DEMERGERS IN INDIA: DO THEY ADD VALUE TO THE SHAREHOLDERS’ WEALTH?

Abstract

In today’s competitive environment to create value for the shareholder is the primary objective of a conglomerate. For this, companies need to ensure the long-term growth of the organization. Corporate Restructuring (CR) can be expansion-oriented or contraction-oriented. The merger, acquisition and takeover are the main forms of expansion-oriented CR whereas demerger, divestituresare the mode of contraction orientation. Globally it has been witnessed that managers had shifted their focus from expansion to contraction mode.  The primary motive of the managers is to create Shareholders’ wealth by applying demerger as a tool.

Research Problem: What will the impact of demerger on shareholders' wealth?

Research Objective:This study has been conducted to find the impact of the demerger on shareholders’ wealth.

Methodology: A total of 59 demergers that took place during 2012-14 were considered for this study. The daily share price of the selected sample has been considered from 1^st April 2009 to 31^st March 2019. The period is particularly selected between 2009 -2019 so that the impact of recession and COVID’19 don’t impact the data. The event study methodology used here analyses the impact of demerger announcement 10 days prior and post announcement. Further, to analyze the impact of demerger in the long-run Buy and Hold Abnormal Return (BHAR) is used.

Findings: The study finds the positive significance of the security over the benchmark index (NIFTY) post demerger announcement. In long run as well, demerger is giving a significant impact on shareholders’ wealth; in which the companies the demerged entities become listed entities post demerger. The shareholder does not get a significant return post demerger by a company in which demerged entities become a private entity.

Managerial implication: This study will help the manager to understand whether a decision of demerger will create value for shareholders or not.

Limitation: This study focuses only on one form of CR i.e., demerger, it becomes important to understand all the different forms of CR and their impact on shareholders' wealth.