Corporate Spinoffs in India – Definition, Meaning, Examples, Benefits, Drawbacks & List of 2020 spinoffs.

Corporate Spinoffs in India

What is Spinoff? - Spin off Meaning 

A spinoff is a type of corporate action. In a spinoff, a particular section of the parent company is  separated from the main business. The spun off company gets its own unique identity different from the parent company. The spinoff company has its distinct business and gets its own management, assets, employees and other resources. It is responsible for its own profits and losses.  In a spinoff, the existing shareholders of the parent company receive shares of the spin off company as special dividends.  A spinoff is also known as a spin out or starburst. 

Understanding Spinoffs with an example

Assume a company, Mykaa Ltd, has multiple lines of businesses like manufacturing: 
  • Lipstick
  • Sportswear 
  • Handbags 
  • Shoes 
One day the company realises that its sportswear segment is doing extremely well but since the company's primary segment is cosmetics, it is not able to focus on the sportswear segment.  This is when Mykaa Ltd decides to spinoff the sportswear company on its own with an independent management team, CEO, resources etc.  The shareholders of Mykaa Ltd become shareholders of the Sportswear company. The newly formed Sportswear company becomes a publicly traded company with its own business units and products. 

Why Do Spinoffs happen? - Reasons for Spinoffs in India 

Spin offs can be both positive and negative. 

Positive reasons for Spinoff 

1. Valuable Spun off company: The parent company might feel that the spinoff company is much more valuable on its own and can create lucrative cash flows if provided independence and separate resources.  2. Increasing Value of the Parent Company: If one segment of the company is underperforming, then spinning it off can increase the value and potential of the parent company by getting rid of a weak section of the business. Through a spinoff the parent company gets streamlined which is beneficial for the company as well as the shareholders. 

Negative Reasons for Spinoff

1. Not in line with long term vision: The parent company may feel that the spinoff company no longer fits with the company’s future vision and will be a drain on its resources.  2. Strategy to offload Debt: Oftentimes, spinoffs are a way for a parent company to offload its debts, to make their own balance sheet look pretty.  3. Absence of buyers: Parent companies might be looking to sell the spinoff company but in the absence of buyers, they end up selling the spinoff company to the shareholders, who have no option but to accept.  4. Avoid Capital Gains Tax: Parent companies opt for a spinoff instead of selling the company to avoid capital gains tax on the sale. 

What happens to existing shareholders in a Spinoff? Spinoffs and Shareholders - The Positives 

In a spinoff, the shareholders of the parent company are allotted shares of the spinoff company as special dividends. Shareholders of profitable spinoff companies can rejoice as the spinoff company gets its independent management, resources and employees and can focus on its independent business objective without the burden of the parent company.  Also, often the spinoff company is the most lucrative business of the parent company. With segregation of operations, the spinoff company can create its own brand and discover its true market value. 

Spinoffs and Shareholders - The Negatives 

Shareholders have little say in spinoffs and are awarded shares of the spinoff company as a special dividend. This means that the shareholders end up having ownership of companies that they have little knowledge or interest in.  Spinoff companies have low market capitalisation and are extremely volatile. Spinoff companies face issues in getting listed due to stringent regulatory norms.  Shareholders of the spinoff company may be unhappy with the spinoff and may aggressively sell their shares, creating higher volatility in the short term, even if the long-term prospects of the spinoff company is lucrative. 

What are the different types of Spinoff - Types of Corporate Spin off 

1. No Ownership Spinoff: In this type of spinoff the parent company maintains zero ownership in the spun off company. All shares are distributed among existing shareholders.  2. Partial Ownership Spinoff: In this type of spinoff, the parent company can retain upto 20% of ownership in the spinoff company. This is done so that the parent company can have some say in the functioning of the spun off company. 

Most Famous Spinoffs in the World 

  • In 1999, Hewlett-Packard Co spun off Agilent technologies Inc
  • In 2006, Viacom created spinoff company Viacom Inc
  • In 2011, Expedia created spinoff company TripAdvisor
  • In 2012, Kraft Foods Inc created spinoff company Kraft Foods Group Inc
  • In 2017, eBay created spinoff company PayPal 

Recent Spinoff companies in India in 2020 

Spinoff company Spinoff Date
Suven Pharmaceuticals Ltd 22nd January 2020
ARCHIDPLY 14th February 2020
TATACHEM 5th March 2020
BORORENEW 9th March 2020
SHARDA 27th March 2020
MAXINDIA 15th June 2020
PRIVISCL 24th August 2020
PANACEABIO 22nd September 2020
MANINDS 25th September 2020
ANANTRAJ 7th October 2020
DEEPENR 11th November 2020
INFIBEAM 11th December 2020

Final Thoughts

While most spinoffs are profitable, investors need to be cautious and should conduct proper research and analysis before buying or selling shares of the spinoff companies.  Conducting in-depth research in the stock market is not easy. You need to study the technical and fundamental aspects of the company before investing. Even if you have the time, the issue is that this data is not readily available and you need your ears on the ground to make correct investment decisions.  Luckily for you, StockBasket has its ears on the ground and has shortlisted the best stocks in India among 6500+ listed companies. The experts at StockBasket have created special baskets like ‘International Education’ basket, ‘Beginners - Lite’ basket and so much more!  Open a FREE StockBasket account today and invest in the best stock baskets as per your financial goals. 

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