MEANING:
Amalgamation is defined as the combination of one or more companies into a new entity. It includes:
- Two or more companies join to form a new company
- Absorption or blending of one by the other
Thereby, amalgamation includes absorption.
However, one should remember that Amalgamation as its name suggests, is nothing but two companies becoming one. On the other hand, Absorption is the process in which the one powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line of activity or has some synergy in their operations. Again the companies may also combine for diversification of activities or for expansion of services
Transfer or Company means the company which is amalgamated into another company; while Transfer Company means the company into which the transfer or company is amalgamated.
| Existing companies A and B are wound up and a new company C is formed to take over the businesses of A and B | Amalgamation |
| Existing company A takes over the business of another existing company B which is wound up | Absorption |
| A New Company X is formed to take over the business of an existing company Y which is wound up. | External reconstruction |
How is Amalgamation different from a Merger?
Amalgamation is different from Merger because neither of the two companies under reference exists as a legal entity. Through the process of amalgamation a completely new entity is formed to have combined assets and liabilities of both the companies.
Objectives of Amalgamation:
The main objective of amalgamation is to achieve synergetic benefits which arise, when two companies can achieve more in combination than when they are individual entities.
The other objectives of amalgamation are:
(i) To reap economies of scale
(ii) To eliminate competition
(iii) To build up goodwill
(iv) To reduce the degree of risk through diversification
(v) Managerial effectiveness.
Procedure of Amalgamation:
The following procedure is followed in an amalgamation:
1. The terms of amalgamation are finalized by the board of directors of the constituent companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
3. Approval of the shareholders of the constituent companies is obtained.
4. Approval of SEBI is obtained.
5. A new company is formed (where necessary) and issues shares to the shareholders of the transferor company.
6. The transferor company is liquidated and all assets and liabilities are taken over by the transferee company.
Types of Amalgamation:
For accounting purposes, AS-14 has categorized amalgamation into two:
1. Amalgamation in the nature of merger.
2. Amalgamation in the nature of purchase.
Amalgamation in the Nature of Merger:
An amalgamation is considered as ‘Amalgamation in the Nature of Merger’ if all the following five conditions are satisfied:
1. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation.
2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation.
3. The consideration to the shareholders of the transferor company (who agree to become equity shareholders of the transferee company) is discharged by the transferee company wholly by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.
4. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
5. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
Amalgamation in the Nature of Purchase:
An amalgamation is in the ‘Nature of Purchase’ if any one or more of the five conditions specified for Merger is not satisfied. In such kind of amalgamation shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. The transferee company may also not intend to continue the business of Transferor Company.
Accounting for Amalgamation:
Accounting Standard AS-14 ‘Accounting for Amalgamation’ issued by the Institute of Chartered Accountants of India states the procedure for accounting for amalgamation.
AS-14 uses and defines the various terms as under:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies.
(b) Transferor Company means the company which is amalgamated into another company.
(c) Transferee Company means the company into which a transferor company is amalgamated.
(d) Reserve means portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for known liability.
(e) Consideration for the amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.
No comments:
Post a Comment