Jan 24, 2020

A Legal Conundrum on Outbound Scheme of Demerger

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A Scheme of Arrangement under Section 230 – 234 of the Companies Act, 2013 in the nature of De-merger was filed before National Company Law Tribunal (“NCLT”), Ahmedabad Bench and same was rejected by NCLT. The Scheme contemplated transfer of two Specified Investment Undertakings of Sun Pharmaceutical Industries Limited to two overseas Resulting Companies, viz. Sun Pharma (Netherlands) B.V., and Sun Pharmaceutical Holdings USA Inc..

Since, Petitioner Company is listed company having its shares listed on BSE Limited and National Stock Exchange of India Limited therefore the company sought the approval of the Stock Exchanges and SEBI which provided their no objection to the Scheme of Demerger. On presentation of Petition before NCLT meetings of Equity Shareholders and Unsecured Creditors were convened, whereby Scheme was approved by majority of Equity Shareholders and Unsecured Creditors.

However, Regional Director (North Western Region) filed its observation on Scheme of Demerger, few decisive observations are hereunder –

  1. Section 234 refers to Cross Border Mergers and Amalgamations and not to Demergers.
  2. Section 2 (19AA) of the Income Tax, 1961 is violated and same will not amount to Tax Neutral Transaction.
  3. Company to make compliance with provisions of FEMA and RBI.

Petitioner Company while replying to aforesaid observation held that, Scheme of Arrangement, either in the nature of Merger or Demerger and the Petitioner Demerged Company has complied with the applicable frame work under FEMA and RBI guidelines. Hence, there was deemed approval of RBI to the Scheme.


While going through the provisions of Section 234 it is evident that same applies to Cross Border Mergers of Indian companies with Foreign Companies and vice versa and the provisions mention only about the words ”Merger” and/ or ”Amalgamation” so the Section 234 do not provide for or rather restrict the Demerger of the Indian Companies with Foreign Company.

In addition to the above, Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is silent on ”Demergers” and mentions only ”Mergers” and ”Amalgamations”.

Moreover Foreign Exchange Management (Cross Border Merger) Regulations, 2018 are applicable to the Mergers and Amalgamations of the Indian Companies with the foreign companies only.

Here the term Demerger which was specifically contained in the draft regulations which was deleted from the final regulations.


In our opinion, Section 234 has to be read along with Section 230 – 232 of Companies Act, 2013 and explanation to Section 230 – 232 of Companies Act, 2013 specifically clarifies transfer of undertaking, property and liabilities of one or more companies. It will be interesting to see how Appellate Tribunal deals in present case, if appeal is preferred.


Mr. Manoj Kumar

Partner & Head – M&A & Transactions




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