As we have already discussed in our previous article about the basics of demerger so, in this article we will keep the scope limited to the treatment of share capital in the case of demerger.
For any demerger transaction between holding and its wholly owned subsidiary it is mandatory to obtain a share valuation report from a registered share valuer who will ascertain the Share entitlement ration and in case of listed company such report shall be supported by a second opinion of merchant banker.
If any one think from simple glace, it is the share valuation report through which you are ascertaining the value of assets for an undertaking which is demerging into resulting company.
In case of Demerger between the listed Holding and wholly owned subsidiary, the share capital of holding in subsidiary shall stand extinguished/cancelled and new shares to the shareholder of listed company will be issued as per the share entitlement ratio in the resulting Company. Accordingly, resulting company will have new share structure.
For instance; X a holding Company is having following share structure
Authorized Share Capital: 10 Crore Share at a value of Rs.1 each and Paid up Share Capital: 1 Crore Share at a value of Rs.1 Each
“Y” Subsidiary is having following share structure before demerger;
Authorized Share Capital: 1 Crore Shares at a value of Rs.1 each and Paid up Share Capital: 10 Lakh Shares at a value of Rs.1 Each
Post demerger at Share entitlement Ratio 1:1, following will be the share capital structure of ‘Y’
Authorized Share Capital: 1.5 Crore shares at a value of Rs.1 Each and Paid Up share Capital: 1 Crore share @1 each
“X” company’s shares holding of around 10 lakhs shall stands cancelled and new equity shares of ‘Y’ will be issued to the existing shareholder of ‘X’. However, scheme of arrangement i.e. demerger is the principal document which shall quote every thing in detail before its presentation to any member or creditor and tribunal.
Any demerger under section 230-232 itself is a complete code and once a scheme has been approved by the NCLT no further permission for reduction of share capital as per section 66 or no procedure for alteration in authorized capital and amendment in memorandum of association as per section 13 and 61 of the companies’ act is required to be followed. However, scheme must clearly specify the amended capital structure post demerger and its accurate effect in the memorandum of association and other external and internal statutory documents of the company.
To understand further, let’s take the real case of demerger between Texmaco Rail & Engineering Limited (Listed) and its wholly owned subsidiary Belgharia Engineering Udyog Private Limited.
CAPITAL STRUCTURE
The capital structure of TREL before demerger is as under:
Authorised Capital- 197,00,00,000 Equity Shares of Rs. 1 each 197,00,00,000 and Issued, Subscribed and Paid-up Share Capital- 32,52,48,270 Equity Shares of Rs. 1 each 32,52,48,270.
The capital structure of before demerger is: Share Capital Amount- Authorized Capital 10,000 Equity Shares of Rs. 10 each 1,00,000. Issued, Subscribed and Paid-up Share Capital- 10,000 Equity Shares of Rs. 10 each 1,00,000
CONSIDERTAION
The Board of Directors of each of TREL and BEL determined the Share Entitlement Ratio as 1:3 i.e. for every 3 shares of TREL shareholders they will be issued 1 share in BEL.
TREL SHAREHOLDERS NEW SHARES IN RESULTING COMPANY BEL
The Resulting Company issued and allotted 10,84,16,090 (ten crore eighty-four lakh sixteen thousand and ninety) New Equity Shares of BEL, having a face value of INR 1 (One Indian Rupee) each, fully paid-up, to the shareholders of TREL or the Demerged Company (as the case may be) as on Record Date.
CANCELLATION OF EXISTING SHARES OF TREL IN BEL
The Existing Equity Shares of BEL held by TREL and its nominees stands cancelled, extinguished and annulled without payment of any consideration or any further act or deed by either of TREL or the Demerged Company or BEL or the Resulting Company.
COMBINATION OF AUTHORISED SHARE CAPITAL
The Authorized Equity Share Capital of BEL increased by INR 25,00,00,000 (Rupees twenty-five crores only) divided into 25,00,00,000 (twenty-five crore) New Equity Shares of INR 1 (One Indian Rupee) each and existing authorized Share Capital of INR 1,00,000 (Rupees one lakh only) divided into 10,000 (Ten thousand) equity shares of INR 10 (Ten Indian Rupees) each stands reclassified into 1,00,000 (One lakh) equity shares of INR 1 (One Indian Rupee) each. The combined authorized share capital of the Company is now INR 25,01,00,000 (Indian Rupees twentyfive crore one lakh only), divided into 25,01,00,000 (Twenty-five crore one lakh) equity shares of INR 1 (Indian Rupee one) each.
-Dixit Mehta, Ductus Legal
DUCTUS EDGE 