Demerger Under Section 232: NCLT Procedure, Tax Neutrality and the Rs 3 Lakh Filing Trap (2026)

In December 2025, the Mumbai bench of the National Company Law Tribunal signed off on one of the largest corporate splits India has seen: Vedanta Limited carved into five separately listed companies through a single scheme of arrangement. That one order moved thousands of crores of assets between entities without a rupee of capital gains tax changing hands. The machinery that made it possible is the same one a Bangalore founder uses to spin a SaaS product out of a services business before a Series B, or to park real estate in a separate company before an IPO: a demerger under Section 232 of the Companies Act, 2013.

The irony is that the tax saving everyone chases is the easy part. The place founders get hurt is a 30-day filing almost nobody calendars after the NCLT order arrives, and it carries a penalty that climbs to Rs 3 lakh per defaulting company and officer.

What a demerger actually is (and what it is not)

A demerger is the opposite of a merger. Instead of two companies becoming one, a single company sheds a part of itself. The business being separated is called an "undertaking". The company letting it go is the demerged company; the company receiving it is the resulting company. Here is the part that defines a demerger: the shareholders of the demerged company get shares in the resulting company in proportion to their existing holding. No cash leaves the group, and ownership stays with the same people, just across two companies instead of one.

That last point is what separates a demerger from a slump sale. In a slump sale you sell the undertaking to a buyer for consideration, and the selling company pays tax on the gains. In a demerger done correctly, the transfer is tax neutral: the demerged company pays no capital gains and the shareholders pay nothing on the new shares they receive. The price of that neutrality is procedure. A slump sale can close in weeks on a business transfer agreement. A demerger needs the National Company Law Tribunal to sanction it, and the Tribunal takes its time.

Founders reach for a demerger for a handful of reasons. A profitable product sits inside a loss-making parent and an investor wants to fund only the product. A family wants to split the real estate from the operating business. A group heading for an IPO needs to strip out a regulated or unrelated business that would complicate the draft red herring prospectus. In each case the goal is the same: a clean entity with its own cap table, its own books, and no baggage from the parent.

The real problem: the order is not the finish line

Most founders treat the NCLT sanction order as the end of the project. It is not. Section 232(5) of the Companies Act requires every company involved in the scheme to file a certified copy of the Tribunal's order with the Registrar of Companies in Form INC-28 within 30 days of receiving it. The appointed date, the effective date, and the order all have to be reflected on the MCA record, and until INC-28 is filed the scheme is not complete on the register even though the Tribunal has blessed it.

Section 232(8) is the penalty for ignoring that step. After the Companies (Amendment) Act, 2019 recast it as a civil default, the company and every officer in default are each liable to a penalty of Rs 20,000, and where the failure continues, a further Rs 1,000 for each day, subject to a maximum of Rs 3 lakh. Run two companies in the scheme and two officers in default, and the exposure quietly multiplies. The order that saved you crores in tax can hand you a six-figure penalty because an associate forgot to calendar a 30-day window in the middle of IPO prep.

There is a second, quieter risk. Until the order is filed and the resulting company's share capital is updated, the demerged shares are not clean. An investor's due diligence team will flag a scheme that is sanctioned but not filed, and a merchant banker will not let that sit inside a DRHP. The filing is not paperwork for its own sake; it is what makes the new structure bankable.

The demerger journey, step by step

The two-stage structure confuses first-timers. The "first motion" is where you ask the Tribunal for permission to hold the shareholder and creditor meetings. The "second motion" is the actual petition for the Tribunal to approve the scheme after those meetings pass it. Between the two sits the voting, and the bar is high: a majority in number representing three-fourths in value of the members or creditors present and voting must approve the scheme for each class. One large dissenting creditor can stall the whole exercise.

