Demerger - Companies Act

A demerger is a corporate reorganization in which a business is broken down, either to function on their own or to be sold or liquidated. Hence, demerge is a separation of one or more units to

form a new company. In this article, we look at the process for demerger under Companies Act, 2013.

Process for Demerger

The following are the major steps involved in the demerger of a company.

Preparation of the Scheme of Arrangement

Scheme of arrangement is the most important document in the demerger process by which the company binds all related stakeholders on the terms of the demerger. A scheme of arrangement would deal with aspects such as the share swap ratio (if applicable, details of the transfer of debt or payment to creditors, transfer of employees, assets, liabilities and more. The scheme of arrangement can be proposed by the directors of the company or the liquidator of the company. The scheme of arrangement would have to be accepted by the shareholders, creditors, employees and all related stakeholders.

Application in Court

A demerger can be completed by making an application to the High Court and through orders issued by a Judge. Hence, to commence the demerger process, an application must be filed in Form 33 along with the affidavits of the promoters and the following documents:

Memorandum and Articles of Association of the Company
Latest Audited Balance Sheets
List of Shareholders and Creditors
Extract of Board Resolution approving the Scheme
Scheme of Arrangement
Draft notice of Meeting, Explanatory Statements, and replacement or substitute

Issue of Notice

A notice must be sent to the interested parties by the authorized individuals, 21 days prior to the date of the meeting along with the proposed scheme of arrangement and proxy forms. This notice would be publicized in Form 38 through newspapers that are well circulated among the interested parties.

Holding of Meeting

A meeting should be held according to the guidelines of the Court and the output of such meetings should be recorded along with votes in support of or against the motion. The chairperson of the meeting must submit a report in Form 39 within the time approved by the Court.

Petition and Sanction of the Court

A petition has to be submitted to the court for authorizing the demerger. It has to be sanctioned by three-fourths of members/creditors to file an appeal. Once the Court hears the objections, it verifies the applicability of the scheme submitted and later issues an order. The Court would then pass an order approving the demerger in the same newspaper in which the notice of the meeting was advertised.

Back to Learn

Frequently Asked Questions

Common questions about Demerger Process Under Companies Act 2013 in India.

A demerger is a corporate reorganization process where a business is broken down into separate units or companies. It involves separating one or more units from the existing company to form a new, independent entity.

The purpose of a demerger can vary, but it is often done to streamline operations, unlock value, or separate unrelated businesses. It can also be undertaken to facilitate the sale or liquidation of certain units or to create more focused and specialized companies.

The first step in the demerger process is the preparation of the Scheme of Arrangement. This document outlines the terms and conditions of the demerger, including the share swap ratio, transfer of assets, liabilities, employees, and other relevant details.

A Scheme of Arrangement can be proposed by the directors of the company or the liquidator of the company, if applicable.

The High Court plays a crucial role in the demerger process. An application must be filed with the High Court, and the demerger can only be completed through orders issued by a judge. The Court also hears objections and verifies the applicability of the proposed Scheme of Arrangement.

The demerger process involves obtaining approval from various stakeholders, such as shareholders, creditors, and employees. A notice of the proposed demerger, along with the Scheme of Arrangement, must be sent to interested parties, and meetings must be held to obtain their approval.

For a demerger to be sanctioned, it must be approved by three-fourths of the members or creditors. If this threshold is met, a petition can be filed with the Court for authorizing the demerger.

Once the Court approves the demerger, it will pass an order approving the demerger. This order must be advertised in the same newspaper in which the notice of the meeting was initially published.

Potential benefits of a demerger include greater operational focus, improved resource allocation, enhanced shareholder value, better risk management, and increased financial flexibility for the separated entities.

Some potential drawbacks or risks of a demerger include the loss of synergies, increased administrative and operational costs, potential disruptions during the transition, and the possibility of undervaluing or overvaluing the separated units.