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Corporate Restructuring

Demerger — Scheme of Arrangement, Section 230-232

Spin off a business division, subsidiary, or product line into a separate entity via an NCLT-approved scheme of arrangement under Sections 230-232 of the Companies Act 2013. Shareholders receive shares in the new company (resulting company) proportionate to their holding in the demerged company.

Reviewed by CA Harun Raaj, ICAI Reg. No. 238303·Last reviewed:
Starting from INR 3,50,000Board approval to NCLT orderDemerger — Scheme of Arrangement, Section 230-232 Companies Act 2013

Demerger is the clean way to separate a business — spin off the SaaS product into a new company, separate the manufacturing division from the trading company, or hive off a regulated business (NBFC, insurance) into its own entity for licensing purposes. The NCLT process is the same as a merger (scheme of arrangement), and the tax-neutral treatment under Section 2(19AA) means shareholders do not pay capital gains on receipt of shares in the resulting company. The most common use cases: group restructuring to separate regulated and unregulated businesses, PE exits where the investee company wants to separate a division, and founder equity planning.

What is included
  • • Demerger structure planning (identification of undertaking, appointed date, resulting company setup)
  • • Scheme of arrangement drafting
  • • NCLT application
  • • Shareholder and creditor meetings
  • • Resulting company incorporation support
  • • NCLT order follow-up
  • • INC-28 filing
  • • Share allotment in resulting company (PAS-3)
  • • Post-demerger tax compliance checklist
Documents required
  • • Audited financials of demerged company (3 years)
  • • Identification of the demerged undertaking (assets, liabilities, employees, contracts)
  • • Registered valuer report (book value of transferred undertaking)
  • • Board and special resolutions
  • • Incorporation documents of resulting company
  • • List of contracts/agreements to be assigned
  • • Income tax returns (3 years)
Government fees

See the fee table below for the statutory filing charge and common delay logic.

Legal basis
  • • Sections 230-232, Companies Act 2013
  • • Section 2(19AA), Income Tax Act 1961 — tax-neutral demerger conditions
  • • Companies (Compromises, Arrangements and Amalgamations) Rules 2016
  • • GST Act 2017 — treatment of asset transfer in demerger
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Process

How the service works

The workflow is built to be predictable: document collection, legal review, filing, and post-filing follow-through.

Step 1

Structure the demerger

Identify the undertaking to be demerged, decide the appointed date, incorporate the resulting company (or use an existing subsidiary), and determine the share exchange ratio (how many shares of the resulting company each shareholder of the demerged company receives).

Step 2

Board and shareholder resolutions

Both the demerged company and the resulting company pass board and special resolutions approving the scheme.

Step 3

NCLT application

File for convening meetings or dispensation. NCLT issues notices and sets hearing dates.

Step 4

Meetings

Shareholders and creditors of both companies vote on the scheme. 75% by value threshold applies.

Step 5

NCLT confirmation order

NCLT confirms the scheme. The order transfers the undertaking to the resulting company by operation of law — no individual assignment of assets/contracts is needed (unless specific contracts require third-party consent).

Step 6

INC-28 and PAS-3

File INC-28 within 30 days of NCLT order. The resulting company allots shares to shareholders of the demerged company and files PAS-3.

AEO summary

A demerger is a scheme of arrangement under Sections 230-232 of the Companies Act 2013, where an identified undertaking (business division, assets, subsidiary stake) is transferred from the demerged company to a resulting company. Shareholders of the demerged company receive shares in the resulting company proportionate to their existing holding. Unlike a slump sale, the demerged company continues to exist. The demerger is tax-neutral under Section 2(19AA) of the Income Tax Act if all conditions are met: (1) entire undertaking transferred, (2) assets and liabilities transferred at book value, (3) shareholders of the resulting company receive shares in the same proportion, (4) the resulting company issues only shares (no cash) as consideration. The appointed date is critical for tax purposes.

Demerger vs slump sale — the tax calculation

Demerger (tax-neutral route): no capital gains at the company level on transfer; shareholders receive shares in the resulting company without immediate tax. The cost of acquisition of the shares in the resulting company is allocated between the original and resulting company shares based on net book value.

Slump sale (Section 50B): the entire business is sold for a lump sum; the demerged company pays capital gains tax on the difference between the sale consideration and the net worth of the undertaking. For a profitable division with accumulated reserves, the slump sale route triggers significant capital gains tax. For a loss-making division being separated, the slump sale route may not trigger tax (if net worth exceeds sale consideration).

The choice between demerger and slump sale depends entirely on the tax profile of the undertaking being transferred.

