Amalgamation
This query is : Resolved
20 November 2013
what is demarger? is it in ipcc syellbus?
20 November 2013
Hi
Meaning of 'Demerger'
De-merger is an opposite of merger a statutory disintegration or separation of two or more companies by the transfer of the properties to one surviving company. The expression 'demerger' is defined in section 2(19AA) of the Income-tax Act. It is a process of reorganizing a corporate structure whereby the capital stock of a division or subsidiary of a corporation or of a newly affiliated company is transferred to the stockholders of the parent corporation without an exchange of any part of the stock of the latter.
However this term is used also to describe the act or process of 'spin-off' of a unit or division or a business out of two or more of them by sale without any change in the shareholding of the selling company or issue by it of new shares to the buyer company or its shareholders. This is described in section 293(1)(a) of the Act as "sell, lease or otherwise disposing of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking."
The Companies Act does not contain the concept of 'de-merger' as such, but it does indirectly recognise it in:—
(a) section 391/394 as a scheme of compromise, arrangement or reconstruction; and
(b) section 293(l)(a) as a sale, lease or otherwise dispose of the whole of the undertaking of the company; or substantially the whole of the undertaking of the company; or if the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking.
The concept of de-merger under the Income-tax Act is identical to that under section 293(l)(a), but it must satisfy the requirements of section 2(19AA) of the Income-tax Act and sections 391 and 394 of the Companies Act.
Meaning of 'Demerger'
De-merger is an opposite of merger a statutory disintegration or separation of two or more companies by the transfer of the properties to one surviving company. The expression 'demerger' is defined in section 2(19AA) of the Income-tax Act. It is a process of reorganizing a corporate structure whereby the capital stock of a division or subsidiary of a corporation or of a newly affiliated company is transferred to the stockholders of the parent corporation without an exchange of any part of the stock of the latter.
However this term is used also to describe the act or process of 'spin-off' of a unit or division or a business out of two or more of them by sale without any change in the shareholding of the selling company or issue by it of new shares to the buyer company or its shareholders. This is described in section 293(1)(a) of the Act as "sell, lease or otherwise disposing of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking."
The Companies Act does not contain the concept of 'de-merger' as such, but it does indirectly recognise it in:—
(a) section 391/394 as a scheme of compromise, arrangement or reconstruction; and
(b) section 293(l)(a) as a sale, lease or otherwise dispose of the whole of the undertaking of the company; or substantially the whole of the undertaking of the company; or if the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking.
The concept of de-merger under the Income-tax Act is identical to that under section 293(l)(a), but it must satisfy the requirements of section 2(19AA) of the Income-tax Act and sections 391 and 394 of the Companies Act.
20 November 2013
Formalities to be complied with in case of Demerger
67.1. Approval of shareholders
(a) Obtain shareholders approval under section 293(l)(a) after finalizing terms and conditions with the buyer;
(b) File resolution alongwith certified copy of the explanatory statement and copies of the agreement executed with the Registrar of Companies with Form 23 within 30 days of the general meeting;
(c) Give a certified copy of resolution to the buyer so that he can begin due diligence.
67.2. Buyers legal due diligence
This mainly comprises verification of:—
(i) Documents relating to title in respect of immovable properties;
(ii) Charges on assets and documents, register of charges;
(iii) Obtain search report from practicing company secretary regarding the registration of charges and verify the same with the documents and bank charges;
(iv) Copies of mortgages, deeds, pertaining the properties;
(v) Minutes book of the Board and general meetings of the Company and its subsidiary if any;
(vi) Copies of Insurance policies;
(vii) Copies of the registered Trade Marks, if any;
(viii) Copies of material contracts;
(ix) Contracts with key managerial personnel;
(x) Licences, certificates for environmental and pollution agencies;
(xi) Licences under Central Excise Act, Shops and Establishments Act, Factories Act and various other Acts applicable;
(xii) Detailed documents relating to the pending litigation, if any, concerning the properties;
(xiii) General Power of Attorneys executed by the Company in favour of any person;
(xiv) Declaration from the Architect stating that all the structures and building have been constructed as per plans approved by the Municipal Corporation and/or other concerned authority and no excess FSI has been used or no unauthorised construction has been done;
(xv) Details of last wage settlements;
(xvi) Details of labour disputes;
(xvii) List of outstanding in PF, ESIC and statutory dues;
(xviii) List of the civil and/or criminal cases filed by or against the Company and present status thereto;
(xix) Books of accounts of the Company;
(xx) List of debtors, creditors, bank guarantee in currency, letter of credit given, loans and advances given or taken and there terms and conditions;
(xxi) Verification of plant and machinery, tools, stores, spares, inventory; etc;
(xxii) Status report from the bank regarding operation of the Bank account.
