how it works
In the dynamic Indian business landscape, companies often reach a point where a strategic "split" can unlock new growth avenues, streamline operations or facilitate better management. Whether it is a demerger, spin-off or divestiture, splitting a company is a complex process requiring meticulous planning and compliance. This is where expert guidance from firms like Praman Advisors Private Limited becomes invaluable.
This delves into the intricacies of company splits in India, highlighting the benefits, required documentation, application process and how Praman Advisors can simplify this journey for your business.
1. Overview: What is a Company Split?
The company split is a corporate restructuring strategy where in existing company is divided into two or more independent entities. This may happen in various forms, each with distinct implications:-
• Demerger: A larger company divides into two or more separate companies, with the shareholders of the original company receiving shares in the new entities in proportion to their existing holdings. This is often done to separate diverse business verticals or unlock shareholder value.
• Spin-off: A subsidiary or a specific business unit of a parent company is separated to become an independent company. Shares of the new entity are distributed to the parent company's shareholders.
• Divestiture: The sale or disposal of a business unit, asset or segment of a company. This is done to raise capital, reduce debt or focus on core competencies.
The objective is typically to create focused, agile entities that can better pursue their specific goals and optimize their operations, ultimately leading to enhanced shareholder value.
Opting for a company split can bring a multitude of benefits, including:-
• Enhanced Focus and Efficiency: By separating diverse business units, each new entity can sharpen it’s focus on it’s core operations, leading to improved efficiency and resource allocation.
• Unlocking Shareholder Value: Often, a conglomerate's different business segments may be undervalued as a whole. Splitting them may allow the market value of each entity independently, potentially increasing overall shareholder wealth.
• Improved Management and Governance: Smaller, more focused entities can lead to more agile decision-making, clearer accountability and improved governance structures.
• Attracting Targeted Investment: Different business segments might appeal to different investor profiles. A split can make it easier to attract investors interested in specific industries or growth areas.
• Streamlined Operations: Complex, multi-faceted businesses can become cumbersome. A split can simplify operations, reduce bureaucracy and enhance operational effectiveness.
• Risk Mitigation: Separating higher-risk ventures from stable ones can help insulate the core business from potential financial or operational setbacks.
• Facilitating Strategic Partnerships or Acquisitions: A clear, focused business unit is more attractive for potential strategic partnerships, joint ventures or even outright acquisition.
The specific documents required will vary based on the type of split and the complexity of your company's structure. However, generally, you can expect to need:-
• Board Resolutions: Formal resolutions from the Board of Directors approving the split plan, it’s terms and necessary steps.
• Shareholder Resolutions: Approvals from shareholders for the proposed split scheme, often requiring special resolutions.
• Detailed Scheme of Arrangement/Demerger: A comprehensive document outlining the rationale for the split, the transfer of assets and liabilities and the share allocation in the new entities.
• Audited Financial Statements: Recent historical and pro forma financial statements for both the continuing and new entities to assess the financial impact of the split.
• Asset and Liability Schedules: Detailed lists of assets and liabilities to be apportioned between the entities.
• Legal Agreements: Transfer agreements, service agreements and any other relevant legal documents to formalize the separation.
• Valuation Reports: Independent valuation reports to determine the fair value of the entities involved and ensure equitable share allocation.
• No Objection Certificates (NOCs): From creditors, lenders or other stakeholders as required.
• Regulatory Filings: Various forms and applications to be filed with the Ministry of Corporate Affairs (MCA), SEBI (for listed companies) and other relevant regulatory bodies.
• Identity and Address Proofs: Of directors and key management personnel.
• Registered Office Proofs: For all entities involved.
Resolving the legal and regulatory complexities of a company split in India can be a daunting task at times. Our team provides end-to-end support to ensure a hassle free compliant process. Here is a general outline of the process, simplified by their expertise:-
a. Initial Consultation & Strategic Planning:
o Praman Advisors will conduct a thorough assessment of your company's objectives, financial health and legal structure.
o They will advise on the most suitable type of split (demerger, spin-off etc.) and help formulate a robust strategic plan.
b. Drafting the Scheme of Arrangement/Demerger:
o Their legal and financial experts will meticulously draft the detailed scheme, ensuring it complies with all relevant provisions of the Companies Act, 2013 and other regulations.
c. Board Meeting & Approval:
o Assistance in preparing the necessary board resolutions and conducting the board meeting for initial approval of the split plan.
d. Shareholder Approval:
o Guidance on convening and conducting the Extraordinary General Meeting (EGM) of shareholders, preparing the notice and obtaining the required special resolutions.
e. NCLT Application (for Demergers/Schemes of Arrangement):
o The petition needs to be filed with the National Company Law Tribunal (NCLT) for demerger. Our team will prepare and file all necessary petitions, affidavits and supporting documents.
o They will represent your company during NCLT hearings and address any observations or objections.
f. Regulatory Approvals:
o Facilitating approvals from other regulatory bodies like the Registrar of Companies (ROC), SEBI (if applicable), Competition Commission of India (CCI) and tax authorities.
g. Asset and Liability Transfer:
o Assisting in the legal transfer of assets, liabilities, employees and contracts to the new entities as per the approved scheme.
h. Post-Split Compliance:
o Ensuring ongoing compliance for both the parent and newly formed entities including updated statutory registers, financial reporting and tax filings.
The fees and timelines for a company split in India can vary significantly depending on the complexity, size of the companies involved and the specific type of split.
• Fees: These typically include:-
o Professional Fees: For legal, financial and secretarial services rendered by firms like Praman Advisors. This can range from several lakhs to tens of lakhs based on the scope of work.
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o Government Fees: MCA filing fees, NCLT application fees, stamp duties etc. These are statutory and depend on the authorized capital of the companies.
o Valuation Fees: For independent valuation reports.
o Other Expenses: Such as public advertisements, stationery etc.
• Timelines: A company split, especially a demerger is a time-consuming process.
o From initial planning to final NCLT approval and completion, it can take anywhere from 06 to 18 months or even longer.
o Key factors influencing the timeline include NCLT availability, clarity of the scheme, number of regulatory approvals required and any potential objections from creditors or shareholders.
Frequently Asked Questions
A stock split involves increasing the number of shares outstanding while reducing the face value per share, without changing the company's overall market capitalization. It is primarily a financial strategy to improve liquidity and affordability. A company split (demerger, spin-off) involves the actual division of the business operations, assets and liabilities into separate, independent legal entities.
For schemes of arrangement like demergers, NCLT approval is mandatory under the Companies Act, 2013 as it involves the transfer of assets and liabilities and affects shareholder rights.
While more common in larger corporations, smaller companies can also undergo strategic splits, if it aligns with their growth objectives and operational efficiency. The legal framework applies to companies of all sizes.
Company splits have significant tax implications including capital gains tax for shareholders, transfer pricing issues and GST implications. It is crucial to have expert tax advisors (like those at Praman Advisors) to ensure tax efficiency and compliance.
Praman Advisors brings a blend of legal, financial and compliance expertise. They simplify the complex process, ensure adherence to all regulatory requirements, draft necessary documentation, represent your company before authorities and help minimize potential risks and delays, allowing you to focus on your core business.