Demerger of a Company: A Case Study

Corporate restructuring is a crucial strategy for businesses looking to enhance shareholder value and streamline operations. One of the most effective methods is the demerger of a company, which involves separating diverse business units into independent entities. In India, demergers are vital in driving business growth and specialization. Governed by the Companies Act, demergers enable companies to streamline operations and unlock hidden value.

Here we will explore what is demerger of a Company and Process of Demerging a Company in Indian Context

What is Demerger of a Company?

A demerger of a company refers to the process of splitting a business into two or more separate entities, each with its own management and shareholder structure. In India, the demerger of a company is governed by the Companies Act 2013, requiring approval from the National Company Law Tribunal (NCLT).

Types of Demergers

1. Structural Demerger – A company divides into separate entities.
2. Spin-off – A parent company creates an independent entity and distributes shares to shareholders.
3. Split-up – A company is entirely divided into multiple businesses.
4. Equity Carve-out – A subsidiary sells a portion of its shares to the public via an IPO.

Process of Demerger a Company in India

General steps involved in the process of demerger of a company are as follows:

Step 1: Board Approval

a. Prepare the demerger scheme outlining:

• Objectives, terms, and conditions.
• Details of asset and liability transfers.
• Share entitlement ratios.

b. Obtain approval from the Boards of Directors of both the demerged company and the resulting company.

Step 2: Valuation and Share Exchange Ratio

1. Appoint an independent valuer to determine the share exchange ratio for issuing shares to the shareholders of the demerged company.

Step 3: Filing Applications with NCLT

a. File an application for the demerger scheme with the National Company Law Tribunal (NCLT) under Sections 230–232 of the Companies Act, 2013 or with Regional Directors (RD) under Sections 233 of the Companies Act, 2013.

b. Include necessary documents such as:

• Scheme of demerger.
• Board resolutions.
• Auditor’s certificate confirming the scheme’s compliance with accounting standards.

Case Studies of Successful Demergers in India

1. ITC Ltd. – Strategic Separation of Hotel Business (2023)

ITC, one of India’s largest conglomerates, operates across diverse sectors, including FMCG, hotels, paperboards, and tobacco. The company decided to demerge its hotel business in 2023 to:

• Focus on high-margin growth in FMCG and tobacco.
• Allow the hotels division to attract sector-specific investments.
• Improve valuation by eliminating the conglomerate discount.

Impact: The demerger unlocked value for both ITC Ltd. and ITC Hotels Ltd., improving stock performance and expanding opportunities.

2. Bajaj Finance – Unlocking Financial Services Value (2022)

Bajaj Finserv, which spans multiple sectors, including insurance and wealth management, separated its financial services arm, Bajaj Finance, in 2022. This move:

• Increased focus on each business unit.
• Provided investors with clearer investment opportunities.
• Helped eliminate the conglomerate discount.

Impact: Bajaj Finance saw improved valuation, while Bajaj Finserv focused on insurance and asset management, increasing market capitalization post-demerger.

3. Reliance Industries – Strategic Spinoff of Jio Financial Services (2023)

In 2023, Reliance Industries demerged its financial services arm, Jio Financial Services, to:

• Scale the business independently and attract targeted investors.
• Enable RIL to focus on its core energy, telecom, and retail businesses.
• Unlock value in the undervalued financial services sector.

Impact: Jio Financial Services attracted strong investor interest, and Reliance continued to grow its core businesses, benefiting shareholders who received shares in both companies.

Is a Demerger Right for Your Company?

The successful demergers of ITC, Bajaj Finance, and Reliance Industries demonstrate that this restructuring approach can unlock substantial value when executed with strategic intent and careful planning. Your company might benefit from a demerger if:

• It faces a conglomerate discount in market valuation
• It operates in distinct industries with different growth profiles
• It struggles to attract industry-specific investors
• Different business units require different capital allocation strategies
• Management focus is diluted across diverse operations

How StratRich Can Assist

At Stratrich, we specialise in guiding Indian businesses through complex corporate restructuring processes, including demergers.

Our deep understanding of the Companies Act 2013, tax implications, and regulatory requirements enables us to provide comprehensive advisory services from strategic assessment to post-demerger optimization.

Conclusion

Demergers represent a powerful corporate restructuring tool, particularly valuable in the Indian context where conglomerates often face market undervaluation. The case studies of ITC, Bajaj Finance, and Reliance Industries highlight that with proper planning, regulatory compliance, and stakeholder management, demergers can successfully unlock hidden value and create more focused, agile businesses.

Contact us today to explore how a demerger of your company can unlock its full potential!