As per the scheme of arrangement, textiles undertaking of Cotton Ltd. is proposed to be demerged to Jutewel Ltd. under sections 391 and 394 of the Companies Act, 1956. One of the conditions of the aforesaid scheme is tha

The given case is similar to the demerger of the software undertaking of Sony India Limited, where it was decided that AS-14 (Accounting Standard 14 - Accounting for Amalgamations) is not applicable to demergers. The Delhi High Court, while approving a scheme of arrangement between Sony India and Sony Software in 2012, clarified that AS-14 is applicable only to amalgamations and not to demergers. In that case, the 'Software Undertaking' of Sony India was proposed to be transferred to Sony Software under Sections 391 to 394 of the Companies Act, 1956. One of the conditions of the scheme was that any excess in the value of net assets of the software undertaking transferred to the resulting company shall be applicable for distribution to the shareholders of the resulting company. The Regional Director of Northern Region, Ministry of Corporate Affairs, objected, stating that any excess in the value of net assets should be adjusted to the capital reserve as prescribed in AS-14 and not to the general reserve as proposed in the scheme. The petitioners contended that AS-14 is applicable only to amalgamations and not to demergers. A plain reading of the accounting standard confirms that it is applicable only in cases of amalgamation and not demergers. This view was also upheld by the Gujarat High Court in the case of Gallops Realty (P) Ltd. (2010 1 CLJ 351) . Therefore, as an advisor, I would advise that the condition to credit any excess in the value of net assets of the textiles undertaking to the general reserve is permissible, as AS-14, which mandates crediting to capital reserve in certain amalgamation scenarios, does not apply to demergers. The scheme's condition is in line with the legal and accounting principles applicable to demergers.