ITC Demerger: It was informed by ITC in the stock market on Monday that ITC Limited is separating its hotel business. The company will separate ITC Hotels Ltd. The company said that ITC Ltd. In the meeting, the Board of Directors assessed and discussed various alternative structures for hotel business. After deliberations, the Board of Directors has given in-principle approval for the demerger of the hotel business under the Plan of Arrangement. The next meeting regarding this is going to be held on August 14. As soon as the news of ITC’s demerger hit the market, the shares of the company fell by about four per cent till the market closed. At the same time, at 10.05 this morning, the company’s shares fell 12 percent to Rs 458.65.

what is demerger

A demerger, also known as a spin-off or disinvestment, is a corporate restructuring strategy in which a company decides to separate or split one or more of its business units into independent entities. This process allows the parent company to focus on its core operations while creating separate entities for the divested business units. Demerger is done by any company so that it can spread business in any other area apart from its traditional business and can pay full attention to it.

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How is demerger done?

The demerger can be accomplished in a variety of ways. How to accomplish this is decided by the Board of Directors of the company. However, it can be understood in three ways. The company can demerger its equity. In an equity demerger, the parent company distributes shares of the new demerged entity or demerged company to its existing shareholders on a proportionate basis, effectively making them shareholders of both the parent and the demerged company. Whereas, in asset demerger, instead of distributing company shares, the parent company transfers specific assets and liabilities related to the demerged business to the newly created entity. This method is often used when the demerged business operates with separate assets and liabilities from the parent company. Whereas, in some cases of cash demerger, the parent company may sell the demerged business to a third party or conduct an initial public offering (IPO) of the newly created entity to raise capital, and the sale proceeds are distributed to the shareholders of the parent company.

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Why does a company demerger a company

Demerger is decided by any company to focus on the core business. Also sometimes, the market may undervalue certain businesses. When they are part of a larger group. A demerger can help unlock the true value of these individual businesses. Sometimes investors may have different preferences for specific business sectors. Demergers allow them to invest directly in businesses they are interested in. In some cases, regulatory authorities may require the separation of certain businesses in order to promote competition and prevent monopolistic practices.

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What are the benefits of demerger to the company?

The demerger of the company allows each separate entity to focus on its unique operations, which helps in better management focus and decision making. In addition, demerging allows the financial position of each business unit to be reported independently, providing better transparency for investors. Demerging can help individual businesses allocate capital more effectively based on their specific needs and growth prospects. Independent entities have the flexibility to pursue their own growth strategies, partnerships and mergers or acquisitions. This helps in the development of the company.

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Take care of legal, financial and operational aspects in demerger

The demerger process can be complex and requires careful planning to ensure a smooth transition for all stakeholders involved. Legal, financial and operational aspects need to be addressed thoroughly during the demerger process. In addition, the impact on employees, customers and shareholders must be considered and managed appropriately.

What is the effect of demerger on the stock

The impact of a demerger on the shares of a company can vary depending on the specific terms of the demerger and the market reaction to the restructuring. In general, there are several possible effects that can occur on the shares of the parent company and the demerged company:

change in share ownership: As part of the demerger process, the shareholders of the parent company may receive shares in the newly formed demerger company. The number of shares issued to shareholders is usually determined based on a predetermined ratio or formula. After a merger, the shareholders effectively become owners of both the parent company and the demerged company.

share price adjustment: The share price of the parent company and the demerged company may be affected by the announcement and subsequent closing of the merger. Factors such as the financial health and growth prospects of each entity, as well as market reaction to the restructuring, can affect share prices. Share prices may rise or fall depending on investor perception about the value of the individual entities following the merger.

Enhanced focus and value: Demergers are often done to unlock the potential value of individual business areas that may be overlooked or undervalued within a larger conglomerate. If the market sees potential in the demerged businesses, it may increase the demand for shares in both parent and demerged companies.

increased liquidity: A demerger can sometimes result in increased liquidity for the shares of both the parent company and the demerged company. With separate businesses, each entity can attract a different set of investors with different preferences, potentially creating a broader investor base for both entities.

change in dividend policy: After the merger, the dividend policies of the parent company and the demerged company may differ depending on their individual financial position and capital requirements. This may affect the dividend income received by the shareholders of the parent company.

Business performance and future growth: Market perception about the potential growth and performance of the demerged company will play an important role in determining its share price. Positive performance and growth prospects should allow the share price to increase over time.