Merger and Amalgamation - An Overview


As per Companies Act, 1956

The terms merger and amalgamation have not been defined in the Companies Act, 1956 though this voluminous piece of legislation contains more than 50 definitions in Section 2 of the Act. For the purpose of this act the terms ‘Merger’ and ‘Amalgamation’ are synonymous. The statutory provisions relating to merger and amalgamation are contained in sections 390 to 396A.

As per General Dictionary Meaning

According to Oxford Dictionary, the expression “merger” or “amalgamation” means “combining of two commercial companies into one” merging of two or more business concerns into one” respectively. ‘Merger’ is a fusion between two or more enterprises, whereby the identity of one or more is lost and the result is a single enterprise whereas ‘Amalgamation’ signifies blending of two or more existing undertakings into one undertaking, the blended companies losing their identities and forming themselves into a separate legal identity. There may be amalgamation either by the transfer of two or more undertaking to a new company, or by the transfer of one or more undertaking to an existing company.

As per Income Tax Act, 1961

Amalgamation as defined in section 2 (1B) of the Income Tax Act, 1961 means the merger of one or more companies with another company or the merger of two or more companies to form one company in such a manner that the following conditions are satisfied:

a)      All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation.

b)      All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation

c)      Shareholders holding at least three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamated company or its nominee) becomes the shareholders of the amalgamated company by virtue of the amalgamation.

As Per Accounting Standard

According to the mandatory Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India (ICAI), ‘amalgamation’ means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies. Under the said AS-14 the following two methods of amalgamation have been contemplated:

1)      Amalgamation in the nature of merger:- Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions:-

a)      All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

b)      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 the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

c)      The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

d)      The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

e)      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.

2)       Amalgamation in the nature of purchase:- Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the conditions specified in (1) above


Following are the main reasons for the companies to go for mergers and amalgamation:

1)      To achieve economies of Scale: - The combination of two or more companies and their resources – production facilities, marketing outlets, managerial skills, liquidity etc. could be used to achieve economies of scale and thus, improve the profitability, and attain synergetic operating economies. It will result in reduction in advertising costs, administration costs and production costs.

2)      To reduce the gestation period for new business: - To develop new business will need a gestation period and might amount to re-investing the wheel. If, however, a company can acquire another company which has a profitable business running and merged with it, it is possible to avoid the initial teething trouble period of a new business and venture into new field with relative ease.

3)      To compete globally: - In this era of globalization, unless a company is large in size and capital, it will be very difficult to compete with global companies where the cost of production is lower due to the benefits of economies of scale. In a free competitive world, it is necessary to position oneself in such a manner to compete with the best and prove oneself as better than the others. This could be achieved only by merger and amalgamation of companies in the same line of business and create a niche world market for oneself.

4)      To utilize the liquidity available with the company for achieving growth through diversification: - Finance is a scarce resource. Liquidity can be better used by acquiring competing and complementary businesses. Sometimes mergers take place by a financially strapped company with a financially rich company and thus take advantage of the finance available with the merged company.

5)      To acquire and maximize the available managerial skills to increase the profitability: - It is possible that a company may have expertise and skilled managerial personnel, but for the reasons beyond their control, the company may not be able to compete with another company. In such cases, the other company would benefit by merging with the former company and take full advantage of the available managerial skills and thus, save costs to improve its own profitability and at the same time, the skilled persons are also gainfully employed.

6)      To Diversify the risk: - Another reason for merger is to diversify the company’s dependence on a number of segments of the economy. Diversification implies growth through the combination of firms in unrelated businesses. All the businesses go through cycles. So in decline stage the company can find it difficult to sustain itself and therefore looks to diversify into the unrelated area of business. Such diversification helps to open up the avenues of growth. In short - We are all aware of the famous saying: “Don’t put all your eggs in one basket.” When a firm operates in many businesses, the downs in one can be compensated by the ups in another. A good example of an Indian company attempting to diversify and develop a new core is ITC. Among the businesses which ITC has entered in recent years are apparel retailing and branding, ready-to-eat packaged foods, confectionery items, InfoTech, paper and boards, Hotel Chain etc.

7)      To avail the taxation advantages under the Income Tax Act, 1961: - Mergers and amalgamation also take place to avail the taxation benefits available to amalgamating companies (subject to fulfillment of certain conditions) under the Income Tax Act, 1961. These benefits are available mainly by virtue of Sec 72A (Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation). Apart from these tax benefits are also available to amalgamating companies and the shareholders of the amalgamated companies.

8)      In the Public Interest: - Where the Central Government is satisfied that it is essential in public interest that two or more companies should amalgamate, it may, by notified order in the Official Gazette, provide for the amalgamation of those companies into a single company. This power is vested in the hands of Central Government under section 396 of the Companies Act, 1956.

Earlier Article of this Series---

Corporate Restructuring - A Phenomenon

To be continued.........

CMA. Sanjay Gupta

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CMA. CS. Sanjay Gupta 
on 26 April 2011

Published in Corporate Law
Views : 57344

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