Divestiture is when a company decides to sell or let go of parts of its business, like assets, subsidiaries, or specific business units, as part of a bigger plan to reorganize itself. In India, this process is guided by the Companies Act 2013, particularly Section 232, which deals with schemes of arrangement, such as demergers. This law lays out a clear and organized way for companies to make these changes to ensure that they get proper approvals from courts and involve stakeholders like shareholders and creditors. This article explains divestiture in corporate restructuring, focusing on how it works in India under the Companies Act 2013. It covers the legal steps, types of divestiture, and why companies choose this strategy, all in easy-to-understand language.
Elevate your career with our Advanced Certification Program in Mergers & Acquisitions designed to transform your professional journey in just six months. This high- engagement course emphasizes real-world applications and features master classes from NLU and industry partners led by expert faculty.
What is Divestiture in Corporate Restructuring?
Divestiture is when a company decides to sell, close, or separate parts of its business, such as assets, subsidiaries, or business units. It’s a key part of corporate restructuring, which is about reorganizing a company to make it more efficient, profitable, or focused.
In India, divestiture in corporate restructuring is guided by the Companies Act 2013, particularly Section 232, which deals with schemes of arrangement, like demergers. This law ensures the process is fair, legal and approved by courts and stakeholders like shareholders and creditors.
Divestiture can happen in different ways, such as creating a new subsidiary (spin-off), dividing a company into multiple parts (split-up), selling a specific business segment (split-off), or selling shares of a subsidiary to the public (equity carve-out).
Companies might do this to get rid of underperforming parts, raise money, follow legal rules, or focus on their main business, which helps them work better and increase value for shareholders.
Divestiture in Corporate Restructuring Under Indian Laws
Divestiture is a strategy where a company gets rid of parts of its business by selling, closing, or transferring them. In India, this process is carefully regulated to make sure it’s done legally and fairly. Before 1991, India’s economy was tightly controlled, and rules made it hard for companies to restructure or divest. After economic reforms in 1991, laws like the Monopolies and Restrictive Trade Practices (MRTP) Act were relaxed, making it easier for companies to merge, restructure, or divest to stay competitive.
Today, divestiture is common in India, with many big deals happening. For example, since 2016, there have been 791 divestiture transactions worth over $50 billion. Notable cases include Reliance Infrastructure selling its business to Adani Transmission for $2.9 billion and Larsen & Toubro selling its electrical business for $2.8 billion. These show how important divestiture is for companies reshaping their strategies.
Definition and Context
Divestiture, sometimes called divestment, means letting go of business assets through selling, exchanging, closing, or even bankruptcy. It can involve part of the business or the whole thing. Companies might divest if a part of their business isn’t making money, doesn’t fit their main goals, or because of legal or regulatory requirements. Unlike mergers or acquisitions, divestiture doesn’t involve taking over another company—it’s about letting go of something the company already owns.
In India, divestiture became easier after the 1991 economic reforms, which loosened rules on industries and foreign investments. While there’s no single “Divestiture Law,” the process is part of corporate restructuring rules, mainly under the Companies Act 2013. This law provides a clear framework to ensure everything is done properly.
Legal Framework
The main law for divestiture in India, especially for demergers, is Section 232 of the Companies Act 2013, found in Chapter XV (Compromises, Arrangements, and Amalgamations). This section covers schemes of arrangement, which are plans for restructuring a company by transferring assets, debts or operations to another company or creating new ones. The process is thorough to protect everyone involved, like shareholders and creditors. Here’s how it works:
Preparing the Scheme: The company creates a detailed document called a scheme of arrangement. This explains how shares will be swapped, assets and debts will be moved, and how employees will be handled.
Filing with the Court: The scheme is submitted to the National Company Law Tribunal (NCLT), which replaced High Courts for this purpose. The company files Form 33, along with supporting documents like affidavits, board resolutions, lists of shareholders and creditors, the scheme, the company’s Memorandum and Articles of Association, and recent financial statements.
Notifying Stakeholders: The company must inform all shareholders and creditors at least 21 days before meetings, often through newspaper ads using Form 38. Meetings are held following court guidelines, and a report is filed using Form 39.
