This article is written by Anupam Bhaduri who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

Over the course of establishing industries in various domains, there comes a time when a business becomes too big for a single board to manage. The divisions which came off as minor subsidiaries sometimes outgrow their projected growth and it becomes difficult for the administration to cater to the needs of the emerging market leader. This is when the parent companies resort to a demerger, making the subsidiary unit into another new company, typically as a going concern. Not only does this relieve the board of directors of the parent company of the additional burden but also offers significant autonomy to the newly formed company. 

What is a demerger and why it may be a way out

A demerger is a method that separates a wing of the business from the parent entity through a court-driven process. In essence, this method of corporate restructuring is often used by conglomerates to break the business into components. In most cases, the demerger is done for any of three reasons:

1. The separated entity can now work on its own.
2. Can be sold off to another company.
3. Can be merged with another entity owned by the conglomerate for a better operational trajectory.

Hence we can easily conclude that for big companies, demerger is essentially creating individual players under one umbrella for effective strategic management rather than hindering the resource utilisation of the company by herding different business under singular management. 

Proposed transaction

The JHS Svendgaard Laboratories Limited, on 9th October, 2020 officially released a resolution that stated that they were to undertake a Composite Scheme as laid down under the provisions of the Companies Act, 2013. The proposed scheme was the demerger of the ‘Retail Investment Division’ of JHS Svendgaard Laboratories Limited. This would then be vested on a going concern basis with JHS Svendgaard Retail Ventures Private Limited (Resulting Company). This would be immediately followed by the amalgamation of JHS Svendgaard Brands Limited (hereby referred to as Transferor Company) with JHS Svendgaard Laboratories Limited (Transferee Company). 

Parties to the transaction 

The entities that are to participate in the business are all part of the JHS group of companies and the transaction is essentially a restructuring of the company to separate their retail business for better and swift management. The parties to the transaction are defined below:

1. JHS Svendgaard Laboratories Limited (Transferee Company/ Demerged Company)- JHS Svendgaard Laboratories Limited also known as JSLL or henceforth the Transferee Company is engaged in the business of production and selling of oral care products like mouthwash, toothbrushes, toothpaste, and denture tablets among other things. The transferee company is also engaged in offering contract manufacturing partnerships for both national and international markets.
2. JHS Svendgaard Retail Ventures Private Limited (Resulting Company)- The resulting Company thus formed is tasked with carrying out the sale of the entire range of Patanjali Products, especially at all major airports of the country. 
3. JHS Svendgaard Brands Limited (Transferor Company)- This brand continues to do business by the sale of oral products and under the label of ‘aquawhite’.

Rationale behind the scheme of the demerger and the subsequent amalgamation

As discussed above, corporate restructuring in the form of amalgamations and demergers are more than just heaving off the load from the management. More often than not, this allows the newly formed company to embark on a path of aggressive expansion and can often work as a miracle in terms of value creation. 

The advantages to be derived from the demerger of the retail section can be summed as below:

1. A separate identity shall be created that will be focussed on the retail business allowing for greater operational efficiency.
2. The independence of structure between the Demerged company and the Resulting Company will make sure that proper strategies are adopted individually for greater growth of the now separated companies. The structure will also go a long way in providing independence to the management in taking decisions regarding utilising their cash flows for either reinvestment purposes or dividends.
3. Value unlock for shareholders of the Demerged Company would now be possible. This is because the transfer of the Retail Business would enable optimal monetization and exploitation of opportunities by attracting joint venture partners, investors and strategy partners who are adept in the sector. This would also further unlock both organic and inorganic growth in the business.
4. Dedicated management and separate administrative set up shall allow for more attention and focus to sectoral growth. 

The advantages to be derived from the subsequent amalgamation of the Transferor Company with the Transferee Company are:

1. Both the Transferor Company and the Transferee Company are players in the same market of oral healthcare products. Thus it is a natural course of events for the two companies to be merged for furthering the consolidation of similar business and effective cost management on administration and various other overheads.
2. The Transferee Company shall be imbued with financial strength and flexibility, which can lead directly to an increase in the overall shareholding value while bolstering the competitive position of the combined entity. 
3. Greater efficiency shall also be achieved in operations with the adequate and optimum utilisation of resources in addition to better administrative guidance and cost reductions. 
4. Rationalization, simplification and the standardisation of business processes focused effort in operational procedures, productivity improvements, optimum streaming of human resources and elimination of procedural duplication will give rise to cost savings for the company.
5. The pooling in of resources- strategic, managerial and financial, shall improve organizational capability. 
6. The people and organisations attached with the Transferee Company shall be a part of the inorganic and the organic growth will aid to faster and more complete growth for the Resulting Company. Thus it can be safely concluded that the amalgamation shall give way to better economical growth in both sectoral spheres and the financial conduct of the Companies. 

Conclusion

Hence, it is easily conceivable that a demerger gives a conglomerate entity certain benefits. A prime benefit is that the conglomerate can let go of the business sector(s) that do not form a core part of its business lineup. In addition to this, the conglomerate can also raise capital by selling off the sector to another company. Demergers are a common means to attract or prevent an acquisition. On the other hand, it can also let go of the component and form its own legal entity for operational clarity. Demergers are also helpful in helping the companies focus their energies on the most profitable ventures while substantially reducing risk and increasing the shareholder value to a great extent. 

In the case of JHS Svengaard Laboratories, it can be seen that JHS effectively shed off a business line to merge it off with one of their similar business entities. This resulted in the creation of a successful; autonomy as well as pooled in the resources of both these entities. 

References 

1. https://archives.nseindia.com/corporate/JHS_09102020141626_Outcomesw.pdf
2. https://www.investopedia.com/terms/d/demerger.asp 

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