Question

Bajaj auto Limited has been a leading two wheeler and three wheeler automobile manufacturing company for many years. For quite some time it also engaged in auto finance through its subsidiary Bajaj Auto Finance. In recent years, it set up subsidiaries for doing life insurance business and general insurance business. Given its substantial presence in the auto sector and finance and insurance sector, the company felt the need for separating its auto business and financial assets. In order to do this the company has done a demerger in early 2008.

a. Site the essence of demerger plan of Bajaj auto Limited.

b. State the after effect of the demerger.

c. Discuss the advantages of professional specialization in this context

Answer 1

(a): The essence of Bajaj Auto’s demerger plan was to separate the business of Bajaj Auto Limited and the business of Bajaj Finserv Limited and list the equities of the two entities in the stock markets on a separate basis. The essence of the plan was to enable the two entities to focus on their core activities. The demerger plan entailed listing of 14,46,83,510 shares of Bajaj Auto Limited on BSE (Bombay Stock Exchange) and listing of 14,46,83,510 shares of Bajaj Finserv Limited.

(b): The after effect of the demerger was that three separate entities were formed. The auto company focused on the auto business, the wind power and financial service company focused on wind-energy generation, insurance, consumer finance and the primary investment company focused on new business opportunities. The company’s stock saw more traction after the demerger and there was value unlocked after the demerger.

(c ): The advantages of professional specialization in this context is that demerger helps the new entities to actively focus on specialization in their core areas and activities and pursue growth opportunities in an active and systematic manner. In this case the demerged entities separately pursued growth opportunities in auto, wind energy, insurance and finance sectors. In other words there was a clear professional specialization as each entity focused on its core business and was able to strengthen its competencies.