Getting Approval: The scheme needs approval from at least 75% of the company’s shareholders and creditors. If there are objections, the court reviews them. Once approved, the court issues an order, and the company files it with the Registrar of Companies.
This process ensures everything is transparent and follows India’s corporate governance rules.
Also, Get to Know About Kotak Mahindra Bank's Acquisition of Sonata Finance Case Study
Types of Divestiture in Corporate Restructuring
Divestiture can take different forms, each with its own purpose and process. Here are the main types:
Spin-off: The company creates a new subsidiary with the same share structure as the parent company. For example, if a company like Afio Ltd. separates its athleisure clothing business into a new company, that’s a spin-off.
Split-up: The company splits into a holding company and several subsidiaries, often to separate different business areas. For instance, United Technologies split into three separate companies.
Split-off: A specific part of the business is separated and sold. An example is General Electric selling its Synchrony Financial business.
Equity Carve-out: The parent company sells shares of a subsidiary to the public, reducing its ownership. For example, GlaxoSmithKline sold shares of its subsidiary to Hindustan Unilever, or Larsen & Toubro sold shares to Schneider Electric.
All these types follow the same legal rules under Section 232, but the paperwork and approvals vary slightly depending on the structure.
Strategies and Government Context
While the above applies to private companies, divestiture also happens with government-owned businesses, called Public Sector Undertakings (PSUs). For PSUs, it’s often called disinvestment, and the process is different. Government divestiture strategies include:
Minority Divestment: The government keeps at least 51% ownership but sells smaller shares to investors or the public through auctions.
Majority Divestment: The government gives up most of its ownership, like with Chennai Petroleum Corporation Limited and Indian Oil Corporation.
Strategic Divestment: The government sells PSUs to private companies to make them more efficient and reduce financial burdens.
Complete Divestment/Privatization: The government sells 100% of its stake, transferring full ownership to private entities.
These are managed by Niti Aayog, and the money goes into the National Investment Fund (NIF). However, PSU divestiture is separate from private corporate divestiture, which follows the Companies Act.
Reasons for Divestiture
Companies choose divestiture for several reasons, including:
Focusing on Core Business: Selling parts that aren’t profitable or don’t fit the company’s main goals to focus on what they do best.
Raising Money: Selling assets to get cash for new investments or to pay off debts.
Increasing Value: Selling an asset if it’s worth more sold than kept, boosting the company’s overall value.
Surviving Financial Trouble: Selling parts of the business to avoid bankruptcy or insolvency.
Following Legal Rules: Selling assets to comply with court orders or regulations, like maintaining fair competition in the market.
These reasons are similar to why companies worldwide divest, as it helps them become more efficient and valuable.
Read to learn more about Merger and Acquisition Process
Summary
Divestiture in corporate restructuring under Indian laws is a well-organized process, mainly guided by Section 232 of the Companies Act 2013. It allows companies to sell or separate parts of their business to improve efficiency, meet legal requirements or strengthen their finances. With different types like spin-offs and split-offs, and clear legal steps, divestiture is a flexible tool for companies. However, it requires careful planning to handle legal, financial, and operational details.
Related Posts:
Divestiture in Corporate Restructuring: FAQs
Q1. What is divestiture in corporate restructuring under Indian laws?
Divestiture is when a company sells or separates parts of its business, like assets or subsidiaries. In India, it’s governed by Section 232 of the Companies Act 2013 to help companies reorganize and achieve strategic goals.
Q2. What are the legal steps for executing a divestiture in India?
The steps include creating a plan (scheme of arrangement), filing it with the National Company Law Tribunal (NCLT), notifying shareholders and creditors, getting 75% approval from them, and getting court approval.
Q3. What types of divestiture are recognized in India?
Types include spin-offs (creating new subsidiaries), split-ups (dividing into multiple companies), split-offs (selling a business segment), and equity carve-outs (selling subsidiary shares to the public).
Q4. Why do companies undertake divestiture in India?
Companies divest to get rid of unprofitable parts, raise money, follow legal rules, focus on their main business, or improve efficiency and shareholder value.
Q5. How does government divestiture differ from corporate divestiture in India?
Government divestiture (disinvestment) involves selling stakes in public sector companies (PSUs) and is managed by Niti Aayog. Corporate divestiture involves private companies and follows the Companies Act.
