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

A listed Indian conglomerate transfers one of its business divisions into a new company and issues the new company's shares directly to the existing shareholders of the conglomerate in proportion to their holdings. No cash is received by the conglomerate or its shareholders. Which description best fits this transaction?

This is a spin-off, also called a demerger. The parent gives shares of the new division company to its own shareholders in proportion to their holdings and receives no cash, so ownership is replicated rather than sold to outsiders.

  1. AA spin-off (demerger) through a distribution of shares to existing shareholdersCorrect
  2. BA trade sale of the division to a strategic buyer
  3. CA management buy-out of the division
  4. DA rights issue by the conglomerate
  5. An equity carve-out through an IPO of the division's shares to new investors

Explanation

In a spin-off the parent distributes shares of the new entity to its existing shareholders pro rata, with no cash consideration. A carve-out instead sells shares to new outside investors for cash. A trade sale and an MBO involve cash paid by a buyer, and a rights issue raises new capital for the parent.

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