Demerger Scheme Valid Even if Foreign Parent of Resulting Company Issues Consideration: NCLT Chandigarh - 2025-07-11

Laws, Courts & Judgments.

NCLT Sanctions Complex Demerger, Affirms Foreign Parent Can Issue Consideration

Chandigarh, India - The National Company Law Tribunal (NCLT), Chandigarh Bench, has sanctioned a complex Scheme of Arrangement involving the demerger of a business between two Indian entities where the consideration was issued by the foreign parent company of the resulting entity. The bench, comprising Judicial Member Harnam Singh Thakur and Technical Member Kaushalendra Kumar Singh, held that such a structure is permissible under the Companies Act, 2013, and clarified that Section 234, governing mergers with foreign companies, is not applicable to demergers.

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Background of the Scheme

The petition was jointly filed by Convergys India Services Private Limited (the "Demerged Company") and Concentrix Technologies (India) Private Limited (the "Resulting Company"). The scheme proposed the demerger of the Customer Relationship Management (CRM) business from Convergys India and its transfer to Concentrix India.

The unique aspect of this arrangement was the consideration structure. Instead of the Indian Resulting Company (Concentrix India) issuing shares to the shareholder of the Demerged Company, the shares were to be issued by Concentrix Services (Netherland) BV, the Dutch parent company of Concentrix India. The shareholder of the Demerged Company is also a foreign entity, Concentrix CVG Customer Management Group Inc.

Regulatory Scrutiny and Company's Defense

The scheme came under scrutiny from the Regional Director (RD) and Registrar of Companies (ROC), who raised several key objections. The petitioner companies provided detailed clarifications, which the NCLT found satisfactory.

1. On the Role of the Foreign Parent Company: - Objection: The RD/ROC argued that since the Dutch parent company (Resulting Company No. 2) was not receiving any undertaking or assets, it did not qualify as a "transferee company" under Section 232(1)(b) of the Companies Act. - Company's Response: The petitioners contended that Section 232 requires the transfer of an undertaking to a transferee company but does not restrict the source of consideration. They argued that the commercial wisdom of shareholders allows for various forms of legitimate consideration, including shares from a holding company.

2. On Applicability of Section 234 (Merger with Foreign Company): - Objection: The RD/ROC suggested that the involvement of a Dutch company necessitated compliance with Section 234 of the Act. - Company's Response: The petitioners successfully argued that Section 234 applies exclusively to mergers and amalgamations with foreign companies, not demergers. In this case, the demerger was purely between two Indian entities, and the foreign company's role was limited to discharging the consideration.

Legal Precedents and Tribunal's Reasoning

In its order, the NCLT relied on established legal precedents to support the petitioners' arguments. The Tribunal cited judgments from the Bombay High Court in Thomas Cook Insurance Services (India) Limited and GlobeOp Financial Services (India) Pvt. Ltd. , which established that:

"The scheme may... not provide for any allotment of shares at all or provide any other appropriate consideration including allotment of shares of a holding company of the transferee company. Acceptance of any particular consideration is part of the commercial wisdom to be exercised by the shareholders of the transferor company."

The NCLT also referenced its own prior ruling in Reckitt Benckiser (India) Private Limited , where a similar arrangement was approved. Based on these precedents, the Tribunal accepted the petitioners' contention that consideration from a foreign parent company is a valid and legally permissible structure for a demerger between Indian entities.

The Tribunal also accepted the petitioners' submissions that the scheme did not require FEMA/RBI compliance as the transfer of undertaking was a domestic transaction, and the issuance of shares occurred between two non-resident entities outside India.

Stance of the Income Tax Department

The Income Tax Department issued a "No Objection" to the scheme but highlighted pending tax demands against the companies. The petitioners provided undertakings to the Tribunal that all tax liabilities, once finalized by the relevant authorities, would be duly paid. The NCLT's order explicitly preserves the Income Tax Department's right to pursue tax claims and clarifies that the sanction does not grant any exemption from taxes.

Final Decision and Implications

The NCLT sanctioned the Scheme of Arrangement, declaring it binding on all parties. The order directs the transfer of the demerged undertaking's properties, liabilities, and employees from Convergys India to Concentrix India.

This judgment reinforces the principle of commercial wisdom of shareholders in structuring corporate arrangements and provides crucial clarity on the scope of Sections 230-232 of the Companies Act, 2013. It affirms that innovative and commercially sensible restructuring, even involving cross-border elements, can be accommodated within the existing legal framework, provided the core transaction (the demerger itself) remains between domestic entities.