67.3. Buyer's financial due diligence
This comprises verification of:—
(i) Internal Audit reports, Tax Audit Report; Cost Audit Report, etc. for past years;
(ii) Past Balance Sheets;
(iii) Provisional balance sheet and profit and loss account till the cut-off date of the demerger.
67.4. Agreement for sale of business
(i) Agreement for the sale of undertaking is signed;
(ii) Business Sale Agreement, Business Assignment Agreement or Agreement for Sale of Business/ Undertaking;
(iii) The Agreement inter alia covers the following issues/points—
(1) Assignment of business and consideration to be paid;
(2) Further assurances in respect of other documentation, assets and liabilities, etc.
(3) Representations and warranties to be given by the seller with regard to:—
(a) The organisation and its standing;
(b) The authority which sanctioned the sale;
(c) Validity of the assignment;
(d) Material changes;
(e) The subject matter has not been otherwise disposed;
(f) Employees - terms and conditions;
(g) Labour matters, Wage Agreement;
(h) Liability of the seller's residuary business;
(i) Legal proceedings against the seller;
(j) Status of tax liabilities in respect of the undertaking being sold.
(4) Representations and warranties to be given by the buyer with regard to:—
(a) About the organisation and its standing;
(b) The authority, which sanctioned the sale;
(c) Validity of the assignment
(5) Assignment of Trade Marks and Patents, if any, to the acquirer;
(6) Survival and enforcement of representations and warranties, indemnification;
(7) Non-assignment;
(8) Arbitration.
67.5. Sale/conveyance deed
(1) Conveyance or Sale Deed for transfer of immovable property of the undertaking;
(2) The Sale Deed is to be submitted to the Registrar for adjudication of Stamp Duty payable under the Stamp Act. It should be noted that the Stamp duty payable on conveyance differs from State to State;
(3) Valuation of movable property should be made. It should be noted that the Stamp duty on immovable property payable on the true market value of the property or consideration payable, which ever is higher.
67.6. Transfer of undertaking to a new company
(1) The new company to approve Transfer of Business Agreement;
(2) After the agreement is executed:—
(a) intimate the change to Income Tax Department, Sales Tax Department, Excise Department and obtain new DGFT and Customs registration numbers;
(b) obtain new registration under the Factories Act;
(c) appoint 'occupier' and 'manager' under the Factories Act;
(d) obtain fresh PF and ESIC No.;
(e) obtain fresh importer-exporter code no.
Formalities to be complied with in case of Demerger
67.1. Approval of shareholders
(a) Obtain shareholders approval under section 293(l)(a) after finalizing terms and conditions with the buyer;
(b) File resolution alongwith certified copy of the explanatory statement and copies of the agreement executed with the Registrar of Companies with Form 23 within 30 days of the general meeting;
(c) Give a certified copy of resolution to the buyer so that he can begin due diligence.
