Introduction

Prospect Legal is a leading corporate law firm specializing in business restructuring, mergers, and demergers. Our expertise in handling complex corporate transitions ensures a seamless and legally compliant process for businesses. Whether a company is looking to optimize its structure, reduce liabilities, or comply with regulatory requirements, our legal experts provide strategic guidance to achieve the best possible outcome.

Where You Can Find Remedies?

Demerger cases in India are primarily handled by the National Company Law Tribunal (NCLT) under the Companies Act, 2013. Additional regulatory approvals may be required from SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India), and tax authorities. Companies seeking legal guidance on demergers should consult experts at Prospect Legal to navigate the regulatory landscape effectively.

Legal Protection Under Section 230-232 of the Companies Act, 2013

Section 230: When Can a Demerger Be Filed?

• A company can apply for a scheme of arrangement with creditors and shareholders.
• The scheme must be approved by 75% of shareholders and creditors.
• The proposal is then submitted to the NCLT for approval.

Section 231: Powers of the Adjudicating Authority (NCLT)

• The NCLT has the authority to approve or modify the demerger scheme.
• It can enforce binding obligations on both companies and shareholders.
• If objections arise, the tribunal resolves disputes before granting final approval.

Section 232: Regulatory Oversight & Tax Considerations

• The demerger must comply with SEBI, RBI, and Competition Commission of India (CCI) regulations.

The Income Tax Act, 1961, provides tax-neutral benefits if demerger conditions are met.

Understanding the Demerger Process

Demerger is a corporate restructuring tool where a company splits into separate entities. This can be classified into:

1. Voluntary Demerger

• Initiated by the company’s board and shareholders.
• Conducted to improve operational efficiency or shareholder value.
• Requires approval from regulatory bodies and compliance with tax laws.

2. Compulsory Demerger

• Ordered by regulators or courts due to monopolistic practices or non-compliance.
• Often mandated by authorities like CCI, SEBI, or the NCLT.
• Ensures fair competition and legal compliance in the business environment.

Process of Remedy Through Prospect Legal

Step 1: Initial Consultation & Risk Assessment

• Conduct feasibility analysis to determine legal and financial impact.
• Identify tax liabilities, shareholder interests, and regulatory concerns.

Step 2: Legal Documentation & Filing

• Draft the Scheme of Arrangement outlining asset division and shareholding structure.
• Submit applications to NCLT, SEBI, RBI, and other relevant authorities.

Step 3: Compliance & Negotiations

• Organize shareholder and creditor meetings for approval.
• Handle legal objections and disputes before NCLT.
• Ensure compliance with tax laws and accounting standards.

Step 4: Resolution & Final Actions

• Secure final NCLT approval and execute the demerger process.
• Complete asset transfers, tax filings, and post-demerger business structuring.

Key Challenges in Demergers & How We Overcome Them

1. Regulatory Hurdles

• Ensuring compliance with NCLT, SEBI, RBI, and CCI regulations.
• Strategic legal filings to avoid objections and delays.

2. Shareholder & Creditor Disputes

• Legal mediation to address conflicts.
• Structured voting mechanisms for smoother approvals.

3. Tax & Accounting Complexity

• Structuring the demerger to minimize capital gains tax and GST impact.
• Ensuring compliance with the Income Tax Act provisions.

4. Operational Transition Issues

• Assisting in corporate rebranding and governance realignment.

Ensuring seamless business continuity post-demerger.