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Unit 13: Tax Treatment for Business Restructuring

others. One may recall that the demerger of DCM Ltd. arose from the division of business Notes
interests amongst the 4 promoter groups, whereas in the case of HCL, this was on account
of the need to induct Hewlett Packard in HCL’s computer-related business. In the case of
Hoechst, Sandoz, Hindustan Ciba and Cyanamid, demerger in India followed restructuring
at the parent company level. Demerger in Apple Industries Ltd., Ramco Industries Ltd. and
Blue Star Ltd. was to capture the high stock market valuation of the information technology
businesses to the resultant companies into which the IT divisions of these companies were
transferred. In some of these cases splitting up of the company has certainly helped in
ensuring greater transparency and managerial accountability in these companies. Some of
these demergers were undertaken to induct strategic partner into the demerged entity.
The spur these demergers in India are varied from family reasons to genuine business
considerations, though everybody vouch safe vociferously commitment to core competency
and focus. Impressive growth potential in the auxiliary businesses have seen companies
demerging their businesses in a bid to unlock the inherent value of the demerged company.
The point to be remembered is, demerger is not just a convenient way of hammering out
settlements; promoters have to be sure that such a move will result in value creation. If a
company is confident of sustaining each of the businesses in the long run and creating value

for each of them, then only it should attempt demergers. Take the case of Reliance Group
demerger. The igniting reason is issue of succession. Demerger which results in a split in
businesses; meets the family need. Take another example .Great Eastern Shipping, is taking
the oilfi eld service operations out of the fl agship, leaving it as a pure shipping company.
The articulated reason as per Mr. K. M. Sheth, Executive Chairman of GE Shipping, the
entire restructuring of the business through the demerger route is aimed at providing
greater focus to each of the businesses of the company as well as to unlock shareholder
value. Mr.Bharat Sheth will manage the shipping operations, whilst his cousin Vijay Sheth
will head the offshore oilfield services business.

Source: http://mergersindiainfo.com/indiascene/indiascene1.html

Exemption and Benefi ts

A demerger transaction fulfilling the conditions of section 2(19AA) is free from capital gains
tax, both with respect to the transfer of assets as well with respect to issue of shares to the
shareholders.
Section 2(22) provides that the issue of shares directly to the shareholder pursuant to the demerger
of an undertaking will not constitute deemed dividend.
Further, in respect of international demergers, provisions similar to amalgamation of foreign
companies have been made. Transfer of shares of an Indian company pursuant to the demerger
of a foreign company is exempt provided the following two conditions are satisfi ed.
1. At least 75% of the shareholders in the demerged foreign company continue to be
shareholders in the resulting company;
2. Such transfer should not attract capital gains tax in the foreign company.

Set-off and Carry Forward of Accumulated Losses and Depreciation

Accumulated losses and depreciation relatable to the undertaking being transferred in a scheme
of demerger is allowed to be carried forward and set off in the hands of the resulting company.
In case such past losses cannot be directly attributed to the undertaking being transferred, the Act
provides for the apportionment of the same between the demerged company and the resulting
company in the same proportion in which the value of the assets have been transferred.

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