67.2. Buyers legal due diligence
This mainly comprises verification of:—
(i) Documents relating to title in respect of immovable properties;
(ii) Charges on assets and documents, register of charges;
(iii) Obtain search report from practicing company secretary regarding the registration of charges and verify the same with the documents and bank charges;
(iv) Copies of mortgages, deeds, pertaining the properties;
(v) Minutes book of the Board and general meetings of the Company and its subsidiary if any;
(vi) Copies of Insurance policies;
(vii) Copies of the registered Trade Marks, if any;
(viii) Copies of material contracts;
(ix) Contracts with key managerial personnel;
(x) Licences, certificates for environmental and pollution agencies;
(xi) Licences under Central Excise Act, Shops and Establishments Act, Factories Act and various other Acts applicable;
(xii) Detailed documents relating to the pending litigation, if any, concerning the properties;
(xiii) General Power of Attorneys executed by the Company in favour of any person;
(xiv) Declaration from the Architect stating that all the structures and building have been constructed as per plans approved by the Municipal Corporation and/or other concerned authority and no excess FSI has been used or no unauthorised construction has been done;
(xv) Details of last wage settlements;
(xvi) Details of labour disputes;
(xvii) List of outstanding in PF, ESIC and statutory dues;
(xviii) List of the civil and/or criminal cases filed by or against the Company and present status thereto;
(xix) Books of accounts of the Company;
(xx) List of debtors, creditors, bank guarantee in currency, letter of credit given, loans and advances given or taken and there terms and conditions;
(xxi) Verification of plant and machinery, tools, stores, spares, inventory; etc;
(xxii) Status report from the bank regarding operation of the Bank account.
67.3. Buyer's financial due diligence
This comprises verification of:—
(i) Internal Audit reports, Tax Audit Report; Cost Audit Report, etc. for past years;
(ii) Past Balance Sheets;
(iii) Provisional balance sheet and profit and loss account till the cut-off date of the demerger.
67.4. Agreement for sale of business
(i) Agreement for the sale of undertaking is signed;
(ii) Business Sale Agreement, Business Assignment Agreement or Agreement for Sale of Business/ Undertaking;
(iii) The Agreement inter alia covers the following issues/points—
(1) Assignment of business and consideration to be paid;
(2) Further assurances in respect of other documentation, assets and liabilities, etc.
(3) Representations and warranties to be given by the seller with regard to:—
(a) The organisation and its standing;
(b) The authority which sanctioned the sale;
(c) Validity of the assignment;
(d) Material changes;
(e) The subject matter has not been otherwise disposed;
(f) Employees - terms and conditions;
(g) Labour matters, Wage Agreement;
(h) Liability of the seller's residuary business;
(i) Legal proceedings against the seller;
(j) Status of tax liabilities in respect of the undertaking being sold.
(4) Representations and warranties to be given by the buyer with regard to:—
(a) About the organisation and its standing;
(b) The authority, which sanctioned the sale;
(c) Validity of the assignment
(5) Assignment of Trade Marks and Patents, if any, to the acquirer;
(6) Survival and enforcement of representations and warranties, indemnification;
(7) Non-assignment;
(8) Arbitration.
67.5. Sale/conveyance deed
(1) Conveyance or Sale Deed for transfer of immovable property of the undertaking;
(2) The Sale Deed is to be submitted to the Registrar for adjudication of Stamp Duty payable under the Stamp Act. It should be noted that the Stamp duty payable on conveyance differs from State to State;
(3) Valuation of movable property should be made. It should be noted that the Stamp duty on immovable property payable on the true market value of the property or consideration payable, which ever is higher.
67.6. Transfer of undertaking to a new company
(1) The new company to approve Transfer of Business Agreement;
(2) After the agreement is executed:—
(a) intimate the change to Income Tax Department, Sales Tax Department, Excise Department and obtain new DGFT and Customs registration numbers;
(b) obtain new registration under the Factories Act;
(c) appoint 'occupier' and 'manager' under the Factories Act;
(d) obtain fresh PF and ESIC No.;
(e) obtain fresh importer-exporter code no.
