A company, which is a conglomerate, may have more than one distinct and unconnected businesses. This may be because of legal compulsion and/or funding requirements. In changing scenario of corporate strategies, corporates would want to focus on core businesses and have a distinct legal structure to carry on different businesses which have different risks and return profile. To put different businesses in separate company, options available are;-
Slump Sale Demerger

  1. Slump Sale ( requiring compliances under section 293(1) (a))
    • To 100% subsidiaryThis is structured in a manner that is made ready to invite strategic and/or financial partner at a later stage , though post-slump sale also 100% beneficial ownership remains with the same shareholders.
    • For cash consideration to an acquirer i.e. third partyFor this option, the company exits the business for cash and has no linkages post sale in terms of ownership and /or control.
  2. Demerger (under section 391 to 394 of the Companies Act, 1956)The primary purpose while going for a Demerger is to have focused attention on both businesses.

So the structure most suitable structure is to be selected after evaluating strategy, financial implications and other objectives of the company.

In this article, we have tried to analyze the transfer of Undertaking under section 293(1) (a) and demerger under section 391 to 394 of the Companies Act, 1956 and its implications under different laws in terms of procedure and liabilities

Comparison of Transfer of Undertaking & Scheme of Demerger

Particulars Under Section 293(1) (a) (Slump Sale) Under Section 391 to 394 (Demerger)
Board Resolution Yes Yes
Document Business Transfer Agreement Scheme of demerger
Court Approval No Yes
Consent of Shareholders Yes By Postal Ballot Method Yes, voting by ballot at court convened meeting
Prior Intimation and NOC from office of Regional Director etc No Requirement Required both to Regional Director as well as to Registrar of Companies
Mode of consideration Generally cash. Generally of shares.
Receiver of consideration The Company The shareholders of the Company
Accounting Treatment No specific Accounting Standard prescribed. Purchase method No specific Accounting Standard prescribed. Purchase method. to be recorded at book values to avoid violation of Section 2(19AA) of the Income Tax Act, 1961.
Stamp Duty Normal Stamp Duty as in the case of sale of property Lower Stamp Duty or no stamp duty
Time Generally 3months Generally 4 months.
Capital Gains attracts long term or short term capital gains tax No tax if it is in compliance with section 2(19AA) of the Income Tax Act, 1961.

The Company may consider transferring undertaking/business u/s 293(1) (a) of the Companies Act, 1956 under following circumstances:

In the case of Zicom Electronic Security Systems Limited, a particular division was transferred to a wholly owned subsidiary for cash consideration. Click Here to View the Full Scheme
  1. If a Company wants to raise funds and/or invite strategic /technology partner for a particular business but does not want to dilute its stake in the flagship/holding Company then it can go for transfer of undertaking u/s 293(1) (a) to a subsidiary Company. The transfer can be by way of exchange of shares. This way the Company is able to raise funds without diluting stake in the main company.
  2. When a company which wants to completely exit particularly it could go for transfer of undertaking u/s 293(1) (a).
  3. A Company having brought forward capital losses can go for transfer under this method. The Company can sell the undertaking at market value and can claim set off of capital gains for brought forward capital losses.

A Company should transfer undertaking/business u/s 391 to 394 of the Companies Act, 1956 under following circumstances:

BILT filed scheme of slump sale/exchange under Sec 391 to Sec 394 of The companies Act,1956 . Click Here to View the Full Scheme
  1. When as part of restructuring the company is not looking from any fund raising nor it wants to have any change in ownership and have mirror image of shareholdings, the Company should go for demerger u/s 391 to 394
  2. A Company with diversified businesses which have grown in size which makes it difficult for the management to manage should separate each business into a different entity. The Company should do this by way of demerger u/s 391 to 394. In this way company has control over all the businesses and each individual business is managed separately in a separate Company.
  3. Statutory requirements: under certain laws, the Company has to maintain the minimum stake/ beneficial ownership of present shareholders to continue to have licence/registration ( share brokers and SEZ registration etc) or to avail certain tax benefits and/or not lose claims deductions claimed earlier…

A Combination of transfer of undertaking u/s 293(1) (a) of the Companies Act, 1956 and section 391 to 394 of the Companies Act, 1956:

In case of BIL,Paper & Textile business of BIL was transferred to group companies under scheme of Arrangement U/s 391 & 394 Click Here to View the Full Scheme
A Company may also go for slump sale under section 391 to 394 of the Companies Act, 1956. This may be to achieve various strategic purposes.
  • To get cash in the flagship company
  • To reduce paid up capital without reducing promoters’ stake
  • To hive off and place general paper business in a foreign subsidiary
  • To raise fund by way of selling 25% of general paper business

Conclusion:

We can conclude that a Company intending to transfer undertaking/business should take into consideration the points mentioned above and then decide the mode of transfer.

Note : This article is an Analysis of Transfer of Undertaking under section 293(1)(a) of the Companies Act, 1956 versus demerger under section 391 to 394 of the Companies Act, 1956.

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1 Comments

  1. Navaneetha Krishnan G says:

    Is sec.391 to 394 is applicable for Pvt. limited company
    Navaneetha Krishnan G
    gnkrishnan02@gmail.com

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