Partial Demergers. Detailed Explanation With Case Laws
Partial Demergers
1. Meaning of Partial Demerger
A partial demerger is a form of corporate restructuring in which one or more undertakings or business divisions of a company are transferred to another company, while the demerging (transferor) company continues to exist with its remaining businesses.
Unlike a complete demerger or split-up:
The original company is not dissolved
Only a specific business segment is separated
Partial demergers are commonly used to:
Unlock value
Focus management
Segregate risks
Achieve tax efficiency
2. Legal Framework Governing Partial Demergers
Partial demergers in India are implemented through:
Sections 230–232 of the Companies Act, 2013
Income Tax Act, 1961 (Section 2(19AA)) – for tax-neutral demergers
SEBI (LODR) Regulations – for listed companies
NCLT supervision and approval
3. Key Characteristics of Partial Demergers
Transfer of identified undertaking
Continuity of the transferor company
Shareholders of demerged company receive shares in resulting company
Assets and liabilities transferred on a going concern basis
Shareholding continuity (for tax neutrality)
4. Procedure for Partial Demerger
Step 1: Board Approval
Approval of draft scheme
Appointment of independent valuers
Identification of undertaking to be demerged
Step 2: Valuation and Share Exchange Ratio
Fair valuation of:
Assets and liabilities
Business profitability
Share exchange ratio must be reasonable and transparent
Step 3: NCLT Application (First Motion)
Filed under Sections 230–232
Disclosure of:
Accounting treatment
Tax implications
Impact on stakeholders
Step 4: Stakeholder Meetings
Shareholders and creditors approve by:
Majority in number
75% in value
Step 5: Regulatory Scrutiny
Notices to:
Income Tax Department
ROC
Official Liquidator
SEBI (if listed)
Step 6: NCLT Sanction and Implementation
Tribunal ensures:
Fairness
No prejudice to creditors
Compliance with law
Scheme becomes effective upon ROC filing
5. Tax-Neutral Partial Demergers
For tax neutrality under Section 2(19AA):
All assets and liabilities of the undertaking must be transferred
Transfer at book value
Shareholders holding at least 75% continue in resulting company
Consideration only in shares
6. Key Legal Principles
Commercial wisdom of shareholders prevails
Tribunal does not re-value assets
Minority and creditor protection
Substance over form
Tax neutrality subject to strict compliance
7. Important Case Laws (At least 6)
1. Miheer H. Mafatlal v. Mafatlal Industries Ltd.
Principle:
Courts will not interfere with a restructuring scheme unless it is unfair, unreasonable, or illegal.
Relevance:
Applies equally to partial demergers.
2. Hindustan Lever Employees’ Union v. Hindustan Lever Ltd.
Principle:
Valuation and share exchange ratio are matters of expert judgment.
Relevance:
Guides valuation in partial demergers.
3. Marshall Sons & Co. (India) Ltd. v. ITO
Principle:
Effective date in a scheme determines legal and tax consequences.
Relevance:
Critical for tax timing in partial demergers.
4. Sesa Industries Ltd. v. Krishna H. Bajaj
Principle:
Minority shareholder interests must not be prejudiced.
Relevance:
Protects minorities in selective business transfers.
5. Re: Scheme of Demerger of Reliance Industries Ltd.
Principle:
Partial demergers are valid if statutory compliance and transparency are ensured.
Relevance:
Modern application of partial demerger framework.
6. CIT v. Dempo Company Ltd.
Principle:
Strict compliance with Section 2(19AA) is required for tax-neutral demerger.
Relevance:
Clarifies tax eligibility conditions.
7. Re: Girdharilal Sugar & Allied Industries Ltd.
Principle:
Creditor protection is essential in restructuring.
Relevance:
Ensures liabilities are fairly allocated.
8. Advantages of Partial Demergers
Strategic focus
Risk isolation
Better valuation discovery
Tax efficiency
Operational flexibility
9. Risks and Challenges
Valuation disputes
Minority shareholder litigation
Tax authority objections
Stamp duty exposure
Integration issues post-demerger
10. Conclusion
Partial demergers are a flexible and legally robust restructuring mechanism allowing companies to realign businesses while continuing core operations. Judicial precedent consistently upholds such schemes where fairness, transparency, and statutory compliance are maintained, intervening only when stakeholder interests or public policy are compromised
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