Demerger & Business Transfer

The Companies Act 2013 has no standalone "demerger" section — a demerger is executed as a Tribunal-sanctioned scheme of arrangement under Sections 230-232, the same NCLT mechanism used for mergers. To qualify for tax-neutral treatment (no capital gains on transfer of the demerged undertaking, and carry-forward of losses/depreciation), the scheme must satisfy the definition of "demerger" under Section 2(19AA), Income-tax Act 1961: transfer of one or more undertakings on a going-concern basis pursuant to a scheme under Sections 230-232; the transferee company issuing shares to the demerged company's shareholders on a proportionate basis; and transfer of assets and liabilities of the undertaking at book values, among other specified conditions. Procedurally: Board approval of the draft scheme and an independent valuation report; application to NCLT for directions on convening creditor/member meetings; approval by a majority in number representing three-fourths in value of those voting; notice to the Registrar, Official Liquidator and sectoral regulators with a 30-day objection window; and a final NCLT sanction order, filed via Forms CAA-1 to CAA-5 as applicable and Form INC-28 with the Registrar.

A demerger is the splitting of a company's undertaking — a business, division or set of assets — into a separate company, with the shareholders of the original company receiving shares in the new one. Under the Companies Act 2013, a demerger is effected through a scheme of arrangement approved by the board, the members and creditors, and sanctioned by the National Company Law Tribunal under Sections 230 to 232. The Income Tax Act 1961 makes a qualifying demerger tax-neutral: Section 2(19AA) defines a demerger, and Section 47(v) provides that the transfer of assets in a demerger is not treated as a transfer for capital gains — provided the conditions of the definition are satisfied.

The tax neutrality is the prize and the discipline. A demerger that meets the Section 2(19AA) conditions — the splitting of an undertaking, the vesting of the property and liabilities, and the allotment of shares in the resulting company — passes assets without triggering capital gains. A restructuring that fails the conditions becomes a taxable transfer, with the entire gain crystallised at once. The difference between a clean demerger and a taxable one is entirely in the drafting and the documentation.

The operational side is equally demanding: the scheme must allocate assets, liabilities, employees and contracts between the companies, the lenders and creditors must consent, and the resulting company must be capable of carrying on the business. A demerger that is approved but not executed — registrations not transferred, contracts not novated, employees not moved — leaves the business split on paper and tangled in practice.

This service is for companies demerging divisions, hiving off businesses, or restructuring between group entities. We structure the scheme under Sections 230-232 of the Companies Act 2013, draft the scheme document with the undertaking split, advise on the Section 2(19AA) and Section 47(v) tax-neutrality conditions of the Income Tax Act, manage the NCLT sanction process, and execute the transfer — registrations, contracts, employees and records.