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CS Professional · Corporate Restructuring, Valuation and Insolvency · Types of Corporate Restructuring

Sagar Pharma Ltd transfers its API manufacturing unit to a new company, Sagar APIs Ltd. Every shareholder of Sagar Pharma receives shares of Sagar APIs Ltd in proportion to their existing holding, and Sagar Pharma continues to exist. What is the key feature that distinguishes this from a sell-off?

The distinguishing feature is that the resulting company issues its shares directly to the demerged company's shareholders in proportion to their holdings, and the demerged company receives no cash. In a sell-off, the seller company itself receives the sale consideration.

  1. ASagar Pharma receives cash consideration from Sagar APIs Ltd
  2. BSagar Pharma's shareholders receive the resulting company's shares, so no cash flows to the demerged companyCorrect
  3. CSagar Pharma must be wound up after the transfer
  4. DSagar Pharma's shareholders lose all their rights in the API business

Explanation

In a demerger the consideration is shares of the resulting company issued directly to the shareholders of the demerged company, in proportion to their holdings. The demerged company does not get sale proceeds, unlike in a sell-off. Option one describes a sell-off, and the demerged company continues to exist, so winding up is wrong.

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