20 November 2013
Activities to be followed for demerger
68.1 Activities from board meeting for approval of demerger scheme to court order
1. Intimation in stock exchange of board meeting date for considering demerger.
2. Board approval for scheme.
3. Informing stock exchange of board’s decision.
4. Consent from shareholders to the Scheme for Resulting Companies (in case of Closely held unlisted Companies)
5. Filling scheme with the Stock Exchanges.
6. NOC/ Approval from Stock Exchanges (BSE/NSE).
7. Filing of Application under section 391(1) with High Court (along with Judge's summons, affidavit in support of summons, and draft minutes of order)
8. Finalizing the notice/Explanatory Statement for Meeting of the Shareholders Secured and unsecured Creditors
9. Hearing of company's application.
10. Hearing of Resulting, Companies application
11. Receiving authenticated copy of order for holding/dispensing with the Meeting of Shareholders/Secured and unsecured Creditors
12. Obtaining certified copy of order of High court for court Convened Meeting.
13. Commencement of Printing of Notice for court convened meeting.
14. Completion of dispatch of notices for meeting under UCP.
15. Advertisement of notice of meetings-
16. Filing of Notice - Advertisement of meeting with stock exchange (s).
17. Filing of advertisement of meeting with court.
18. Filing of Affidavit signed by Chairman of the meeting or other person directed by the court verifying that the directions regarding the issue of notices and the advertisements have been duly complied with.
19. Meeting of Creditors and Members.
20. Reporting the decision of the poll to the High Court.
21. Filing of petition with the Court along with relevant documents.
22. Admission of the petition.
23. Minutes of order by judge fixing the date of hearing of petition and advertisement of notice of hearing;
24. Advertising the notice of hearing in newspaper.
25. Obtaining certified copy of order on admission of petition.
26. Filing of copy of petition with annexures with RD / ROC ' through e-Form 61
27. Filing of affidavit confirming service of notice of petition and publication in newspaper.
28. Follow up with RD/ ROC.
29. Receipt of letter, queries etc from RD and ROC.
30. Follow - up with RD/ROC/ Legal Counsel to resolve issues, if any.
31. Initial date of hearing of petition.
32. Adjoined hearing if any.
33. Filing of amended petition if any.
34. Final date of hearing of petition.
35. Obtaining certified copy of order on petition.
36. Payment of Stamp duty, if required.
37. Filing of certified order with RD/ROC along with Form.
68.2 Activities from court order till Record Date
1. Acknowledgement of receipt from RoC and certified true copy of (Court order to be filed with the stock Exchange.
2. Notice to Stock Exchange for Record Date to determine eligibility to receive shares of the Resulting Companies and voluntarily give advertisement of the Record Date in National Dailies; (21day notice).
3. Enter into and agreement with CDSL and NSDL (if not having connectivity)
4. Printing of stationery-Allotment Advice, Share Certificate, Envelopes.
5. Application seeking exemption for relaxation of Rule 19(2){b) from SEB1 through the designated Stock Exchange.
6. Application lo Stock exchange for in - principle approval for Listing of shares.
7. Designated Stock exchange to forward the application to SEB1 for approval under Rule 19(2)(b) of SCRA Rules.
8. Prepare Information Memorandum (IM).
9. Compliance with clause 49- pre-requisite for Listing.
10. File Information Memorandum with BSE and NSE.
11. Stock Exchange to receive SEBI approval and give in-principal approval for listing of shares of the resulting companies.
12. Keep shares certificates, covering letter, envelop of resulting companies ready for over printing.
13. Keep text and stationery ready for intimation of corporate actions for the Resulting Companies.
14. Letter relating to cost of acquisition to be sent, to shareholders.
15. Ex-date for Stock Exchange for F & O
16. Record Date.
Activities to be followed for demerger
68.1 Activities from board meeting for approval of demerger scheme to court order
1. Intimation in stock exchange of board meeting date for considering demerger.
2. Board approval for scheme.
3. Informing stock exchange of board’s decision.
4. Consent from shareholders to the Scheme for Resulting Companies (in case of Closely held unlisted Companies)
5. Filling scheme with the Stock Exchanges.
6. NOC/ Approval from Stock Exchanges (BSE/NSE).
7. Filing of Application under section 391(1) with High Court (along with Judge's summons, affidavit in support of summons, and draft minutes of order)
