What is Demerger?

the separation of a large company into two or more smaller organizations,

particularly as the dissolution of an earlier merger.
(The act of splitting off a part of an existing company to become a new company, which
operates completely separate from the original company. Shareholders of the original
company are usually given an equivalent stake of ownership in the new company. A
demerger is often done to help each of the segments operate more smoothly, as they
can now focus on a more specific task. opposite of merger.
But accounting for demerger As "It does not result in a purchase or sale transaction but is
just a division of an existing entity, the demerged company."
So there is no reason to restate the carrying amount of assets and liabilities.
"Therefore, demerger is accounted for at the recorded book values of the assets and
liabilities transferred to the new entity.")

Reasons for Demerger?

(1) Corporate attempt to adjust to changing economic and political
environment of the country;
(2) Strategy to enable others to exploit opportunity effectively to optimize
returns when the parent company is unable to do so;
(3) To correct the previous investment decisions where the company
moved into the operational field having no expertise or experience to
run the show on a profitable basis;
(4) To help finance an acquisition;
(5) To realize capital gains from the assets acquired at the time when they
were under performing and now no better performance, capital gain
can be realized;
(6) To make financial and managerial resources available for developing
other more profitable opportunities;
(7) Selling unwanted and surplus or unconnected parts in the business as
a restructuring strategy to get rid of sick part of the company.


Effect of demerger?
(i) Tax neutrality of the assets transferred to resulting company.
(ii) To extend the benefit of carry forward of loss or depreciation relating to
transferred undertaking to resulting company.
(iii) To extend the benefits like S. 80IA, S. 80IB, etc. to the split off unit.
(iv) To allow the expenditure incurred for demerger.
(v) Tax neutrality of the demerger for the shareholders of demerged company.

Types of Demerger?
Spinoff
Businesses wishing to 'streamline' their operations often sell less
productive, or unrelated subsidiary businesses as spinoffs.
The spin-off companies are expected to be worth mores independent
entities than as parts of a larger business.
It creates a separate legal entities
Its shares are distributed on pro rata basis to existing shareholders of parent
company.
existing shareholders have the same proportion of ownership in the new
entity as in the original firm.
New entity has its own policies &strategies.
No cash is received by original parent.
(a spin off is when a portion of an organization (sometimes an entire department,
sometimes a unit, etc) starts their own organization but is still partly owned by the
original organization. The original organization usually does not own a majority share
however. A spin off often happens in a decentralized organization because both the
dept and the organization realize the potential of the departmetn to act on its own. The
spin off entity gets many positives such as more autonomy and more nimbleness, while
the original organization gets to stop funding the dept but still benefits from its
operations because they are part owner.)

Split Off
A variation of spin off
A portion of Existing shareholders receives stock in a subsidiary in
exchange for parent co. stock.
A means of reorganizing an existing corporate structure in which the stock of
a business division, subsidiary or newly affiliated company is transferred to
the stockholders of the parent company in exchange for stock in the latter.
Split-offs often occur when the parent company wishes to draw a greater
distinction between itself and the split-off business.

Spilt up
The entire firm is broken up in series of spin offs, so that parent no longer
exists & only new offspring survives

Divestitures
The sale of a portion of the firm to an outside third party.
Cash or equivalent consideration is received by divesting firm

Carve-out
Sale of portion of firm via an equity offering to outsiders
Sometimes known as a partial spinoff, a carve out occurs when a parent
company sells a minority (usually 20% or less) stake in a subsidiary for an
IPO or rights offering.
In most cases the parent company will spinoff the remaining interests to existing
shareholders at a later date when the stock price is much higher. Also known as a
"carveout" or an "equity carve out."

Tax benefits to resulting company?
Expenses incurred for the purpose of amalgamation or demerger shall be
allowed @20% every year from the year in which the demerger takes place.
Depreciation shall be apportioned between the demerged company and the
resulting company in the ratio of number of days for which the assets were
used by them.

The accumulated losses and unabsorbed depreciation in a demerger shall be
allowed to be carried forward by the resulting company.

Benefits available for demerger are also extended to authorities or boards
set upbyCentralor State Govt.

Taxation of shareholders in demerged company
Dividend: S. 2(22) has been amended by inserting a new clause (v) to
provide that no dividend income shall arise in the hands of shareholders of
demerged company on demerger.

Capital gains: A new clause (vid) in S. 47 has been inserted to provide that
no capital gains shall arise to shareholder softhead merged company on
account of receipt of any shares from the resulting company.