Demerger , case study of Larsen and Toubro limited

Demerger under companies act ,1956

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Clause (B) of sec 390 arrangement includes a reorganization of the share capital of the company by the consolidation of shares of different classes OR by the decision of shares into shares of different classes OR , by both these methods . Such divisions may take place for various reasons internal or external .

Procedural aspect in respect of demerger

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Scheme must be within companys powers - court will not sanction a scheme of compromise or arrangement which is beyond powers of company defined in MOA . - company may alter relevant clauses in its MOA to get sanctioned .

Res Judicata rejected proposed scheme again proposing ,will be declined according to this principle second time as well.

Rules and forms in respect of scheme of demerger

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Form no. 33 summons for directions to convene a class meeting under section 391 rule 67 . From no.34 affidavit in support of summons rule 67 From no.35 order on summons for directions rule 69 Form no36 notice convening meeting rule 73 From no.37 form of proxy rule 73

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Form no. 38 advertisement of notice convening meeting of creditors / shareholders. Form no. 39 report by chairman of the meeting rule 78 Form no. 40 petition to sanction the scheme of compromise or arrangement rule 79 . From no. 41 order on petition rule 81 .

Case larsen & toubro ltd intro..

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L&T est. 1942 . Leading in manufacturer and engineer in turnkey projects Diversified activities such as electrical , construction, cement manufacturing ,medical equipments ,shipping ,heavy engineering nad IT. By 2000, planned to demerge and concentrate on more infrastructure business .

Why demerger ?
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GIL (Grasim Industries) flagship of Aditya Birla Group wanted control over L&T management , First acquired 15% stake and made open offer to L&T shareholders to increase it . Later the shareholders approved the demerger of L&Ts cement division Ultra Tech CemCo Ltd(UCL).

3phases of demerger.
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First L&T spin off the cement business into new company ,Ultra Tech Cemco Ltd, L&T hold 20% and bal. 80% would be existing shareholders of L&T. Second- GIL buy 8.5%UCL from L&T for 342.60 per share and make open offer to other shareholders of another 30% at the same price. Third- L&T Employee Welfare foundation would acquire the GILs 15.3% stake .

Demerger ratio .
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For every 2 shares (FV-10) held in L&T, shareholder was given 1 share in new L&T. At the same time for every 5 shares held in L&T the shareholder was given 2 shares in the demerged cement company- Ultra Tech Cemco.

Benefits of Demerger to L&T

Lead to immediate realization of value from cement business ` Create 2 distinct listed entities for engineering - cement  Enable L&T to become focused Engineering ,Construction and Technology Company.
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Benefits of Demerger to Grasim

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Economies of scale and overall competitiveness . Access domestic and international markets . Increased capacity .