8. Finalizing the notice/Explanatory Statement for Meeting of the Shareholders Secured and unsecured Creditors
9. Hearing of company's application.
10. Hearing of Resulting, Companies application
11. Receiving authenticated copy of order for holding/dispensing with the Meeting of Shareholders/Secured and unsecured Creditors
12. Obtaining certified copy of order of High court for court Convened Meeting.
13. Commencement of Printing of Notice for court convened meeting.
14. Completion of dispatch of notices for meeting under UCP.
15. Advertisement of notice of meetings-
16. Filing of Notice - Advertisement of meeting with stock exchange (s).
17. Filing of advertisement of meeting with court.
18. Filing of Affidavit signed by Chairman of the meeting or other person directed by the court verifying that the directions regarding the issue of notices and the advertisements have been duly complied with.
19. Meeting of Creditors and Members.
20. Reporting the decision of the poll to the High Court.
21. Filing of petition with the Court along with relevant documents.
22. Admission of the petition.
23. Minutes of order by judge fixing the date of hearing of petition and advertisement of notice of hearing;
24. Advertising the notice of hearing in newspaper.
25. Obtaining certified copy of order on admission of petition.
26. Filing of copy of petition with annexures with RD / ROC ' through e-Form 61
27. Filing of affidavit confirming service of notice of petition and publication in newspaper.
28. Follow up with RD/ ROC.
29. Receipt of letter, queries etc from RD and ROC.
30. Follow - up with RD/ROC/ Legal Counsel to resolve issues, if any.
31. Initial date of hearing of petition.
32. Adjoined hearing if any.
33. Filing of amended petition if any.
34. Final date of hearing of petition.
35. Obtaining certified copy of order on petition.
36. Payment of Stamp duty, if required.
37. Filing of certified order with RD/ROC along with Form.
68.2 Activities from court order till Record Date
1. Acknowledgement of receipt from RoC and certified true copy of (Court order to be filed with the stock Exchange.
2. Notice to Stock Exchange for Record Date to determine eligibility to receive shares of the Resulting Companies and voluntarily give advertisement of the Record Date in National Dailies; (21day notice).
3. Enter into and agreement with CDSL and NSDL (if not having connectivity)
4. Printing of stationery-Allotment Advice, Share Certificate, Envelopes.
5. Application seeking exemption for relaxation of Rule 19(2){b) from SEB1 through the designated Stock Exchange.
6. Application lo Stock exchange for in - principle approval for Listing of shares.
7. Designated Stock exchange to forward the application to SEB1 for approval under Rule 19(2)(b) of SCRA Rules.
8. Prepare Information Memorandum (IM).
9. Compliance with clause 49- pre-requisite for Listing.
10. File Information Memorandum with BSE and NSE.
11. Stock Exchange to receive SEBI approval and give in-principal approval for listing of shares of the resulting companies.
12. Keep shares certificates, covering letter, envelop of resulting companies ready for over printing.
13. Keep text and stationery ready for intimation of corporate actions for the Resulting Companies.
14. Letter relating to cost of acquisition to be sent, to shareholders.
15. Ex-date for Stock Exchange for F & O
16. Record Date.
20 November 2013
Documents to be filed along with company application with the High Court
Application is to be filed with the High Court where the registered Office is situated for directions to convene a meeting for considering the draft Scheme of Demerger or for dispensing with the meeting. The following documents are necessary at this stage:
a) Judge's Summons under Order XIV read with Rule 67{or Rule9, 11(b)& 19} read with Sections 391 to 393 and 394 of the Companies Act (to be filed in Form No.33 of the Companies [Court] Rules, 1959).
b) An affidavit in support of summons in form No. 34 of the Companies (Court) Rules, 1959.
c) Memorandum and Articles of Association of the company.
d) Latest Audited Balance Sheet.
e) List of Shareholders. (if meetings are to be dispensed with)
f) List of Secured Creditors.
g) Scheme of Amalgamation/Demerger.
h) Consent affidavits from all shareholders. (if meetings are to be dispensed with)
i) Consent letters from secured creditors.
