an opportunity to create
individual profit centres and investors in the company also benefit from the process as there
is fresh valuation of the demerged entity which in turn often results in an increase in the share
price. Demerger is often done with an eye to segregate, categorise and more importantly
specialise a particular segment of a corporate entity.
However due to the creation of an altogether new business entity, the same requires
prudence and astute decision making on the part of the investor.

The folowing points must however be considered both from an investors as well as a legal
point point of view:4

Extent of separation

First, the activities separated at the time of demerger is a critical factor. It is

important to remember that the overall size of the business entity and the extent of the
profits that it makes is one important factor that determines the pricing of the newlylisted shares. Also, the future potential will determine the price impact after the
demerger.

4. Demergers: A great way to get richer by Arnav Pandya in New Delhi

19 | D E M E R G E R S

Identifying benefits

The key role for the investor is to identify an entity where the strong or profitable
business remains. And then, look for the company which has a future potential.

Trading price

Demerger can lead to some immediate gains for the investors where the price of the
separate entities shoots up. Too high a rise and one should immediately opt for the sell
option. It is not uncommon to find valuations touch dizzying heights after a demerger
and the benefits have to be booked.

Investor interest

There is often a high interest on a particular scrip, immediately after the demerger
leading to a shooting up of the scrip. Following a thumb rule where the price of the
scrip vis-a-vis actual valuation gives a fair idea about the extent of overvaluation or
undervaluation taking place.

20 | D E M E R G E R S

SUGGESTIONS

The de-merger of a highly promising business from others may help focus stock
market attention on the business. But it can also make the individual stocks more
vulnerable to swings in fortune in their chosen area of business. Hence, the pros and

cons of the business should be studied carefully.

To raise capital gains from the assets acquired at the time of underperformance of the

entity.
Utilization of financial and human resources for better profitable opportunities

compared to the prevailing entity.

It also leads to selling of unwanted surplus in the business thereby carrying out the

restructuring/reorganization strategy and get rid of the sick entity

Maximization of shareholder's value -since it is felt that the value of the business

when separated will be more than the value of the group.

To Focus more on the activities of various business units which is not possible by the
giant corporate. (Similar to the proposition of forming a separate state for better

administration and development Jharkand and Bihar )

.To get relief from strict government regulations which the entity may face before

demerger as a result of other business

Rating of the corporate becomes an easy affair relating to the specific business in
which they have the expertise.

REFERENCES
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http://www.rediff.com/money/slide-show/slide-show-1-why-wipros-demerger-is-

good-for-investors/20121205.html
http://www.investorwords.com/6788/demerger.html
http://www.investopedia.com/terms/d/demerger.asp
http://www.lexisnexis.com/uk/lexispsl/corporate/synopsis/92510:99208/Demergers-

and-restructuring/Demergers
http://www.herbertsmithfreehills.com/-/media/Opinions/Taxation%20of
%20demergers%20Tax%20Journal%20October%202013.pdf

22 | D E M E R G E R S