What happens next after Bajaj Auto demerger?

Post demerger of Reliance industries Ltd., the next demerger to happen in Indian corporate is the demerger of Bajaj Auto Ltd (BAL).

The record date fixed for demerger was March 25, 2008 as a consequence of which shareholders of the Bajaj Auto will receive shares of the three demerged new companies in the ratio of one share each for every one share held in Bajaj Auto.

The 3 new companies formed as a consequence of the merger are along with their business activities and individual acquisition costs are as under:

1. Bajaj Auto Ltd (BAL) – auto business (22.1%)
2. Bajaj Finserv Ltd (BFSL) – wind energy generation, insurance, consumer finance (21.4%)
3. Bajaj Holdings & Investment Ltd (BHIL) – investments and new business opportunities (56.5%)

Also the name of listed Bajaj Auto Ltd has been changed to Bajaj Holdings & Investment Ltd.

The shares of the newly formed companies is expected to list around end of April and there would be no tax implication for shareholders on receiving the new shares.

The only tax liability that would arise for shareholders is when these shares are sold and that would depend on the time period of holding of the original Baja Auto shares.

After calculating the acquisition cost of individual shares according to the percentage mentioned above, the capital gains tax would be calculated. If period of holding is more than 1 year, then all gains would be tax free. If shares are sold within one year of purchase of Baja Auto shares, then shareholder would have to pay 15% short term capital gains tax.

Historically, demerger has led to creation of wealth for shareholders as has been recently seen in two successful cases of demeger of Reliance Industries and Indiabulls.

Though it remains to be seen how the Bajaj management approaches with the new companies as in this the demerger has not gone well with market as can be seen from the share price trends of Bajaj Holdings Ltd. Link