Mergers and Amalgamations

The terms merger and amalgamation are used interchangeably as a form of business organization to seek external growth of business. A merger is a combination of two or more firms in which only one firm would survive and the other would cease to exist, its asset/ liabilities being taken over by surviving firm. Amalgamation is an arrangement in which the asset/liability of to or more firm to form a new entity or absorption of one/more firm with another. The out come of this arrangement is that the amalgamating firm is dissolved/wound-up and losses it identity and its shareholders become shareholders of the amalgeted firm. Although the merger/amalgamation of firm in India is governed by he provision of the companies act, 1956, it does not defined this term. The income tax act , 1961, stipulates to pre-requisite for amalgamation through which the amalgeted company seeks to avail the benefit of set of /  carry forward of losses and unabsorbed depreciation of the amalgamating company against its future profits u/s 72A ,namely,

  1. All the property and liabilities of the amalgamated company / companies immediately before amalgamation should vest with/ become the liabilities  of the amalgamated company and
  2. The shareholders other than amalgamated company/its subsidiary holding at list 90% value of shares/ voting power in the amalgamating company should become shareholders of the amalgamated company by virtue of amalgamation. The scheme of merger, income tax implications of amalgamation and financial evaluation are discussed in the section.

Following the economic reforms in India in the post-1991 period, there is a discernible trend among promoters and established corporate group towards consolidation of market share and diversification into new areas through acquisition/takeover of companies but in a more pronounced manner  through mergers/amalgamation. Although the economic consideration in terms of motive and effect of these are similar, the legal procedure involved are difficult. The merger and amalgamation of corporate constitute a subject matter of the companies act, the courts and law and there are well-laid down procedure for valuation of share and right of investor. The acquisition/takeover bids fall under the purview of SEBI. The terms merger and amalgamation on the one hand and acquisition and takeover on the other are treated here synonymously. Section one of the chapter covers the framework of merger/amalgamation including financial evaluation. The regulatory framework governing acquisition/takeover is described in section two.

Scheme of Merger/Amalgamation

Whenever two or more companies agree to merge with each other, they have to prepare a scheme of amalgamation. The acquiring company should prepare the scheme in consultation with its merchant banker/ financial consultant. The main contents of a model scheme, are listed below

  • Description of the transfer and the transfer company and the business of transferor.
  • Their authorized, issue and subscribed/ paid-up capital
  • Basis of scheme; the main terms, of the scheme in self’-contained paragraph on the recommendation of valuation report, covering transfer of asset/liabilities, transfer date, reduction or consolidation of capital, application to financial institution as lead institution for permission and so on.
  • Change of name, object clause and accounting year .
  • Protection of employment
  • Dividend position and prospectus
  • Management: board of director banking their number and participation and transfer company’s director on the  board
  • Application under section 391and 394 of the companies act, 1956, to obtain high course approval
  • Expenses of amalgamation
  • Condition of the scheme to become effective and operative, effective date of amalgamation

The basis of merger/ amalgamation in the scheme should be the report of the value’s of asset of both the merger partner companies. The scheme should be prepared on the basis of the values report; reports of the charter accountant engaged for financial analysis and fixation of exchange ratio, report of auditors and audited account of both the companies prepared up to the appointed date. It should be ensured that the scheme is just and equitable to the shareholders, employees of each of the amalgamating company and to the public.

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