Shareholders of ITC woke up on 6 January 2025 owning a hotel company they had never bought. For every 10 ITC shares in their demat account, they were entitled to one share of ITC Hotels, and ITC told them to move 13.51% of what they had originally paid for ITC onto the new holding. That is a demerger in one sentence: a listed company carves out a business into a separate company, its existing shareholders receive shares in the new entity in a fixed ratio, and the original purchase cost is split between the two. No cash changes hands and, under Indian income tax law, the allotment is not treated as a sale.
Record Date Eligibility and How Your Cost Gets Split
- A demerger moves a business into a separate company and hands its shares to existing shareholders in a set ratio, such as 1:1 at Reliance and 1:10 at ITC.
- You qualify only if you hold the parent’s shares on the record date. Buying afterwards gets you nothing from the new company.
- The parent’s share price drops by roughly the value carved out, so a demerger does not make shareholders richer on day one.
- Your original cost is split in a ratio the company announces: 95.32% Reliance and 4.68% Jio Financial; 86.49% ITC and 13.51% ITC Hotels.
- The holding period of the new shares starts from the date you bought the parent’s shares, which matters for long-term capital gains.
What Is a Demerger, in Plain Terms?
A demerger splits one company into two (or more) listed businesses owned by the same shareholders. The company being split is called the demerged company. The company that receives the business is the resulting company. If you held 1,000 shares of the parent before the split, you hold 1,000 shares of the parent afterwards plus whatever the ratio gives you in the new company.
The reasons boards give are familiar. Conglomerates argue that a hotel chain, a lending arm or a truck maker is valued poorly when it sits inside a cigarette company or an oil refiner, and that separate managements can raise money and make decisions faster. What a shareholder controls is narrower: knowing which dates matter and how to account for the new shares at tax time.
How a Demerger Differs From a Slump Sale or Subsidiary IPO
| Route | What happens to the business | What existing shareholders receive |
|---|---|---|
| Demerger | Moved into a separate company under a court-approved scheme | Shares in the new company, in a fixed ratio, at no cost |
| Slump sale | Sold as a going concern for a lump-sum price | Nothing directly; the cash stays with the parent |
| Subsidiary IPO | Stays a subsidiary; part of it is sold to new investors | Nothing automatically, unless the company reserves a quota for its shareholders |
How the Demerger Process Works in India
A listed demerger takes months and passes through several gates. Upstox’s explainer lays out the sequence most schemes follow:
- Board approval: the parent’s board approves the split in principle and appoints valuers.
- Valuation and ratio: registered valuers and bankers fix the share entitlement ratio, which decides how many new shares each holder gets.
- Scheme of arrangement: a legal document that lists which assets, liabilities and employees move, the appointed date and how fractional entitlements are handled.
- Exchange observation: the stock exchanges review the scheme and issue a no-objection or observation letter.
- Tribunal and votes: the National Company Law Tribunal (NCLT) orders meetings of shareholders and creditors, where approval needs a special majority of three-fourths in value of the votes cast, then sanctions the scheme.
- Effective date and record date: once the order is filed with the Registrar of Companies, the scheme becomes effective and the company announces the record date for entitlement.
- Allotment and listing: new shares are credited to demat accounts and, after exchange approval, listed. The gap between record date and listing is usually a few weeks.
For a shareholder, step six is the one that counts. Entitlement depends on holding the parent’s shares at the close of the record date, and because Indian equities settle on T+1, the last day to buy is effectively the trading day before. Our explainer on record date vs ex-date walks through that timing.
What Happens to Your Shares and the Share Price
On the record date, the parent stops carrying the demerged business in its price. Exchanges handle this by running a special pre-open call auction for the parent on that day, so the market can discover an ex-demerger price before normal trading starts. The difference between the previous close and the new price is, roughly, what the market thinks the carved-out business is worth. The same call-auction mechanism is used on IPO listing days, which we covered in our piece on the special pre-open session.
So a demerger does not create wealth on day one. Your portfolio value is the parent at its lower price plus the new shares at their implied value. The new shares then sit in your account, visible but not tradeable, until they list.
Reliance, ITC and Tata Motors Demergers by Ratio and Cost Split
| Demerger | Record date | Ratio | Cost split (parent : new) |
|---|---|---|---|
| Reliance Industries to Jio Financial Services | 20 July 2023 | 1 JFS share for every 1 Reliance share | 95.32% : 4.68% |
| ITC to ITC Hotels | 6 January 2025 | 1 ITC Hotels share for every 10 ITC shares | 86.49% : 13.51% |
| Tata Motors to TML Commercial Vehicles | 14 October 2025 | 1 new share for every 1 Tata Motors share | See company notice |
Sources: Reliance record date and ratio from Zerodha’s TradingQnA summary, cost split as reported by Value Research; ITC figures from ITC’s filing with NSE; Tata Motors dates from Groww’s summary.
Reliance and Jio Financial Services
Reliance spun off its financial services arm with a scheme effective from 1 July 2023. The special pre-open session on 20 July 2023 discovered a price of ₹261.85 per Jio Financial share, according to a PTI report, well above what several brokerages had estimated. Because the ratio was 1:1, every Reliance holder simply received an equal number of JFS shares.
