Definition of Demerger :

Section 2(19AA) defines demerger in relation to companies, as the transfer, pursuant to a scheme of arrangement under section 391 to 394 of the Companies Act, 1956, by the demerged company of one or more of its undertakings to any resulting company in such manner that:

(a) all the property and liabilities of the undertaking which is being transferred by the demerged company become the property and liabilities of the resulting company by virtue of the demerger;

(b) the property and liabilities of the undertakings being transferred by the demerged company are transferred at their book values immediately before the demerger;

(c) in consideration of the demerger, the resulting company issues shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company;

(d) shareholders holding not less than 75% in value of the shares in the demerged company (other than shares already held therein immediately before the demerger by the resulting company or by a nominee of the resulting company or its subsidiary) becomes shareholders of the resulting company by virtue of the demerger;

(e) the transfer of the undertaking is on a going concern basis;

(f) the demerger is in accordance with the conditions, if any, notified by the Central Government under section 72A(5).

For this purpose, the following points need to be noted:

(i) An “undertaking‟ shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

(ii) “Liabilities‟ shall mean the following:

(a) those which arise out of the activities or operations of the undertaking;

(b) the specific loans or borrowings (including debentures) raised, incurred and utilized solely for the activities or operations of the undertaking;

(c) so much of the general or multipurpose borrowings of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of the demerged company immediately before the demerger.

(iii) For determining the value of the property, any change in the value of assets consequent to their revaluation shall be ignored.

(iv) Demerged company means the company whose undertaking is transferred pursuant to demerger, to the resulting company.

(v) The splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils the conditions specified by the Central Government.

“Resulting company‟ means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and against which the resulting company issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.