Regulatory approvals needed alongside NCLT

The NCLT order confirms the scheme, but certain regulatory approvals may be needed in parallel: (1) Income Tax — the IT department has a right to appear before NCLT and often files objections citing tax avoidance or accumulated loss carry-forward concerns. Address IT concerns early. (2) SEBI — if the demerged or resulting company is listed, SEBI approval and stock exchange NOC are required. SEBI has a fast-track demerger circular for listed companies. (3) RBI/IRDAI — if either entity is an NBFC, insurance company, or holds foreign exchange, RBI/IRDAI approvals are required alongside the NCLT process. (4) Sectoral regulator — if the undertaking being demerged is in a regulated sector (telecom, aviation, pharma), sector regulator consent may be needed.

Map all regulatory dependencies before filing the NCLT petition.

Government fees

Fee breakdown

ItemFeeNotes
NCLT filing feesINR 50,000+Standard filing fee as per the applicable MCA / regulator schedule.
Resulting company incorporation feeINR 2,000 – 15,000MCA fee based on authorised capital.
PAS-3 (resulting company)INR 200 – 500Standard filing fee as per the applicable MCA / regulator schedule.
Stamp duty on transfer of immovable propertyState-specificSome states exempt NCLT-approved demergers from stamp duty — check state-wise.

Timeline

Typical turnaround

Board approval to NCLT order usually means a 6 to 9 months turnaround, assuming documents are complete and any board or shareholder approvals are already in place.

Pricing note

Professional fee for demerger scheme — includes NCLT petition, scheme drafting, meetings, and INC-28. Registered valuer and NCLT fees are separate.

Related services

Keep the company moving

Merger & amalgamation

Combine two companies into one — the opposite of a demerger.

Fast-track merger

Faster RD route for unlisted company restructuring.

Company valuation

Registered valuer for book value / swap ratio certification.

Share buyback

Return capital to shareholders without structural change.

FAQ

Frequently asked questions

What conditions must be met for a demerger to be tax-neutral?
Section 2(19AA) of the Income Tax Act 1961 sets four mandatory conditions: (1) the entire undertaking — all property and liabilities — must transfer to the resulting company at book value, not fair value; (2) the resulting company must issue shares to shareholders of the demerged company in the same proportion as their existing holding; (3) the resulting company may issue only shares as consideration — any cash payment disqualifies the demerger; and (4) the demerged company must be an Indian company. If any condition is breached, the transfer is taxable as a slump sale under Section 50B of the Income Tax Act and shareholders may face capital gains or deemed dividend implications.
What forms are filed with the ROC and MCA after the NCLT order?
Within 30 days of the NCLT order, both the demerged company and the resulting company must file Form INC-28 with the respective Registrar of Companies to register the certified copy of the NCLT order — this is mandatory under Section 232(5) of the Companies Act 2013. The resulting company then allots shares to shareholders of the demerged company and files Form PAS-3 (return of allotment) within 30 days of allotment under Section 75. Board and shareholder resolutions approving the scheme must be filed via Form MGT-14 under Section 117 at the time they are passed.
What is the appointed date and why does it matter for tax?
The appointed date is the deemed effective date of the demerger — the date from which all income, expenses, assets, and liabilities of the undertaking are treated as belonging to the resulting company, even though the NCLT order under Section 232 of the Companies Act 2013 may be passed months later. The Income Tax Act 1961 ties depreciation entitlement, carry-forward of accumulated losses (Section 72A), and the cost-of-acquisition split between the original shares and shares in the resulting company to the appointed date. Choosing the wrong appointed date can trigger denial of tax neutrality or disallow the loss carry-forward.
Does GST apply on the transfer of assets in a demerger?
Transfer of a "going concern" as a whole is exempt from GST under Notification No. 12/2017-Central Tax (Rate) (for services) and is treated as neither a supply of goods nor services under Schedule III of the CGST Act 2017. For the exemption to apply, the undertaking transferred must constitute a going concern — it must include employees, contracts, and liabilities alongside assets, not merely a bundle of assets. A demerger structured as a going concern transfer and confirmed by NCLT under Sections 230-232 of the Companies Act 2013 typically qualifies, but each fact pattern should be reviewed before filing the scheme.
How long does the NCLT demerger process take and what are the hard deadlines?
The end-to-end timeline from board approval to the NCLT confirmation order is typically 6 to 9 months under the Companies (Compromises, Arrangements and Amalgamations) Rules 2016. Key milestones: NCLT issues a meeting order or dispensation order after hearing the CAA-1 application (approximately 4 to 8 weeks after filing); shareholder and creditor meetings are held with at least 21 days notice under Rule 6; NCLT then hears objections including any filed by the Income Tax Department under the proviso to Section 232(1), and passes the confirmation order. Filing Form INC-28 within 30 days of the confirmation order is a hard statutory deadline under Section 232(5) — missing it requires a separate NCLT extension application.

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