ITC and ITC Hotels
ITC’s scheme became effective on 1 January 2025. The 1:10 ratio meant small holders could end up with fractions, which is why every scheme spells out how fractional entitlements are dealt with. Read that clause if your holding is not a multiple of the ratio. ITC also published the cost split with a worked example.
Tata Motors and Its Commercial Vehicles Business
Tata Motors separated its commercial vehicles business from the passenger vehicle and Jaguar Land Rover side. Holders on the 14 October 2025 record date received one TML Commercial Vehicles share for each Tata Motors share, and the new company listed on 12 November, about four weeks later, according to Groww. Its cost-apportionment figures appear in the company’s own notice to the exchanges, which is the document to rely on when you file.
How Demerger Shares Are Taxed in India
Three rules do most of the work, and all three favour the shareholder.
- No tax on allotment: receiving shares of the resulting company in a demerger is not treated as a transfer under section 47(vid) of the Income-tax Act, 1961, as Taxmann’s guide to business restructuring explains. Nothing is payable when the new shares arrive.
- Cost is split, not created: under section 49(2C) and (2D), the new shares take a slice of your original cost in the same proportion as the net book value of the transferred assets bears to the parent’s net worth, and the parent’s cost is reduced by the same amount. Companies calculate this and announce it as a percentage.
- Holding period carries over: the clock for the new shares starts on the date you bought the parent’s shares, not on the listing date, Value Research notes. Sell JFS shares the week they list and the gain can still be long term if you held Reliance for more than a year.
These are section numbers of the 1961 Act. The Income-tax Act, 2025 applies from 1 April 2026 and renumbers the law, so check the current reference with your tax adviser before filing.
Worked Example: Splitting Your Purchase Cost
ITC’s own example uses 1,000 shares bought at ₹400 each. We added a Reliance case using the same method, assuming 100 shares bought at ₹2,000 each. The arithmetic was run in code.
| Item | ITC example (company’s) | Reliance example (ours) |
|---|---|---|
| Shares held before | 1,000 ITC | 100 Reliance |
| Original cost | ₹4,00,000 | ₹2,00,000 |
| New shares received | 100 ITC Hotels | 100 JFS |
| Cost kept by parent | ₹3,45,960 (86.49%) | ₹1,90,640 (95.32%) |
| Cost moved to new shares | ₹54,040 (13.51%) | ₹9,360 (4.68%) |
| Cost per new share | ₹540.40 | ₹93.60 |
Suppose the Reliance holder later sells all 100 JFS shares at ₹300. The capital gain is ₹30,000 minus ₹9,360, or ₹20,640, and it counts as long term if the Reliance shares were bought more than 12 months before the sale. Forgetting the split is the most common filing error: people either treat the new shares as costing zero, which overstates the gain, or keep the full original cost on the parent, which understates the gain on the parent when it is eventually sold.
What Shareholders Should Do During a Demerger
- Note the record date: holding on the record date is the only test. Selling the day after still leaves you entitled.
- Save the cost-apportionment notice: companies file it with NSE and BSE, often weeks after the record date. Download it and keep it with your contract notes.
- Check your broker’s records: some platforms update cost figures automatically, others leave the new holding at zero. Correct it yourself before tax season.
- Do not panic at the price drop: the parent’s lower price after the record date reflects value moved to you, not value lost.
- Judge the new company separately: once listed, it has its own results, debt and management. Holding it by default is a choice like any other.
Demergers sit at the opposite end of corporate dealmaking from acquisitions such as Salesforce’s purchase of Braze, where one company absorbs another for cash. More explainers on corporate events are in our Business News section.
This article is for information and education only and is not investment, tax or financial advice. Figures were checked on 29 October 2026; confirm current details with the official source or a registered adviser before acting.
Applying for Shares, Price Drops and Selling New Holdings
Is a Demerger Good or Bad for Shareholders?
Neither by default. Total value is roughly unchanged on the record date. Gains or losses come later, depending on how the market values the two businesses separately.
Do I Need to Apply to Get Shares in a Demerger?
No. If you hold the parent’s shares on the record date, the new shares are credited to the same demat account automatically.
Why Did My Share Price Fall After the Demerger?
The carved-out business no longer belongs to the parent, so its price adjusts down by roughly that value. You hold the difference as shares in the new company.
How Is the Cost of Acquisition Calculated After a Demerger?
Multiply your original cost by the percentage the company announces for each entity. ITC used 86.49% and 13.51%; Reliance used 95.32% and 4.68%.
When Can I Sell Shares Received in a Demerger?
Only after they list on the exchange, usually a few weeks after the record date. Tata Motors’ commercial vehicles company listed about four weeks after its record date.
NSE Filings, Section 49 and Broker Notes on Demerger Tax
- ITC Limited: intimation on cost of acquisition after the ITC Hotels demerger (NSE filing)
- Income Tax Department: section 49, Income-tax Act, 1961
- Taxmann: business restructuring under the Income-tax Act
- Value Research: Jio Financial Services demerger, how you will be taxed
- PTI via Morung Express: market-discovered price of Jio Financial Services
- Zerodha TradingQnA: demerger of Reliance Industries
- Groww: Tata Motors demerger
- Upstox: what is a demerger, process and examples
