Demerger under Companies Act,2013
Demerger can be defined as a division and spill of a company into a different small no. of companies and it’s not compulsory that a new company should be a subsidiary of a parent company. Demerger is a form of Corporate Restructuring that is undertaken by companies for specialization. The demerger is not defined under the Companies Act, 2013, it is defined in Sub-section (19AA) Section of the Income Tax Act,1961
In other words, a demerger can be defined as a corporate partition in different no. of business and they may or not be a subsidiary of a parent company or they can be sold, or liquidated.
Provision Of Companies Act, 2013 Applicable On Demerger are:
- The provisions contained in Section 230-233 of Chapter XV of the Companies Act, 2013 read with The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, are applicable in the case of Demerger.
- Earlier in the Companies Act, 1956 provisions of Demerger were complete- code or a single window clearance, i.e. once the scheme is approved by the high court, separate approval from stakeholders and various statutory authorities is not required. As the High Court has original jurisdiction in company matters as per previous companies’ acts, whereas, has appellate jurisdiction in other acts.
Fast Track Provision of Demerger
Section 232 of the Act, the provisions thereof extend to a scheme for the reconstruction of the company or companies involving the merger or the amalgamation of any two or more companies including a scheme of demerge
The demerger in India takes place according to Section 232 of the Companies Act 2013 under the scheme of arrangement. Under this arrangement, the company has to first amend its MOA & AOA and prepare a draft scheme of arrangement that the board of directors should adopt through resolution.
Examples of Demerger are:
- PayPal splitting from eBay in 2014
- Welspun Corp Limited demerged to Welspun Steel Limited in July 2021
- Piramal Enterprise Demerged in Piramal Financial Services and Piramal Pharmaceuticals
The demerger enables the company to diversify its losses by splitting the underperforming part of the business into a separate entity. It enables the holding company to sustain itself out of the remaining funds and helps maintain the goodwill of the company in the market. Since the demerger is a scheme of the arrangement, the demerger shall take place according to the Companies Act 2013.
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