Today’s global corporate landscape is quite uncertain, due to which companies often face challenges linked with managing diverse business verticals and diversified operations. To unlock the untapped potential and strategically tackle the challenges associated with managing diversified verticals under a single umbrella, companies often consider demerger as the most appropriate option to create more shareholder value. By separating distinct business units, demergers allow each entity to operate independently, with greater efficiency and focus.
In this article, we will talk about what corporate restructuring is and how conglomerates like Vedanta can unlock the true value of their company through Vedanta demerger.
What is a Demerger?
In contrast to mergers, which combine separate entities into a single company, a demerger divides a company, enabling each new entity to pursue its strategic goals while focusing on specific business verticals. The concept of demergers has been defined under the Income Tax Act, 1961, and is primarily governed by the Companies Act, 2013.
How Demerger Process Carried Out?
The process to initiate a demerger in India primarily includes the involvement of the National Company Law Tribunal (NCLT). Besides, in case of a listed entity, the business has to adhere to the requirements prescribed by the Securities Exchange Board of India (“SEBI”). The main steps of demerger are as follows:
Board’s Approval
It is one of the first and foremost requirements for the demerger of a company. The approval from the board of directors is a must to carry forward the process. In-principal approval from the board of directors means the initial approval given by a company’s board of directors, which is based on the evaluation of the potential benefits of separating a specific business unit or segment into an independent entity.
For instance, in the case of Vedanta demerger, more than 99.9% of stakeholders voted in favour, paving the way forward.
Scheme of Arrangement
Once in-principal approval has been granted by the shareholders, a scheme of arrangement is formulated under Sections 230-232 of the Companies Act, which lays down the transaction perimeter. It also specifies the transfers taking place in the demerger, including but not restricted to assets, liabilities, contracts, employees and licenses. The final approval is given by the NCLT only after the same is approved by the board of directors.
NCLT Approval
After the board’s approval, the scheme of arrangement of the companies will be filed with the NCLT, a key regulatory authority in the country. The NCLT, if required, will ask the companies to obtain approvals from other regulators and/or revise the scheme of arrangement, aligned with the interests of the members.
Final Approval/SEBI
After that, the scheme of arrangement needs to be approved as directed by NCLT. In the case of listed companies, the companies are supposed to file the scheme of arrangement with the stock exchanges and obtain observations or a no-objection letter from the SEBI/stock exchanges.
Vedanta Demerger Scheme Expected Soon
Among various demergers, one of the most recent is the Vedanta demerger, which aims to unlock shareholders’ true value and streamline operations. Scheduled for completion by September 2025, the demerger will restructure Vedanta Limited into five independently listed, sector-specific companies, including Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Iron and Steel, and Vedanta Ltd.
As per this demerger, Vedanta shareholders will receive ONE additional share in each of the four newly demerged companies for every ONE share they currently hold, enabling businesses to check out the future growth possibilities.
Final Words
In recent times, the corporate landscape has seen a rapid restructuring in operations with more companies looking for ways to unlock value and streamline operations. Even the major industry player, Vedanta Limited, has announced its Vedanta demerger, attracting great interest from stakeholders.
By allowing individuals to focus on their core strengths, demergers foster improved management, operational efficiency, and enhanced profitability. With more Indian conglomerates embracing the restructuring model, shareholders are expected to benefit from substantial value creation.
Vedanta News 