A demerger involves the transfer of an undertaking from the demerged company to the resulting company, and the resulting company issues its shares to the shareholders of the demerged company. The valuation of the undertaking determines the share exchange ratio, and it is the evidentiary foundation for the fairness of the scheme.
The Scope
The valuation must determine the fair value of the undertaking that is being transferred, and it must allocate the value between the demerged company and the resulting company. The valuer must consider the undertaking’s assets, liabilities, cash flows, and prospects, and it must apply the methodology that is appropriate to the business.
The Methodologies
The DCF method values the undertaking by discounting its expected future cash flows. The comparable companies or transactions method values the undertaking by reference to similar businesses. The asset-based method values the undertaking by reference to the fair value of its net assets. The valuer may use a combination of the methods, and it must explain the weight given to each.
The Share Exchange Ratio
The share exchange ratio is determined by reference to the relative values of the demerged company and the resulting company. The ratio must reflect the value of the undertaking that is being transferred, and it must be fair to the shareholders of both the companies. The NCLT examines the ratio in the scheme proceedings, and it may reject the scheme where the ratio is not supported by the valuation.
A technically sound demerger valuation selects the appropriate methodology, documents the assumptions, and supports the share exchange ratio with the valuation report.
Call to Action
Anuj Desai & Associates advises companies on the valuation of a business undertaking for a demerger—from the methodology and the share exchange ratio to the NCLT scrutiny and the defence of the valuation. If you are planning a demerger, we can help you coordinate the valuation.
📧 office@anujdesaiassociates.com
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