How to handle a merger or demerger on Zerodha

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A merger (or amalgamation) is a corporate action in which two or more companies combine into a single entity, with shareholders of the merging (transferor) company receiving shares of the surviving (transferee) company in exchange for their old shares, according to a share swap ratio. A demerger is the reverse: a company separates one or more of its businesses into a newly listed entity, with existing shareholders receiving shares in the new company in addition to (or in exchange for) a portion of their existing shares.

Both transactions are structured as schemes of arrangement under Sections 230-232 of the Companies Act, 2013, and are approved by the National Company Law Tribunal (NCLT). Once the NCLT order is effective, the swap is mandatory and automatic: no individual shareholder action is required. Zerodha processes the share credit on the basis of instructions from the company’s RTA and CDSL.

Conflict-of-interest disclosure: WebNotes is an independent information publisher with no commercial arrangement with Zerodha.

Prerequisites

  • An active demat account with Zerodha at CDSL.
  • Shares of the merging or demerging company held in the Zerodha demat account on the record date set by the company after NCLT approval.
  • No payment, application, or active step is required from the investor in most merger/demerger situations.

Merger: how your Zerodha holdings change

Share swap process

  1. Record date: The transferor company sets a record date (disclosed to exchanges after NCLT approval). Shareholders holding shares on the record date receive shares of the surviving/transferee company.

  2. Share swap ratio: The scheme document specifies the ratio. For example, a merger of Company A (transferor) into Company B (transferee) with a ratio of 3:5 means shareholders of Company A receive 3 shares of Company B for every 5 shares of Company A held. Fractional entitlements arising from the swap are typically settled in cash by the company (see the guide on fractional share entitlement).

  3. Share credit: After the NCLT order becomes effective and the record date passes, the RTA instructs CDSL to credit transferee company shares to eligible shareholders’ demat accounts and to debit (cancel) the transferor company’s shares. This process typically takes 15 to 30 working days after the record date.

  4. Console update: The old shares (Company A) disappear from Console holdings and are replaced by the new shares (Company B) once CDSL processes the transfer.

Monitoring merger progress on Zerodha

During the period between the record date and the share credit, Console may show a reduced or zero holding in the transferor company (as shares are cancelled) but the new shares may not yet appear. Zerodha’s support team can confirm the status of the credit with CDSL and the RTA.

Demerger: how your Zerodha holdings change

Demerger mechanics

In a demerger:

  • The parent company (say, Company P) separates a business into a new entity (Company D, the demerged entity).
  • Existing shareholders of Company P receive shares of Company D in a ratio specified in the scheme. For example, 1 share of Company D for every 2 shares of Company P held.
  • Shareholders retain their Company P shares. The Company P share price adjusts downward to reflect the value transferred to Company D.
  • Company D is listed on the exchange after the NCLT order becomes effective.

Share credit for demerger

  1. Check the record date announced by Company P.
  2. Hold Company P shares in the Zerodha demat account before the record date.
  3. After NCLT effective date and record date, CDSL credits Company D shares to eligible shareholders’ demat accounts.
  4. Company D begins trading on NSE and BSE. The listing price reflects the market’s valuation of the separated business.
  5. No action is required from the shareholder; the credit is automatic.

Tax treatment

Merger (amalgamation)

Under Section 47(vii) of the Income Tax Act, 1961, a share swap in a qualifying amalgamation is not treated as a transfer (and thus not taxable as capital gains) if:

  • The amalgamation satisfies the conditions under Section 2(1B) (broadly: at least 75% of shareholders of the transferor company become shareholders of the transferee company, and the transferee company issues shares to the transferor’s shareholders in consideration of the amalgamation).
  • The shares received in the transferee company inherit the original cost and holding period of the shares in the transferor company.

The cost of acquisition of the new shares (Company B) is the original cost paid for the old shares (Company A). The holding period for LTCG/STCG purposes is counted from the original date of purchase of Company A shares (not from the merger date).

If the amalgamation does not satisfy Section 2(1B) conditions, the swap is a taxable transfer and capital gains tax applies in the year of the swap.

Demerger

Under Section 47(vid), a share swap in a qualifying demerger is also not a taxable transfer if the demerger satisfies the conditions under Section 2(19AA) (broadly: the demerged undertaking is transferred as a going concern and shareholders receive shares in the resulting company proportionally).

Cost allocation between the parent company and the demerged company after the demerger:

The original cost of the parent company shares is apportioned between the parent and the demerged entity in the ratio of the net book values of the assets retained by the parent and transferred to the demerged entity, as of the demerger date. This ratio is typically disclosed by the company’s RTA or tax advisors. An illustrative example:

  • Original cost of Company P shares: Rs 1,00,000.
  • Net asset value retained by Company P after demerger: Rs 60.
  • Net asset value transferred to Company D: Rs 40.
  • Cost allocated to Company P shares: Rs 60,000.
  • Cost allocated to Company D shares: Rs 40,000.

The holding period for both the retained parent shares and the demerged company shares runs from the original purchase date of the parent company shares (not from the demerger date), for qualifying demergers.

Fractional shares in merger/demerger

The swap ratio often produces fractional share entitlements. For example, a 3:5 ratio on 100 shares of the transferor company produces 60 full shares and 0.0 fractional shares, but if the holding is 101 shares, the entitlement is 60.6 shares. The 0.6 fractional share is typically settled in cash by the company at the swap price or at the market price. See how to handle a fractional share entitlement for details.

What can go wrong

Shares not credited within 30 working days: Merger/demerger share credits can take longer than standard corporate actions due to NCLT formalities, RTA processing, and CDSL reconciliation. Raise a support ticket with Zerodha if new shares are not credited within 30 working days of the effective date.

Incorrect swap ratio applied: The RTA may occasionally process incorrect quantities. Compare the credited quantity against the scheme’s disclosed ratio and your original holding. Raise a dispute with Zerodha and the RTA if the quantity is incorrect.

Delisted transferor shares lingering in Console: After a merger, the transferor company is eventually delisted. During the window between the record date and delisting, both old and new shares may temporarily appear. This resolves after CDSL processes the cancellation.

Tax on non-qualifying amalgamations: If the merger structure does not meet the Section 2(1B) conditions (for example, a cash merger where shareholders are paid cash instead of shares), the transaction is taxable in the year of the swap. Consult a chartered accountant if the merger involves any cash component.

References

  1. Companies Act, 2013, Sections 230-232, scheme of arrangement framework.
  2. Income Tax Act, 1961, Sections 2(1B) and 47(vii), tax neutrality for qualifying amalgamations.
  3. Income Tax Act, 1961, Sections 2(19AA) and 47(vid), tax neutrality for qualifying demergers.
  4. Income Tax Act, 1961, Section 49(2), cost of acquisition in amalgamation.
  5. CBDT Circular No. 794 (2000), cost allocation for demergers.
  6. SEBI LODR Regulations, 2015, record date and disclosure requirements for mergers/demergers.
  7. Zerodha support documentation, merger/demerger share credit on Console.

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The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

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