Demerger of Companies | Vedanta, Reliance Industries & NMDC

When a company grows bigger and bigger due to acquisition of new businesses, diversification or otherwise the management takes recourse to restructuring it to streamline its businesses by divesting/demerging its non core or less relevant businesses into a separate entity. This enables the company to home in on its core business by segregating its underperforming verticals. Sometimes a large company is divided into two or more entities to give each a linear shape so that the new management can pursue the business and growth of each unit independently. One of the chief motives of the demerger of companies is enhancing shareholder value. Share prices of the parent company start moving up on many occasions with the commencement of the process of demerger. Subsequently, with the benefits of demerger accruing to the company further rise happens. 

There are generally three types of demerger, namely, `split up’, `spin off’ and `carve out’ demergers. In `split up’ a large company splits itself into two or more entities and shares of the new entities are allotted to the shareholders of the parent company. The resulting companies start operating independently. The parent company stops functioning and its shares are extinguished. The assets and liabilities of the parent company are also apportioned to the new companies. In `spin off’ the parent company segregates a division of business into a new entity and enlist it in the stock market. The existing shareholders of the parent company are allotted shares of the new entity. Thus they hold shares of both the parent company and the new entity. In `carve out’ a business division is separated and the parent company sells its shares through an IPO and raises funds in the process. The shareholders of the parent company are not generally benefited by such a type of demerger. 

Now we may study a few cases of recent demergers and see how it has affected the share price of the demerged companies. NMDC was demerged in October 2022 when its share price was around ₹130. Its share price fell on the demerger ex date due to obvious reasons and traded around the level of ₹110-12 for a few months. Subsequently it moved up and traded at higher levels reaching the ₹240 mark  in the month of March 2024. NMDC share holders were allotted an equal number of shares of NMDC steel, an integrated 3 MTPA steel company which was spun off from NMDC. The shares of NMDC steel is trading at ₹62 at present. The total benefit comes to ₹240-130=110 plus ₹62(price of NMDC steel which was demerged from NMDC) i.e. ₹172.  Reliance Industries was demerged in July 2023 when its financial services wing known as Jio financial services was separated. The stock price of Reliance Industries started moving up with the announcement of its demerger and rose upto Rs2841 0n 19th July 2023 and fell to ₹2619 on 20th July  the effective date of demerger .After moving sideways for some months, it rose up and now priced at ₹2940 as on 19.4.2024. Meanwhile shares of Jio financial services which were awarded to the shareholders of Reliance industries in equal numbers were enlisted in stock market and trades now at Rs370. Take the case of the demerger of Vedanta which is under process. Vedanta Ltd.  is a conglomerate with business interests in oil & gas , aluminium, steel making and iron ore, base metals, zinc and power etc. The company is undergoing splits into six companies which are mentioned below along with their financials.

Financial year 2022-23(₹ In crores)   

The company has big growth plans for each segment of its business. It has recently expanded its alumina refining capacity to 3.5 MTPA  from 2 MTPA and has plans to increase it to 5 MTPA per annum. In addition to aluminium it has plans to substantially enhance its power generation, oil production, zinc production and iron ore capacities. 

As regards the share price of Vedanta Ltd,  the  demerger process of which is under way it has  increased sharply from ₹271  as on 31 March to ₹386 as on 19th April 2024 and further increase is not ruled out. 

In order to take advantage of the benefits that might accrue due to demerger of a company it  is required to analyse each vertical of the parent company that will be demerged and its growth plan as well as the type of demerger it will have and its impact on the company right from its news/announcement.