NCLT Approves Ajmera Realty’s Non-Conventional Demerger

1. Introduction

• In a significant order that may shape the future of corporate restructuring in India, the National Company Law Tribunal (NCLT), Mumbai Bench, has sanctioned a non-conventional scheme of demerger between Ajmera Realty and Infra India Limited and its wholly-owned subsidiary, Radha Raman Dev Ventures Pvt. Ltd. The order, delivered on 04 July 2024, carries far-reaching implications for listed companies aiming to unlock value without triggering regulatory complications such as mandatory listing.

2. Background and the parties involved

• Ajmera Realty and Infra India Ltd (the ‘ARIIL’ or the ‘demerged company’ or the ‘Ajmera Realty’), is a prominent name in India’s real estate sector, with projects in Mumbai, Ahmedabad, Surat, Rajkot, Bangalore, and Bahrain. Radha Raman Dev Ventures Pvt. Ltd. (the ‘RRDVPL’ or the ‘Resulting Company’), is a wholly-owned subsidiary of ARIIL, incorporated to carry out real estate development activities.
• The core purpose of the demerger was to transfer a specific commercial real estate project, located on a 6.5-acre (measuring around 28,113 sq.mts.) land parcel in Wadala (East), Mumbai, to RRDVPL. The aim was to separate this high-potential asset into a standalone vehicle, enabling focused development, ease of attracting investors, and improved project execution, all while maintaining the existing shareholding and promoter control.

3. Demerger structure

• In most traditional demerger schemes, when a company transfers part of its business into another entity, it is the Resulting Company (the entity receiving the business) that typically issues shares to the shareholders of the Demerged Company. This is done to compensate the shareholders for the reduction in the value of the Demerged Company due to the transfer of assets or business.

However, in the case of ARIIL, the group adopted a non-traditional and innovative approach that deviated from this norm.

• Instead of the Resulting Company i.e., RRDVPL, issuing shares, the Demerged Company (ARIIL) itself issued shares to its own existing shareholders as consideration for the demerger. This meant that for every 50 equity shares already held by a shareholder in ARIIL, they received 1 additional equity share of INR 10 (fully paid-up) in ARIIL itself.
• Thus, the shareholders were compensated without receiving any stake in the Resulting Company (RRDVPL), which is quite unusual in typical demerger setups.

4. The objective behind such demerger structure

a) Avoiding regulatory burden: If RRDVPL had issued shares to public shareholders, it would have automatically become subject to SEBI regulations governing public companies, including the obligation to list on a stock exchange (NSE or BSE). Listing involves extensive compliance, disclosures, and cost.

b) Preserving promoter control: Issuing shares through ARIIL (which is already a listed entity) helped retain the existing promoter shareholding pattern, thus ensuring no dilution of control in either ARIIL or RRDVPL.

c) Maintaining internal capital structure: Since RRDVPL is a wholly owned subsidiary of ARIIL, keeping its shareholding unchanged meant simplified ownership and internal group control was fully maintained.

d) Focus on value unlocking: The transaction was not just about transferring assets, it was aimed at unlocking the value of a specific commercial real estate project by housing it in a dedicated legal entity. The chosen structure allowed the group to do so without triggering external ownership or regulatory thresholds.

5. Statutory compliances and legal observations

• To obtain approval for the demerger, the companies followed the legal procedure outlined under Sections 230 to 232 of the Companies Act, 2013, which governs compromises, arrangements, and amalgamations. The Scheme of Arrangement was submitted along with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, the procedural rules that dictate how such corporate restructurings should be carried out.
• As part of the statutory process, the Regional Director (Western Region), Ministry of Corporate Affairs reviewed the scheme and filed a comprehensive report listing various observations and compliance concerns. The Petitioner Companies (ARIIL and RRDVPL collectively known as the ‘Petitioner Companies’ or the ‘Companies’) responded to each of these points with clarifications, affidavits, and undertakings.
• Below is a breakdown of the key issues raised and how they were addressed:

a) Pending legal prosecutions:

The Regional Director noted that past prosecutions had been initiated against Ajmera Realty under both the Companies Act, 1956 and the Companies Act, 2013. These included violations related to accounting and audit matters (such as under Sections 211, 212, 217, and 148).

Response by the Petitioner Companies:

i. The companies clarified that all such prosecutions had already been compounded (i.e., legally settled) through orders of the Company Law Board (CLB).

ii. Fines and penalties imposed were duly paid.

iii. In the case of Section 148 (relating to cost audit), the company responded to the show-cause notice by arguing that it was not liable for a cost audit in that financial year.

iv. There was no ongoing legal action remaining on this matter, and no further notice was received from the authorities.

b) Protection of creditor interests:

The Tribunal emphasized that creditors must not be adversely affected by the demerger.

