What is Demerger? What are the reasons for demerger?

Demerger is the act of splitting off a part of an existing company to become a new company, which operates completely separate from the original company. 

• Shareholders are usually given an equivalent stake in the new company
• Reasons: Internal or external factors
• Spin-Off: A type of demerger, division of a company into wholly owned subsidiary of parent company. 
  • Eg: Kotak Mahindra Finance Ltd formed Kotak Mahindra Capital Corporation (investment banking division)
  • Eg: Sun Pharma formed Sun Pharma Advanced Research Company Ltd.  

Main motivations for demerger

1. Focussing on core business
2. Reduce the risks of diseconomies of scale and diseconomies of scope by reducing the range of function in a business, lower management costs.
3. A defensive tactic to avoid attention of the competitors.