Divestiture
Divestiture means an out and out sale of all or substantially all assets of
the company or any of its business undertaking/divisions, usually for
cash (or for a combination of cash and debt) and not against equity
shares.
Divestiture means sale of assets, but not in a piecemeal manner.
Accordingly, all assets, i.e., fixed assets, capital work in progress,
current assets and many a times even investments are sold as one lump
and the consideration is also determined as one lump sum amount and
not for each asset separately. Due to this reason, it is also called ‘slump
sale’ under the Income Tax Act, 1961.
Divestiture
The consideration is normally payable in cash for two
reasons:
to pay off the liabilities and secured/unsecured loans.
to bring cash into the company for pumping into remaining
business or to start a new business.
No part of consideration is payable in the form of equity
shares.
Important Concepts
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Demerged company
Demerged company means the company whose assets, liabilities, loans
and business(es) are being transferred in the process of demerger to
another company in case of either spin-off or split-up. It is also called
transferor company.
Important Concepts
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Resulting company
•Resulting company(ies) means the company or companies to
which assets, liabilities, loans and business(es) are being
transferred in the process of demerger.
•It is not necessary that one has to float a new company to act as
resulting company.
Demerger
Forms of Demerger:
➨ Spin-off
➨ Split-up
➨ Split-off
Demerger
➨Spin-off
• It is creating subsidiary with same proportion of shares as
the main company. In a spin off, a company creates a
subsidiary. The holding in the subsidiary and the main
company have the same proportion.
• When is spin-off of carried out? When the company wants
to take different decisions, different payment structure,
different strategy; wants to give a different degree of push to
a product, it creates a subsidiary through spin off.
• No cash exchange is involved. Only shares are transferred.
Demerger
➨ Split-up
• In a split-up, a holding parent and a few subsidiaries are created from
the original company. In the process of splitting up of a company, the
company creates a holding company ( which has only financial assets
and no physical production operations) and this holding company in
turn holds the shares of the subsidiary companies. The shareholding
could be different in each company.
• When is split up carried out? When a company is into diversified
businesses, and the management competencies to run these different
activities cannot be managed centrally by the same management, a
company is split-up into many subsidiaries. There is no interference
from the people not belonging to a product or market in the operations
making management of each subsidiary efficient. This is a convenient
tool to divide the family wealth in corporate form among the heirs.
• No cash exchange is involved. Only shares are transferred.
Demerger
➨ Split-off or Vertical Demerger
• It means to separate a business vertical & sell to the outsiders. The division
in the form of a split off is a business transfer in true sense. In the process of
split off, a certain vertical of a company is separated into a new, different
company; and then it is sold to a third party.
• In a split-off, shareholders in the parent company are offered shares in a
subsidiary, but the catch is that they have to choose between holding shares
of the subsidiary or the parent company. A shareholder has two choices: (a)
continue holding shares in the parent company or (b) exchange some or all of
the shares held in the parent company for shares in the subsidiary. Because
shareholders in the parent company can choose whether or not to participate
in the split-off, distribution of the subsidiary shares is not pro rata as it is in the
case of a spin-off.
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Demerger
➨ Split-off or Vertical Demerger
• A split-off is generally accomplished after shares of the subsidiary have earlier
been sold in an initial public offering (IPO) through a carve-out. Since the
subsidiary now has a certain market value, it can be used to determine the
split-off's exchange ratio.
• When is split off carried out? When the company wants to exit a certain
product, practical, market, or geographical location, it can create a new
company, sell it and get rid of that.
Carve-Out
» In a carve-out, the parent company sells some or all of the
shares in its subsidiary to the public through an initial
public offering (IPO), effectively establishing the subsidiary
as a standalone company.
» Since shares are sold to the public, a carve-out also
establishes a net set of shareholders in the subsidiary.
» A carve-out allows a company to capitalize on a business
segment that may not be part of its core operations as it
still retains an equity stake in the subsidiary.
» A company undertaking a carve-out is not selling a
business unit outright but, instead, is selling an equity
stake in that business or relinquishing control of the
business from its own while retaining an equity stake.
Carve-Out
» Carve-outs are normally used to
mobilize funds for core business or
businesses of a company by
realizing the value of non-core
businesses.
» They are also used to carve out
capital hungry businesses from
the businesses requiring normal
levels of capital so that further fund
raising by equity dilution can be
restricted to capital intensive
businesses sparing the other
businesses from equity dilution.
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• https://economictimes.indiatimes.co
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