Demerger Scheme Of Arrangement

The ministry of port, shipping and waterways have approbated the scheme of arrangement for the demerger of its 'Non-Core Assets' (Demerged Undertaking) of the Shipping Corporation of India limited (Demerged Company). The company's letter dated 16th September 2021 has received the approval of a new wholly-owned subsidiary as a 'Resulting Company' for demerger of Non-Core Assets.

Scheme of arrangement or compromise is the most crucial document prepared by the Company contemplating to a de-merge entity, by which the company binds all related stakeholders on the terms of the demerger. In this article, we will enlighten this scheme for the demerger of non-core assets of SCI along with the concept of the demerger of the company.

What is Demerger?

Demerger means split or division of a business or any undertaking of a Company and makes them separate units or undertakings. In short, De-Merger means the separation of a Large Company into one or more small companies.

A demerger is a form of corporate restructuring undertaken by companies in order to promote specialization. Companies have started practicing demerger because of the many benefits it offers. Demerger allows a company to expand its operations in a very systematic manner. It allows a specific division or unit to grow as a separate and a focused entity, thereby increasing its efficiency and effectiveness. It benefits the shareholders by providing them better opportunities to participate in the management, operations, decision-making process, and profits of the applicant company as well as the resulting company.

Section 232 of Chapter XV of Companies Act 2013 deals with mergers and amalgamation including demergers.

Demerger can be affected by any of the following three ways-

• Demerger by agreement between promoters; or
• Demerger under the scheme of arrangement with approval by the Court under section 391;
• Demerger under voluntary winding up and power of liquidator.

 

Demerger Under The Scheme Of Arrangement With Approval By The Tribunals Under Section 232 Of The Companies Act

In order to affect a demerger, there must be a provision in the Memorandum of understanding of the principal company. The scheme of such arrangement has to be submitted in the respective Tribunal having jurisdiction.

Process of Demerger

Whenever Company plans to de-merge one of its undertakings from the Main Business, then the most adaptable process is the Demerger of Company. The demerger is in fact a corporate partition of a company into two or more undertakings, thereby retaining one undertaking with it and by transferring the other undertaking to the resulting company or companies. It is a scheme of business reorganization. De-merger is not defined specifically in the Companies Act, 2013. However, an explanation is given to section 230(1) of the said Act prescribes it as an arrangement for the reorganization of the company’s share capital by:

1. Consolidation of shares of different classes
2. Division of shares of different classes
3. Or both

 

The demerger is mentioned in section 2(19AA) of the Income Tax Act, 1961, subject to fulfilling the conditions stipulated in section 2(19AA) of the Income Tax Act, and shares have been allotted by the 'resulting company' to the shareholders of the 'demerged company' against the transfer of assets and liabilities.

The following are the major steps involved in the demerger of a company.

• Preparation of the scheme of arrangements
• Application in Tribunal
• Issue of notice
• Holding of meeting
• Petition and sanction of the tribunal

 

The scheme of arrangement is prepared after consulting the interested parties and stakeholders. Such an arrangement is approved by the board of directors. Also, the share exchange ratio is determined while balancing the interest of all the parties.

What is the Non-Core Assets Demerger Scheme?

The scheme provides a share entitlement ratio of "one equity share of Rs.10 each at par in the resulting company for every 1 equity share of Rs.10 each held by them in the demerged company." It mandates the formation or incorporation of a new wholly-owned subsidiary as a 'resulting company' for the demerger of non-core assets of the company.

What are SCI's non-core assets?

Freehold land in cities of Mumbai, Delhi, Chennai, Kolkata & Bangalore. Of this land, SCI owns about 60 acres of land in Powai, Mumbai which can be developed in a 60 lakh sq. feet residential project. Apart from this include a shipping house at Nariman point, Mumbai. Shipping house is a 19 storey building rated one of the best buildings in the area. Ownership flats and buildings are largely posh flats in Mumbai & Delhi.

The Government of India has decided on strategic disinvestment of its stake in SCI. Strategic stake sale of government's entire shareholding in SCI, being 63.75%, along with the handing over of its management control, was already initiated on 22nd December 2020, with consultant also having been appointed recently, with work on the demerger seen progressing well.

This demerger scheme will mostly re-rate the stock and this process of monetization can expect to start from December 2021.

CONCLUSION

There are demergers in the public and the private sectors. The contemporaneous method to combat the present economic situation in India is being well dealt with the equipment of Demergers. In the private sector, the demerger of the Reliance group into Reliance Industries Ltd. and Anil Dhirubhai Ambani group is by far the biggest demerger witnessed in India. The public sector is also well abreast with this emerging idea of reconstruction.

In the case of demerger of assets, the determination of core assets and non-core assets by SCI will henceforth facilitate business analysis through a strategic disinvestment process. With the intention of facilitating alternative and efficient disinvestment of non-core assets like SCI, demerger through this scheme of demerger is a good solution.