A big tycoon of India ITC Limited has previously applied to Competition Commission of India (CCI) for demerger of shares of its hotel business. Now, CCI has recently approved the same. This demerger will lead to division of its shares in 10:1 ratio. This means that a shareholder holding 10 shares will get 1 share each of the demerged division. ITC has given the following update:
“Post obtaining no-objection from stock exchanges, Scheme of Arrangement for demerger (“the Scheme”) was filed with National Company Law Tribunal (NCLT). NCLT has directed convening a meeting of shareholders of ITC on June 6, 2024, to consider and approve the Scheme.”
It is a big news for the Indian economy as a whole considering the fact that Market Capitalization of ITC is INR 5.32 trillion.
Therefore, it becomes important to know about what is demerger and why is it done?
Definition:
A demerger is simply division of units of a large enterprise. It is done mainly due to three reasons:
- When a business becomes so big that it becomes non-manageable at central level. So, it becomes necessary to split the businesses into various heads.
- To focus on core business, all side businesses are split from the whole.
- In order to avoid forced takeover from other businesses.
The advantages lie in above definition itself. There are many types of demergers including Spinoff and Split.
Reasoning:
- The split division becomes a new entity so of course it increases the value of per share.
- If the split division becomes profitable after being disconnected to the loss bearing entity, it leads to better dividend and increased capital stock in the hands of shareholders.
So, now one can get an idea on why so many companies like Vikram Thermo (India) Ltd, Mahaluxmi Rubtech Limited, Forbes & Company Ltd and Ujaas Energy Ltd go for the same.
