Until 2015, demergers were a popular form of divestment, where the business would be transferred under a court approved scheme as a going concern to the acquirer. Despite the fact that a typical scheme would take between nine to 10 months to be approved by a high court and would require consents from each class of creditor and shareholder of the company the ability to bind minority creditors and shareholders, transfer all licenses, approvals and permits through the sanction of the scheme brought certainty to parties.
Partner
Shardul Amarchand Mangaldas & Co
As the entire business would stand vested in the acquirer by operation of law, other than stamp duty payable on the scheme, the costs associated with implementing the demerger were lower than contractual arrangements. Regulators also preferred demergers as they had the authority of the courts.
Since the jurisdiction for schemes was transferred to the National Company Law Tribunal and the Insolvency & Bankruptcy Code, 2016, was notified adhering to the strict timelines of the code has meant the case load of the already short-staffed tribunal has prioritized insolvency proceedings over demerger schemes. Almost overnight, a scheme that previously took nine to 10 months now started taking 15-18 months. Facing uncertainty on timelines, parties have reverted to opting for slump sales or business transfers or withdrawing schemes filed earlier. But does this necessarily spell the demise of demergers?
Weighing the pros and cons of a demerger scheme and a slump sale, parties need to balance the key objectives and challenges of the transaction. Where timing is paramount, parties are opting for slump sales that require fewer approvals and can be implemented within a matter of a few months.
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Natashaa Shroff is a partner and Taranjeet Singh is a principal associate at Shardul Amarchand Mangaldas & Co.
Shardul Amarchand Mangaldas & Co
Amarchand Towers
216 Okhla Industrial Estate
Phase 3
New Delhi – 110 020
Executive Chairman: Shardul Shroff
Managing Partner Delhi: Pallavi Shroff
Contact details
Tel: +91 11 4159 0700, 4060 6060
Email: Connect@AMSShardul.com
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