The forms you will actually touch

Getting the tax neutrality right (Section 2(19AA))

A demerger is only tax neutral if it meets the definition in Section 2(19AA) of the Income-tax Act, 1961. Fail the definition and the Income Tax Department treats the transfer as a taxable slump exchange, and the whole point of the exercise collapses. The conditions that catch people out are specific, so treat them as a checklist rather than a formality.

First, all the assets and all the liabilities of the undertaking must move to the resulting company. You cannot cherry-pick the good assets and leave a liability behind. Second, the transfer has to happen at the values appearing in the books immediately before the demerger, not at fair value or a revalued figure. Third, the resulting company must issue its shares to the shareholders of the demerged company on a proportionate basis, and shareholders holding at least three-fourths in value of the demerged company must become shareholders of the resulting company. Fourth, the undertaking must transfer as a going concern.

When those conditions are satisfied, Section 47(vib) says the transfer of assets from the demerged to the resulting company is not a taxable transfer, and Section 47(vid) protects the shareholders when they receive the new shares. Get one condition wrong, say a stray liability left in the parent or a book-value slip, and both protections evaporate. This is why the valuation report and the drafting of the "undertaking" definition in the scheme matter more than any other document in the file.

What you must do now

If a split is anywhere on your 2026-27 plan, the preparation that happens before you ever touch a form decides whether the project runs six months or sixteen.

1. Fix the appointed date first. The appointed date is the date from which the demerger takes economic effect, and it drives the accounting, the tax year and the cut-off for assets and liabilities. Decide it before drafting, and keep it defensible; the Tribunal and the tax officer will both test it.
2. Define the undertaking precisely. List the exact assets, liabilities, employees, contracts and licences that move. A vague definition is the single most common reason a scheme fails the Section 2(19AA) test later.
3. Get a registered valuer's report. The share-entitlement ratio has to be supported by a valuation from a registered valuer. For listed or IPO-bound companies, a fairness opinion from a merchant banker usually sits alongside it.
4. Map every regulator who gets a CAA-3 notice. Beyond the ROC and Regional Director, the Income Tax Department always gets notice, and a sectoral regulator (RBI, SEBI, IRDAI) may too. Missing one invites an objection that resets your timeline.
5. Clean the books before you file, not after. Unregistered charges, pending ROC filings and a messy statutory register will all surface in the Tribunal's scrutiny. Close them first.
6. Calendar the INC-28 filing the day the order is reserved. Do not wait for the certified copy to arrive. Put a 30-day reminder against the hearing date so the filing never slips.
7. Budget for stamp duty. Stamp duty on the scheme order is a state levy and varies widely; Karnataka, Maharashtra and Delhi all treat it differently. Price it into the deal before the board signs off, not after.

Demerger, slump sale or fast-track: which route

A demerger is not always the right tool. Sometimes a slump sale is faster and cleaner, and for intra-group reshuffles the fast-track route under Section 233 avoids the Tribunal entirely. The choice turns on who owns the two companies and how much tax is at stake.

For an arm's-length sale to a third party, a slump sale is usually right and a demerger is overkill. For a reshuffle between a holding company and its wholly-owned subsidiary, check whether the fast-track route under Section 233 fits before committing to a full Tribunal process. A demerger earns its cost when you need tax neutrality and the undertaking is going to shareholders rather than a buyer.

The deeper implication for 2026-27

According to CS Sapna Malpani, the demerger is quietly becoming a pre-IPO default rather than an exotic restructuring. As more Bangalore startups reverse-flip to India and groom themselves for a domestic listing, the first thing a merchant banker asks is whether the entity filing the DRHP carries any unrelated business, and the cleanest answer is a demerger done 12 to 18 months before the filing. The order itself is routine; the discipline that is missing is treating the post-order filings and the Section 2(19AA) conditions with the same seriousness as the tax structuring.

The forward call for the next two years is straightforward. With the MCA pushing form consolidation and faster NCLT benches, sanction timelines should compress, which makes demergers more attractive for mid-market companies that once found the process too slow. That will put pressure on the weakest link, which is execution after the order. Expect more adjudication on the 30-day INC-28 window, not less, as benches clear schemes faster and companies keep treating the filing as an afterthought.

