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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

A listed Indian company transfers its entire consumer-goods division to a newly formed company and issues the new company's shares directly to its own existing shareholders in proportion to their holdings. The original company continues to trade. Which description best fits this restructuring?

This is a demerger or spin-off. The division moves into a new company whose shares are given to the parent's existing shareholders in proportion to their holdings, and the parent keeps trading. No cash is paid by managers or outsiders, so it is not a buy-out or buy-back.

  1. AA demerger (spin-off) in which shareholders receive shares in the new entityCorrect
  2. BA management buy-out of the division by its managers
  3. CA rights issue to fund the division
  4. DA share buy-back from the existing shareholders
  5. A hostile takeover of the division

Explanation

Shares in the new entity go to existing shareholders pro rata, while the parent continues to operate. This is a demerger or spin-off. A management buy-out would involve managers buying the division, and a buy-back would involve cash leaving the company.

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