What Is a Demerger in Stocks?

You invest in a stock with the aim of earning high returns. After a while, you come across news that the business is splitting its shares, and you will be getting shares of both entities. Is this good for you or not?

Well, this is what demerger in stocks is all about. When investing in stocks and shares, this is a common term that you must know to ensure that you understand the benefits and implications well. Now, in general, demerger in stocks is beneficial for the stockholders as it allows them to have a better number of stocks with no additional investment usually.

But to know all the details, it is important to know all the details. So, let us start by understanding the concept and move ahead with what happens to shares after a demerger. 

Understanding Demerger in Stocks

A demerger is a corporate restructuring process. It is a process where a large company splits one or more of its business divisions into a separate and independent entity. The purpose of a demerger is usually to create focused companies that can perform better individually. 

By following the demerger, the business can create better strategies and work on the goals designed for its business unit. But there is a key benefit that the demerger of shares offers to the shareholders as well. They receive shares of the new entity, but in the proportion of their holding and as decided by the company. 

One such example of a demerger that happened in 2025 is that of Tata Motors. Under this Tata Motors demerger, the shareholders are getting a split with a 1:1 ratio, allowing them to get one share of the new entity for their existing holdings. 

Key Features of Stock Demeger

In the simplest words, where the company will benefit from the growth of both entities, the shareholders will also gain from the same. But there are certain features of the demerger that you should be aware of:

• It separates one or more business units from the parent company.

• A new, independent company is created after the split.

• Shareholders of the parent company get shares in the new entity.

• Assets and liabilities of the separated unit are transferred to the new company.

• Both companies operate with separate management and strategies.

• The process requires the legal and regulatory bodies' approval.

• It helps in unlocking the true value of each business segment.

• Usually, it is structured as a tax-neutral transaction.

• The new company gets listed on the stock exchange.

• It improves operational focus and performance of both entities.

Types of Demerger

No matter whether you are just trading or investing in the stock market, it is important that you know what kind of demerger is happening. This is where it will allow you to make the right decisions and will help you gain the benefits from the same as well. So, here are the key types that you must know of:

1. Spin-off

The parent company forms a new independent entity. Here, the company gives its shares to existing shareholders. Both companies continue to operate separately after the demerger.

2. Split-up

The parent company splits into two or more independent entities. Now, after this, the original company ceases to exist after the separation.

3. Equity Carve-out

The parent company offers a minority stake in the new entity. This is done through an IPO while keeping majority ownership. This allows it to raise funds and showcase the new unit’s value.

4. Divestiture

Under this, a specific business unit or division is sold to another company or investor. The main aim here is to help the parent firm focus on its core business.

5. Subsidiary Separation

This is a pattern where an existing subsidiary becomes a completely independent company. It is now one with its own management, ownership, and decision-making structure.

How Does a Demerger Work

A demerger works through a series of structured steps. This ensures the smooth separation of one or more divisions from the parent company. The goal is not only to create new entities but to ensure that the entities work in a seamless manner to help the business earn profits and hold on to shareholder value.

So, here are the steps are as follows:

Step 1 – Decision and Planning

The company’s board start with the identification of the division or business unit. This is the one that needs to be separates. The idea is to start with planning and restructuring that can benefit them.

Step 2 – Valuation of Assets and Liabilities

The next is the valuation part. Now, the assets and the liabilities of the unit that is going to be demerged are taken into consideration here. Both the book value and the market value are taken into consideration here. 

Step 3 – Scheme of Arrangement

A formal demerger scheme is drafted. This will be the formal document that will guide you through the process, share allocation ratio, and transfer details. This document is then submitted for approval.

Step 4 – Regulatory and Shareholder Approval

The plan must be approved in order to get the demerger started. This will need the approval of the shareholders and creditors. The plan will then be submitted to the regulatory authorities, such as SEBI and the National Company Law Tribunal (NCLT).

Step 5 – Allocation of Shares

Once the demerger is approved, the next stage is to focus on the allocation. The shareholders of the parent company get the shares of the new entity in the proportion so approved. This will allow them to have additional holding but with no new investment. 

Step 6 – Listing of the New Entity

The new company is listed separately on the stock exchange, like NSE or BSE. Once these shares are listed on the stock exchanges, you will be able to trade in them just like any other share in the market.

Step 7 – Independent Operations

Now, both companies will start working as independent entities. They will be in a position to operate and work on their goals with the help of their internal management. This will allow them to generate profits and help the shareholders earn as well. 

Benefits of Demerger for Shareholders and Company

A demerger can bring significant advantages to both shareholders and the company. It allows businesses to operate more efficiently. This allows the shareholders to gain from better working and performance. 

Benefits of Demerger for Shareholders

• Unlocks true value by separating profitable business segments.

• Provides shareholders with shares in both the parent and new company.

• Allows you to buy and sell the stocks of the company as per need with flexibility.

• Offers potential for better returns from independent business performance.

• Enhances transparency and understanding of each company’s growth potential.

Benefits of Demerger for Company

• Allows focused management and clearer strategic direction.

• Improves operational efficiency by removing non-core divisions.

• Can bring in investors based on the need of the business line. 

• Increase profits with the use of proper plans and assets.

• Supports long-term growth with proper focus and planning.

Risks of Demerger for Shareholders and Company

Demerger is really helpful. But is that it? Well, unlike anything, there are certain risks as well that you must know. So, let us explore the same here in this guide.

Disadvantages of Demerger for Shareholders

• Price fluctuation can impact the portfolio. 

• Confusion over the new company’s valuation or performance.

• Dilution possibility based on the share allocation ratio decided. 

• Risk of uneven growth between the two entities.

Disadvantages of Demerger for Company

• Chances of issues with working but is temporary.

• Legal, administrative, and other costs can be high.

• Delay in approval can lead to issues.

• Market response cannot be predicted.

Upcoming Demerger in Stocks to Know

Now that you know what is demerger in stocks, it is time to explore the upcoming ones. So, here are the top ones to know:

Conclusion

Demerger is stocks is rather a strategic decision. It is based on the primary aim of helping the company with better management and working. It helps to attain goals much faster, which is quite important. But proper analysis of the demegerb is also crucial.

While you get additional stocks as existing investors, knowing and analysing can help you manage your portfolio. And if you are new to trading and are looking for a platform that can help you manage your investments well, register on Rupeezy.

Start your trading and investing journey with the right tools and support in no time. 

FAQs

Is a demerger good for the stock market?

Yes, demergers often lead to better price discovery and investor confidence as each business unit operates independently with greater focus.

How do investors receive shares after a demerger?

Investors automatically get shares of the new entity in their demat account based on the approved swap ratio once the demerger is completed.

Can a demerger increase company profitability?

Yes, separating unrelated businesses can improve management efficiency. This helps with better profits over time.

Are demergers taxable for shareholders in India?

Most demergers in India are structured as tax-neutral under the Income Tax Act. So, there are no immediate capital gains, which is good. 

How can investors track upcoming demergers?

Investors can learn about the upcoming demergers with the help of the news and announcements. So, keep an eye out for such information.