Legal Provisions as per Companies Act, 2013 of Demergers

In India, Demergers are governed by the Companies Act, 2013, specifically under Chapter XV (Sections 230–240), which deals with compromises, arrangements, and amalgamations. Although the Act does not explicitly define “Demerger,” it provides a legal framework for such corporate restructuring activities.

Key Legal Provisions

1. Section 230: Power to Compromise or Make Arrangements with Creditors and Members

Section 230 allows companies to enter into compromises or arrangements with creditors and members. A demerger, being a form of arrangement, falls under this provision. The process involves:

• Application to NCLT: The company must apply to the National Company Law Tribunal (NCLT) for approval of the proposed scheme.

• Disclosure Requirements: The application should include details like the scheme’s terms, valuation reports, auditor’s certificates, and other relevant documents.

• Meetings: NCLT may order meetings of creditors or members to consider the scheme. Approval requires a majority in number representing three-fourths in value of creditors or members present and voting.

• Sanctioning: Upon satisfaction, NCLT may sanction the scheme, making it binding on all stakeholders.

2. Section 232: Merger and Amalgamation of Companies

Section 232 specifically addresses mergers and amalgamations, which encompass demergers. Key aspects include:

• Transfer of Undertakings: The scheme may involve transferring whole or part of the undertaking, property, or liabilities from the transferor to the transferee company.

• Dissolution Without Winding Up: The transferor company may be dissolved without undergoing the winding-up process.

• Continuation of Legal Proceedings: Any legal proceedings by or against the transferor company continue against the transferee company.

• Employee Transfer: Employees of the transferor company become employees of the transferee company on the same terms.

• Accounting Treatment: The scheme must comply with accounting standards prescribed under Section 133.

• Regulatory Approvals: If the transferor company is listed, approvals from regulatory bodies like SEBI may be required.

3. Section 233: Fast-Track Mergers

Section 233 provides a simplified procedure for mergers and amalgamations between:

• Two or more small companies.

• A holding company and its wholly-owned subsidiary.

Key features:

• Board Resolutions: Approval from the Boards of Directors of both companies.

• No Objection Certificates: Obtaining NOCs from creditors and shareholders.

• Registrar and Official Liquidator: Filing the scheme with the Registrar of Companies and the Official Liquidator.

• Approval: If no objections are raised, the scheme is deemed approved without NCLT intervention.

4. Section 234: Cross-Border Mergers

Section 234 allows Indian companies to merge with foreign companies, subject to:

• Prior Approval: Obtaining prior approval from the Reserve Bank of India (RBI).

• Jurisdiction: The foreign company must be incorporated in a jurisdiction notified by the Central Government.

• Compliance: Adherence to rules prescribed by the Ministry of Corporate Affairs.

Procedural Aspects:

1. Drafting the Scheme

The scheme of demerger should detail:

• Transfer of Assets and Liabilities: Clearly specify which assets and liabilities are being transferred.

• Share Exchange Ratio: Outline the ratio at which shares will be exchanged between the companies.

• Appointed Date: Define the date from which the scheme becomes effective.

• Rationale: Provide the business rationale for the demerger.

2. Valuation and Reports

• Valuation Report: Obtain a valuation report from a registered valuer to determine the share exchange ratio.

• Auditor’s Certificate: The company’s auditor must certify that the accounting treatment is in compliance with applicable accounting standards.

3. Filing with NCLT

• Application: File an application with NCLT along with the scheme, valuation report, auditor’s certificate, and other requisite documents.

• Notices: Issue notices to creditors, shareholders, and regulatory authorities as directed by NCLT.

• Meetings: Conduct meetings of creditors and shareholders to approve the scheme.

4. Regulatory Approvals

• SEBI Approval: If the company is listed, obtain approval from the Securities and Exchange Board of India (SEBI).

• RBI Approval: For cross-border demergers, secure approval from the Reserve Bank of India.

5. Sanctioning and Filing

• NCLT Order: Upon satisfaction, NCLT sanctions the scheme.

• Filing: File the NCLT order with the Registrar of Companies within 30 days.

Tax Implications:

While the Companies Act, 2013, does not directly address tax aspects, the Income Tax Act, 1961, provides tax neutrality for demergers under certain conditions:

• Section 2(19AA): Defines demerger and lays down conditions for tax neutrality.

• Section 47: Specifies transactions not regarded as transfers, thus exempting them from capital gains tax.

Compliance with these provisions ensures that the demerger is tax-neutral for both the companies and their shareholders.