LIVE GST Certification Course by CA Arun Chhajer begins 27th April. Register Now!!

Amalgamation

Ashish (student) (366 Points)

12 March 2015

I am not getting why such things happen in Amalgamation.

Can somebody explain me the following lines:

If X Ltd. agrees to take over only the fixed assets of Y Ltd. and to discharge the purchase consideration by issuing equity shares of Rs 10 each at a premium of Rs 45 per share. Market Value of an equity share of X Ltd. at present is Rs 100. Value of Fixed Assets in the books of Y Ltd is 1100000.

Now my questions is:

1. Why is it written that X Ltd is ready to issue equity share with a premium of 45? I know this helps in finding the no of shares X Ltd would issue but apart from that is there any other practical issue with premium of Rs 45 ? What benefit does X Ltd or Y Ltd would get by such premium. What gain or loss it would be on X Ltd and Y Ltd if the premium would be 35 or 55.

Reply
Follow
Share

2 Replies

Jithin (Learner) (1057 Points)
Replied 12 March 2015

Hi this is just like any other transaction where two parties agree to trade at a price which is acceptable to both the parties. In this case, the consideration happens to be equity shares which are issued at Rs.55(Rs.45 premium)..Thats all..If X Ltd. and Y Ltd. both are agreeable to an issue price at a premium of Rs.35 or for that matter Rs.55, the transaction would be at that price. It is entirely upto the two parties to decide upon what price to buy and sell.

Now coming to your 2nd question regd the benefits to the two parties, let me try to explain. Y Ltd., as you can see, is getting shares at Rs.55 whereas the current market price is Rs.100. So thats a benefit to Y Ltd. Now you will ask me why X Ltd is issuing shares at such a low price to Y Ltd. My answer is X Ltd sees a better value for the the fixed assets than the aquisition price(11 lacs). So thats the benefit to X Ltd. They(X Ltd.) are getting these fixed assets at a price lower than the value estimated by them. Now you may think why dont then Y Ltd. attach a higher value to the assets. Maybe for Y Ltd. the assets maynt be as useful as these can be to X Ltd. Y Ltd. maynt have the technological expertise to use these assets on a profitable basis. Or may be the operating costs are pretty high to Y Ltd. to operate these assets and therefore the net cash inflows from these assets may be low, leading to a low valuation of the assets. There can be an umpteen no. of such reasons for different valuation of the assets by the buyer and the seller. To sum up, any transaction happens only if it benefits both the parties, amalgamation being no exception. The benefit may be expicit or impicit, but there shall nevertheless be a benefit to both the parties.

1 Like