j) If the company does not have any secured creditor, a certificate In that effect from the statutory auditor must be obtained.
k) Valuation Report regarding share exchange ratio.
l) Vakalat Nama
m) Extract of the Board Resolution approving the draft Scheme of Demerger.
n) Draft notice of meeting, Explanatory Statement pursuant to section 393 of the Companies Act, form of proxy. (in case meetings are convened)
Documents to be filed along with company application with the High Court
Application is to be filed with the High Court where the registered Office is situated for directions to convene a meeting for considering the draft Scheme of Demerger or for dispensing with the meeting. The following documents are necessary at this stage:
a) Judge's Summons under Order XIV read with Rule 67{or Rule9, 11(b)& 19} read with Sections 391 to 393 and 394 of the Companies Act (to be filed in Form No.33 of the Companies [Court] Rules, 1959).
b) An affidavit in support of summons in form No. 34 of the Companies (Court) Rules, 1959.
c) Memorandum and Articles of Association of the company.
d) Latest Audited Balance Sheet.
e) List of Shareholders. (if meetings are to be dispensed with)
f) List of Secured Creditors.
g) Scheme of Amalgamation/Demerger.
h) Consent affidavits from all shareholders. (if meetings are to be dispensed with)
i) Consent letters from secured creditors.
j) If the company does not have any secured creditor, a certificate In that effect from the statutory auditor must be obtained.
k) Valuation Report regarding share exchange ratio.
l) Vakalat Nama
m) Extract of the Board Resolution approving the draft Scheme of Demerger.
n) Draft notice of meeting, Explanatory Statement pursuant to section 393 of the Companies Act, form of proxy. (in case meetings are convened)
20 November 2013
Sale to effect a demerger via section 293(1)(a) of the Act not preferred
Where a demerger is attempted through section 293(1)(a), the company which is hiving of its unit(s) could be treated as the transferor company and which gets the assets on the transfer could be treated as transferee company. If, however, the managements decide to route a demerger through section 293(1)(a) of the Act, the approval by way of an ordinary resolution must be taken from shareholders at a general meeting. In such a case there is a transfer/sale of undertaking including the assets less liabilities of the to the transferee company. This would entail payment of statutory duties on the value of assets less liabilities taken over by the transferee company. It is for this reason companies do not make use of section 293(1)(a) of the Act for effecting demergers.
Whether in demerger valuation of shares is a vital issue?
Valuation of shares, which is mandatory in a scheme of amalgamation may not be necessary in cases of demerger where the shareholders continue to hold shares in the transferor company and are also issued shares in the transferee company in proportion to their holdings in the transferor company. In a way no exchange ratio is required in a demerger scheme where the shareholders of the transferor company continue to remain as the shareholders of the transferee company also. [Larsen & Toubro Ltd., In Re (2004) 60 CLA 555 (Bom)].
Sale to effect a demerger via section 293(1)(a) of the Act not preferred
Where a demerger is attempted through section 293(1)(a), the company which is hiving of its unit(s) could be treated as the transferor company and which gets the assets on the transfer could be treated as transferee company. If, however, the managements decide to route a demerger through section 293(1)(a) of the Act, the approval by way of an ordinary resolution must be taken from shareholders at a general meeting. In such a case there is a transfer/sale of undertaking including the assets less liabilities of the to the transferee company. This would entail payment of statutory duties on the value of assets less liabilities taken over by the transferee company. It is for this reason companies do not make use of section 293(1)(a) of the Act for effecting demergers.
Whether in demerger valuation of shares is a vital issue?
Valuation of shares, which is mandatory in a scheme of amalgamation may not be necessary in cases of demerger where the shareholders continue to hold shares in the transferor company and are also issued shares in the transferee company in proportion to their holdings in the transferor company. In a way no exchange ratio is required in a demerger scheme where the shareholders of the transferor company continue to remain as the shareholders of the transferee company also. [Larsen & Toubro Ltd., In Re (2004) 60 CLA 555 (Bom)].
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