Response by the Petitioner Companies:

i. The companies stated that there were no compromises or arrangements being made with any creditor.

ii. No secured creditors existed in the Resulting Company (RRDVPL), and hence, consent was not needed from them.

iii. For the Demerged Company (ARIIL), No Objection Certificates (NOCs) were obtained from secured creditors before the final hearing.

iv. The Tribunal had earlier waived the requirement for holding meetings with unsecured creditors, and the company complied with this direction.

c) Intimation to regulatory authorities

Another critical requirement was to notify all regulatory bodies that may be affected by the restructuring.

Response by the Petitioner Companies:

i. The companies confirmed that notices were served under Section 230(5) to all concerned authorities:

• Securities and Exchange Board of India (SEBI)
• BSE Limited and National Stock Exchange (NSE)
• Income Tax Department
• Registrar of Companies (ROC)
• Real Estate Regulatory Authority (RERA)

ii. Importantly, the companies pointed out that the demerged undertaking had no active real estate projects, so RERA approval was not required.

iii. This was in line with MahaRERA’s Circular No. 24/2019, which exempts such internal group transfers from RERA consent, as long as 75% of shareholders remain the same and the transaction is not regarded as a transfer under the Income Tax Act.

d) Accounting standards compliance

The Regional Director emphasized that the companies should follow applicable accounting standards while implementing the scheme.

Response by the Petitioner Companies:

i. The companies gave a formal undertaking to comply with Indian Accounting Standards (IND-AS), specifically:

• IND-AS 103 – which governs business combinations.
• Other relevant standards like IND-AS 8 or AS-5 related to accounting policy changes and disclosures.

ii. This ensures that all accounting entries related to the demerger are legally valid and transparent.

e) Significant Beneficial Ownership (SBO) filings

There was a compliance lapse noted regarding the disclosure of beneficial owners, those who ultimately control or benefit from shares held through other entities.

Response by the Petitioner Companies:

i. The companies confirmed that they have since filed Form BEN-2 with the Registrar of Companies, which is the statutory form for declaring Significant Beneficial Owners (as required under Section 90 of the Companies Act, 2013).

ii. They also confirmed compliance with the Companies (Significant Beneficial Owners) Amendment Rules, 2019.

f) No change in shareholders or external transfer

To further ensure that the transaction was purely internal, the authorities examined whether any external ownership change occurred due to the demerger.

Response by the Petitioner Companies:

i. It was clarified that no new shares were issued by RRDVPL (the Resulting Company).

ii. Instead, ARIIL issued bonus shares to its own shareholders as consideration, thereby ensuring that the ownership structure remained unchanged.

iii. This made the transaction fall under the RERA exemption clause (as per Circular No. 24/2019), thus bypassing the need for Allottee approval.

The Regional Director ultimately withdrew all objections and expressed no further reservations against the sanctioning of the scheme.

6. Final ruling by NCLT:

After considering the petition, scheme documents, stakeholder responses, and statutory compliance submissions, the NCLT Mumbai Bench-V approved the scheme through its order dated 04 July 2024. The following were key directives of the Tribunal:

a) The Scheme was sanctioned, with 01 April 2020 as the Appointed Date.

b) The Petitioner Companies were directed to file the certified copy of the order with the Registrar of Companies in Form INC-28 within 30 days.

c) Compliance with stamp duty adjudication before the Superintendent of Stamps was to be completed within 60 working days.

d) Regulatory authorities were instructed to act upon the certified order.

e) Stakeholders or regulators could approach the Tribunal for further clarification, if required.

The Tribunal found the scheme to be lawful, commercially justified, and not prejudicial to creditors or public interest. It reiterated that Section 232 of the Companies Act 2013, permits flexibility in determining the mode of consideration, and there is no legal requirement that the consideration must always come from the Resulting Company.

7. Conclusion

This decision is particularly significant because it establishes judicial acceptance of non-conventional structuring under the Companies Act, 2013. It reaffirms that:

a) Companies have the freedom to structure demergers innovatively, provided they comply with statutory and regulatory requirements.

b) There is no compulsion under law for the Resulting Company to issue consideration shares.

c) Avoiding a listing requirement for the Resulting Company is not in itself a reason to reject a scheme, as long as it is fair and in the interest of stakeholders.

For listed companies, especially holding companies seeking to spin off verticals or ring-fence strategic assets, this ruling offers a robust legal precedent. It underscores the latitude available in corporate structuring, allowing businesses to achieve commercial goals without being straitjacketed by formality.