Amalgamation is an arrangement or reconstruction. It is a legal process by which two or more companies are to be absorbed or blended with another. As a result, the amalgamating company loses its existence and its shareholders become shareholders of new company or the amalgamated company. In case of amalgamation a new company may came into existence or an old company may survive while amalgamating company may lose its existence.
According to Halsbury’s law of England amalgamation is the blending of two or more existing companies into one undertaking, the shareholder of each blending companies becoming substantially the shareholders of company which will carry on blended undertaking. There may be amalgamation by transfer of one or more undertaking to a new company or transfer of one or more undertaking to an existing company. Amalgamation signifies the transfers of all are some part of assets and liabilities of one or more than one existing company or two or more companies to a new company.
The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying (i) Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of purchase.
1. Amalgamation in the nature of merger:
As per AS-14, an amalgamation is called in the nature of merger if it satisfies all the following condition:
- All the assets and liabilities of the transferor company should become, after amalgamation; the assets and liabilities of the other company.
- 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.
- 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 share in the transferee company, except that cash may be paid in respect of any fractional shares.
- The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
- No adjustment is intended to be made in 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.
Amalgamation in the nature of merger is an organic unification of two or more entities or undertaking or fusion of one with another. It is defined as an amalgamation which satisfies the above conditions3.
2. Amalgamation in the nature of purchase:
Amalgamation in the nature of purchase is where one company’s assets and liabilities are taken over by another and lump sum is paid by the latter to the former. It is defined as the one which does not satisfy any one or more of the conditions satisfied above.
As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B) with the following three conditions to be satisfied.
- All the properties of amalgamating company(s) should vest with the amalgamated company after amalgamation.
- All the liabilities of the amalgamating company(s) should vest with the amalgamated company after amalgamation.
- Shareholders holding not less than 75% in value or voting power in amalgamating company(s) should become shareholders of amalgamated companies after amalgamation
Amalgamation does not mean acquisition of a company by purchasing its property and resulting in its winding up. According to Income tax Act, exchange of shares with 90%of shareholders of amalgamating company is required.