How it compares with provisions people confuse it with

Three provisions get muddled with a demerger. Section 66 capital reduction also needs the Tribunal, but it cancels or returns capital rather than moving a business, and it is covered separately in our capital reduction guide. A cross-border merger under Sections 230-234, used by startups returning to India, moves a whole company across borders rather than carving out an undertaking; our reverse-flipping playbook covers that route. And a conversion of a private company into a public company under Section 18 changes the company's class without touching its business at all. A demerger is the only one of the four that splits a live business into a separate, separately-owned company.

Sources and references

• Section 232, Companies Act 2013 (merger and amalgamation): IBC Law
• Section 2(19AA), Income-tax Act 1961 (definition of demerger): Indian Kanoon
• Section 232 text and penalty: CA2013.com
• Section 232 commentary: Taxguru
• NCLT Mumbai approves Vedanta five-way demerger (Dec 2025): Business Standard

Frequently asked questions

What is a demerger under Section 232 of the Companies Act?

A demerger under Section 232 is a court-sanctioned split in which a business undertaking is transferred out of one company, the demerged company, into another company, the resulting company, through a scheme of arrangement approved by the National Company Law Tribunal. The shareholders of the demerged company receive shares in the resulting company in proportion to their existing holding, so ownership of the business stays with the same people across two companies instead of one.

How long does a demerger take in India?

A demerger typically takes 6 to 12 months from the first board approval to the final NCLT sanction order. The time is driven by the two-stage Tribunal process: a first motion to get directions for shareholder and creditor meetings, the meetings themselves with a 30-day notice period, and then a second motion petition for sanction where regulators and objectors are heard. Complex schemes with multiple companies or a dissenting creditor can run longer.

Is a demerger tax free?

A demerger is tax neutral only if it meets every condition in Section 2(19AA) of the Income-tax Act, 1961. The main conditions are that all assets and liabilities of the undertaking transfer at book value, the resulting company issues shares to the demerged company's shareholders on a proportionate basis, shareholders holding at least three-fourths in value become shareholders of the resulting company, and the undertaking moves as a going concern. If any condition fails, the transfer is taxed and the neutrality is lost.

What is Form INC-28 and why does it matter in a demerger?

Form INC-28 is the filing through which a certified copy of the NCLT order sanctioning the demerger is submitted to the Registrar of Companies. Section 232(5) requires every company in the scheme to file it within 30 days of receiving the order. It matters because the scheme is not complete on the MCA record until it is filed, and missing the window triggers the Section 232(8) penalty.

What is the penalty for not filing the demerger order on time?

Under Section 232(8), if a company fails to file the order as required by Section 232(5), the company and every officer in default are each liable to a penalty of Rs 20,000, and where the default continues, a further Rs 1,000 for each day, subject to a maximum of Rs 3 lakh. Because the penalty applies per company and per officer, a two-company scheme with two defaulting officers can face a materially larger total exposure.

What is the difference between a demerger and a slump sale?

In a demerger the undertaking is transferred to a resulting company owned by the same shareholders, no cash leaves the group, and the transfer is tax neutral if Section 2(19AA) is met, but it needs NCLT sanction and takes months. In a slump sale the undertaking is sold to a buyer for a lump-sum price, the selling company pays capital gains tax under Section 50B, and it can close in weeks without the Tribunal. Use a demerger to split a business among existing owners, and a slump sale to sell a business to an outsider.

Do I need NCLT approval for every demerger?

A full demerger under Sections 230-232 needs NCLT sanction. However, certain restructurings between a holding company and its wholly-owned subsidiary, or between small companies, can use the fast-track route under Section 233, which is approved by the Regional Director on behalf of the Central Government and avoids the Tribunal. Check whether your transaction qualifies for Section 233 before committing to the longer Tribunal process.