A Study of Corporate Restructuring in Indian with special focus on Demergers

Abstract

newlineThe study broadly examines the motivations for demergers, the announcement effects of newlinedemergers and the impact of demergers on performance, profitability, efficiency and valuation newlineof the companies in the Indian context. The announcement impact of the demerger on newlineshareholders wealth is examined using Event Study methodology. Based on the results, it is newlineconcluded that demerger announcements increase shareholders wealth in India and that the newlineIndian Stock Market exhibits semi-strong form efficiency with respect to the event examined newlinein this study. newlineThe impact of demergers on performance is examined using a Free Cash Flow analysis. The newlineresults reveal that there is no significant difference in the Free Cash Flow returns for the postdemerger newlineperiod as compared to the period prior to the demerger both in case of the Parent newlinecompany as well as the Resulting company. There is a negative impact on the Free Cash Flow newlinereturns at a Consolidated level. The sources of the changes in the Free Cash Flow returns are newlineexamined and there is no significant difference in the operating cash flow returns on account newlineof demerger in the post-demerger period. It is also observed that there is no impact of newlinedemergers on the working capital position of the companies. While there is a reduction in newlineCapital expenditure in case of Parent companies, it is not statistically significant. In case of newlineResulting companies, there is a significant increase in Capital expenditure in the postdemerger newlineperiod. This indicates that after the demerger, Resulting companies are able to take newlineindependent decisions and make long term investments. newlineThe impact of demergers on the valuation of the companies is examined based on the newlineEnterprise Value after the demerger. There is an increase in the Enterprise Value both in case newlineof Parent companies as well as Resulting companies in the post-demerger period. While the newlineincrease in case of Parent companies is not statistically significant, in case of Resulting newlinecompanies, the increase is statistically significant. The st