What is Amalgamation?
Amalgamation is defined as the combination of one or more companies into a new entity. It includes:
- A. Two or more companies join to form a new company
- B. Absorp tion or blending of one by the other
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
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.
Types of Amalgamation
- Amalgamation in the nature of merger:
- Amalgamation in the nature of purchase:
In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transferee company. In this case, the business of the transferor company is intended to be carried on after the amalgamation. There are no adjustments intended to be made to the book values. The other conditions that need to be fulfilled include that the shareholders’ of the vendor company holding atleast 90% face value of equity shares become the shareholders’ of the vendee company.
This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied. Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is acquired normally do not continue to have proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded as the goodwill, while if it is less than the net assets value it is recorded as the capital reserves.
- To acquire cash resources
- Eliminate competition
- Tax savings
- Economies of large scale operations
- Increase shareholders value
- To reduce the degree of risk by diversification
- Managerial effectiveness
- To achieve growth and gain financially
Procedure for Amalgamation
- The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
- A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
- Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
- A new company is formed and shares are issued to the shareholders’ of the transferor company.
- The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company.
Accounting of Amalgamation
Through this accounting method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts.
In this method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation.