Amalgamation and Merger

Notes 2 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Tabeed Malpani

STUDY MATERIAL(4
th
sem BCOM ) AMALAGMATION &MERGER BY MS HARINI(MESIOM)

Study material on Amalgamation and Merger
Company law all over the world seeks to regulate the manner in which promoters of the company secure the facility of a separate legal
entity for mobilizing large funds from the capital market. If the chief object of the company’s act is to provide the legal infrastructure
required for early promotion and management of companies, there are other correlated objects such as safeguarding of the interests’
investors and shareholders. One such object is found in the provision of “enabling devices" to ensure that companies can, if they so
choose, merge together, take over one another or in dire circumstances, go through a "slimming process" or legally enforceable decision
to reduce capital and to scale down commitments to third parties. Changes in the legal structure or in corporate name or volume and
composition of capital for all possibilities which are provided for in the company’s act.
Three major processes through which companies structure can be altered may now be noted:
1. Amalgamation
2. Absorption and
3. Reconstruction.
Amalgamation takes the shape of merging one with another or merging of two or more companies which give rise to formation of a new
company. Amalgamation means an amalgamation pursuant to the provisions of the company’s act, 1956 or any other statute which may
be applicable to the companies. However, the companies act 1956 has not specifically define the term amalgamation. But the definition
of the term may be inferred from several legal decisions. According to the act, the term amalgamation includes absorption.
This view has been held by the court decisions also. For instance, in Somyagulu versus Hop Prudhommce and CO LTD. the term
amalgamation has been defined as a state of things under which two companies or joined so as to form a third entity or one is absorbed
into to another or will blended with another.
Internal reconstruction is a process by which a company is reorganized through:
a) the reduction of share capital and other liabilities
b) the revaluation of tangible assets and
c) writing off the accumulated losses and fictitious assets
External Reconstruction is a process of reorganizing a company by reducing capital and liabilities and writing off fictitious assets. This
process takes place essentially by the way of the company to be reconstructed being taken over by another company. The company
which is reconstructed is wound up and hence takes the form of amalgamation for all practical purposes.
Different Types of Amalgamation:
Amalgamation may be the nature of
I) Merger or
II) ii) purchase.
Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions:
I. All the assets and liabilities of the the transferor company become after amalgamation the assets and liabilities of the transferee
company. The transferor company means the company which is transferring its assets and liabilities into another company while
the transferee company means the company into which the assets and liabilities are purchased basically transferor company is
the vendor company and transferee company is the purchasing company.
II. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company shall become the equity
shareholders of the transferee company by the virtue of amalgamation
III. The purchase consideration for amalgamation receivable by those equity shareholders of the transferor company is discharged
by the transferee company wholly by the issue of equity shares in the purchasing company except that cash may be paid in
respect of any fractional shares
IV. The business of the transferor company is intended to be carried on, after amalgamation, by the transferee company.
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STUDY MATERIAL(4
th
sem BCOM ) AMALAGMATION &MERGER BY MS HARINI(MESIOM)
V. No adjustment is intended to be made to the book values of assets and liabilities of the transferor company when they are
incorporated in the financial statements of the purchasing company
An amalgamation is classified as amalgamation in the nature of merger when all the conditions listed above are satisfied.
Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the five conditions mentioned
above.
Methods of accounting for amalgamation: there are two methods of accounting for amalgamation namely
I) The pooling of interest method and
II) The purchase method.
Pooling of interest method
1. Pooling of interest method is applicable for amalgamation in the nature of merger
2. Assets, liabilities, reserves and P & La/c of the transferor company are all incorporated through journal in the financial
statements of the purchasing company. Hence there is total incorporation of financial figures.
3. No goodwill or capital reserve account is to come about as a result of difference between the purchase consideration paid
and the net assets taken over by the transferee company. The difference is to be adjusted in general reserve or other reserves.
4. No such account called amalgamation adjustment account is to be brought into books, as all the reserves are taken into the
books of the transferee company.

Purchase Method
1. This method is applicable for amalgamations which are in the nature of purchase.
2. Only net assets that is assets less liability taken over are incorporated into the books of the transferee company. Reserves and
profit and loss account are not incorporated. Hence there is only partial incorporation of financial figures.
3. The difference of purchase consideration paid and the net assets taken over by the transferee company is either goodwill or
capital reserve.
4. Wherever the transferee company has to carry forward any statutory reserve for legal compliance it is accounted by the following
journal entry
. Amalgamation Adjustment a/c Dr
To Statutory Reserve a/c
the amalgamation adjustment account will be shown on the asset side of the balance sheet of the transferee company under the head
miscellaneous expenditure.
Absorption:
When two or more companies merge together for the purpose of dividing the market or of reaping economies of scale through horizontal
integration of their production plans, such that, one of the existing companies, usually the biggest one takes over the assets of other
companies, then the process is known as Absorption.
The key element here is that no new company is created but instead all existing companies involved in the Merger excepting one go into
liquidation.

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