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CS Professional · Corporate Restructuring, Valuation and Insolvency · Planning and Strategy

Lakshmi Industries Ltd has a cement unit and a hotel unit. The board proposes to transfer the hotel unit to a new company, Lakshmi Hospitality Ltd, which will issue its shares directly to Lakshmi Industries' existing shareholders in proportion to their holdings. Lakshmi Industries continues with cement. What is the effect on shareholders?

Shareholders end up holding shares in both companies in the same proportion as before. In a demerger the resulting company issues shares directly to shareholders of the demerged company, who keep their original shares as well, rather than the demerged company receiving the shares.

  1. AThey hold shares in both companies in the same proportionCorrect
  2. BLakshmi Industries holds the new shares as an investment
  3. CThey receive cash and cease to hold shares in the hotel business
  4. DTheir shareholding in Lakshmi Industries is cancelled

Explanation

In a demerger the resulting company issues its shares to the shareholders of the demerged company in proportion to their existing holdings. So shareholders continue to own Lakshmi Industries and also own the new company. If the company itself received the shares, it would be a subsidiary-creating transfer, not a demerger.

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