• The act of splitting off a part of an existing company to become a new company, which operates completely separate from the original company.
• Shareholders of the original company are usually given an equivalent stake of ownership in the new company.
• A demerger is often done to help each of the segments operate more smoothly, as they can now focus on a more specific task. Opposite of merger.
• For e.g. In this case, Bajaj limited has been demerged into (a) Bajaj auto limited to focus on the auto business, (b) Bajaj Finserv Ltd (BFSL) to focus on insurance, consumer finance etc, and (c) Bajaj Holdings & Investment Ltd (BHIL) to focus on investments and new business opportunities.
• Demerged company means the company whose assets liabilities loans and business 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.
• Resulting companies on the other hand means the company or companies to which assets liabilities loans & business are being transferred in the process of demerger.
Types Of Demerger:
1. Spin off: Spin off involves the transfer of all or substantially all assets, liabilities, loans and business of one of the business divisions or undertakings into another company whose shares are allotted to the shareholders of the transferor company on a proportionate basis.
Example: ABC has 3 business divisions A, B, C. A is engaged in textiles, B is engaged in steel and C is engaged in software. If ABC Limited transfers its assets liabilities and business of its division C i.e. software business to a separate company complying with other conditions mentioned below & continues to run divisions A & B i.e. textiles & steel, it will be a case of a spin off.
2. Split up: involves transfer of all or substantially all assets, liabilities, loans and businesses of the company to 2 or more companies in which again like spin off the shares in each of the new companies are allotted to the original shareholders of the company on a proportionate basis but unlike spin off the transferor company ceases to exist.
Example: Transfer the assets of all the 3 divisions, to 3 different companies by which ABC limited will either remain as a shell company or cease to exist, it will be a case of split up.
Process of Demerger:
Case Study – Wipro Limited:
Wipro Limited: is a multinational IT consulting and System Integration Services Company headquartered in Bangalore, Karnataka
As of March 2014, the company has 1,47,452 employees servicing over 900 large enterprise & Fortune 1000 corporations with a presence in 61 countries.
On 31 March 2014, its market capitalisation was approximately 1.27 trillion ($20.8 billion), making it one of India's largest publicly traded company and seventh largest IT services firm globally.
To focus on core IT Business, it demerged its non-IT businesses into a separate company named Wipro Enterprises Limited with effect from 31 March 2013.
Wipro Limited has announced the plan to demerge its non-IT business into a separate company called the Wipro Enterprises Limited. The non-IT business consists of:
A) Consumer Care, Lighting and Furniture Business
B) Infrastructure Business (Hydraulics and Water)
C) Medical Diagnostic and Service Business
Wipro’s non-IT Business:
• For the year ended March 31,2012, Wipro Limited had a consolidated top line of about 37,000 crs.
• The IT Business contributed about 32,000 crs which was 86% of the turnover.
• The non-IT business contributed 14% or roughly 5,000 crs which looks small when compared to the IT revenues but is large enough in its own right.
• In consumer care space, Wipro has brands like Santoor soap, Chandrika soap, Aramusk, Yardley, Safe wash etc.
• In indoor lighting, Wipro shares No 1 position with Philips; in commercial lighting Wipro is No 3 and in the furniture business, it is No 2 after Godrej.
· Wipro Infrastructure Engineering is world’s largest independent hydraulics cylinder manufacturer in the world with a 70% MARKET share in India.
• The management has been very active in growing the consumer care business inorganically. In the last few years, host of acquisitions have been done like Glucovita (2003), Chandrika (2004), North West Switches (2006), Unza Holdings (2007) and Yardley in 2009. The latest one being the acquisition of LD Waxsons (2012).
• In the non-IT business, the consumer care and lighting business is the largest piece, generated ROCE of 18-20% in FY 12. Annualising revenues to 4000 crs and going by the peer valuations, this piece could easily sell for 2-3 times its revenues if it were to list separately. Thus the consumer care division can be valued between 8000-12000 crs.
• Other businesses like infrastructure and medical diagnostic businesses are relatively small and currently earn far lower margins and ROCE than the consumer care business. The annualised revenues would be about 1500 crs. Difficult to value this piece in light of the poor margins right now. However, just to put a range of values to it, if it were to sell between 0.5-1 time’s revenues, this piece could be valued between 750-1500 crs.
• The demerger will make Wipro Limited a pure IT company and will also assist Wipro Limited meeting the minimum public shareholding requirements. The promoter owned 78.31% stake in the company as of Sep 30, 2012.
• SEBI has approved the proposal to reduce the promoters’ holding by way of the demerger and subsequent exchange of shares in order to comply with the minimum public shareholding norms.
The new company will be an unlisted entity and the shareholders have been provided with 3 options to choose from in lieu of the non-IT business which will get hived off.
• Receive 1 equity share of Wipro Enterprises for every 5 equity shares of Wipro Limited.
• Receive one 7% Redeemable Preference share (Face Value Rs 50) in Wipro Enterprises for every 5 equity shares held in Wipro Limited. The preference share shall have a maturity of 12 months and shall be redeemed at a value of Rs 235.20.
• Exchange the shares of Wipro Enterprises with shares of Wipro Limited (pure IT company post the scheme of arrangement) held by the promoter. 1 share of Wipro Limited can be opted for every 1.65 shares of Wipro Enterprises.
• NRI shareholders can either choose for option 1 or option 3. However, the ADR holders will compulsorily be given option 3.
- CA, CS, CMA, MBA Naveen Rohatgi
