By S&S Co. Advocates & Solicitors · Published 25 September 2026 · Informational content, not legal advice. See our disclaimer
A Demerger Is a Scheme, Not a Standalone Concept
Indian company law does not define 'demerger' as a distinct statutory transaction; rather, a demerger is implemented as a scheme of arrangement under Sections 230-232 of the Companies Act, 2013, by which one or more undertakings of a demerged company are transferred to a resulting company (existing or newly incorporated), typically in exchange for shares of the resulting company being issued to the shareholders of the demerged company. Getting the scheme document's drafting right is therefore central to a clean demerger, since the scheme itself is the operative legal instrument.
The NCLT Process
The process broadly involves the Board approving the draft scheme, applying to the NCLT for directions on convening meetings of the classes of shareholders and creditors whose interests are affected, obtaining the statutory majorities at those meetings, and then petitioning the NCLT for final sanction. Along the way, the Regional Director, Registrar of Companies, Official Liquidator (where applicable) and relevant sectoral regulators are given an opportunity to raise observations, which the company typically needs to address before sanction is granted.
Identifying and Allocating the Undertaking Cleanly
A frequent source of dispute after a demerger is ambiguity in the scheme about precisely which assets, liabilities, employees, contracts and litigation belong to the demerged undertaking transferred to the resulting company, as opposed to those retained by the demerged company. A well-drafted scheme identifies the transferred undertaking with precision (ideally by reference to specific business lines, identified contracts, and named employees or categories of employees) rather than relying on broad, generic descriptions that later require interpretation.
Employee and Creditor Treatment
The scheme should expressly address whether employees of the transferred undertaking move to the resulting company on terms not less favourable than their existing terms, and how continuity of service and accrued benefits such as gratuity are preserved. Creditor treatment similarly needs to be addressed clearly in the scheme (including whether the resulting company assumes joint and several liability, or several liability only, for obligations connected with the transferred undertaking) since this directly affects creditor consent and NCLT scrutiny at the sanction stage.
Frequently Asked Questions
Is a demerger a separately defined transaction under the Companies Act?
No. A demerger is implemented through the general scheme-of-arrangement mechanism under Sections 230-232, transferring one or more undertakings of the demerged company to a resulting company, typically in exchange for shares issued to the demerged company's shareholders.
Who reviews a demerger scheme before NCLT sanction?
The Regional Director, Registrar of Companies, Official Liquidator where applicable, and relevant sectoral regulators are given an opportunity to raise observations, in addition to obtaining the statutory majorities from affected classes of shareholders and creditors at their respective meetings.
What is a common drafting pitfall in demerger schemes?
Ambiguity about precisely which assets, liabilities, employees, contracts and pending litigation form part of the transferred undertaking, as opposed to what is retained by the demerged company: this frequently leads to post-completion disputes if not drafted with precision.
Does the resulting company automatically inherit liability for all obligations connected with the transferred undertaking?
It depends entirely on how the scheme itself allocates liability: schemes can and do provide for joint and several liability, or for several liability limited to the resulting company, and this allocation should be addressed expressly rather than left to inference.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- Companies Act, 2013, Sections 230-232, and National Company Law Tribunal Rules, 2016.
- This guide addresses legal structuring considerations only; the tax-neutrality conditions applicable to a demerger under separate tax legislation should be assessed independently with qualified tax counsel.