AMALGAMATION OF COMPANIES

PREPARED BY
DR. HIMANSHI D. MANSUKHANI
 INTRODUCTION
Amalgamation is the combination of one or more companies into a new
entity. An amalgamation is distinct from a merger because neither of the
combining companies survives as a legal entity; a completely new entity is
formed to house the combined assets and liabilities of both companies.
Company may combine is in following ways:-
1. Amalgamation
2. Absorption
3. External Reconstruction
1. Amalgamation :
In amalgamation a new company is formed to take business of two or more old
companies.
For example, if the ABC limited and DEF limited are taken over by new company
XYZ limited, it is called amalgamation. The old companies taken over are know
as the “vendor companies”, and the new company which takes over is known as
the "purchasing company”.
2. Absorption:-
When an existing company takes over business of another company by
discharge of purchase consideration.
The old company which takeover the business known as Vender Company.
Existing company is called as Purchasing Company.

3. External reconstruction:-
In external reconstruction, a new company is formed to take over the
business of an existing company.
For example, if the business of ABC ltd, a loss-making company is taken over
by a new company ABC ltd, it is called external reconstruction. The old
company which is taken over is known as the “Vendor Company”; and the
new company which takes over is known as the “purchasing company ”.
 AMALGAMATION VS. ABSORPTION VS.
EXTERNAL RECONSTRUCTION

Type Vendor company Purchasing company

Amalgamation Two or more existing New company

companies One formation
Two or more liquidations

Absorption One or more existing An existing company

companies No formation
One or more liquidations

External Reconstruction One and only one existing New company

company One formation
One liquidations
 OBJECTIVES OF AMALGAMATION
The main objective of amalgamation is to achieve synergetic
benefits which arise, when two companies can achieve more in
combination than when they are individual entities.

The other objectives of amalgamation are:

(i) to reap economies of scale

(ii) to eliminate competition

(iii) to build up goodwill

(iv) to reduce the degree of risk through diversification

(v) Managerial effectiveness.

 PROCEDURE OF AMALGAMATION
The following procedure is followed in an amalgamation:

1. The terms of amalgamation are finalized by the board of directors of the

constituent companies.

2. A scheme of amalgamation is prepared and submitted for approval to the

respective High Court.

3. Approval of the shareholders of the constituent companies is obtained.

4. Approval of SEBI is obtained.

5. A new company is formed (where necessary) and issues shares to the

shareholders of the transferor company.

6. The transferor company is liquidated and all assets and liabilities are
taken over by the transferee company.
 TYPES OF AMALGAMATION

For accounting purposes, AS-14 has categorized amalgamation into

two:
Amalgamation in the

1. Nature of Merger 2. Nature of Purchase

1. Amalgamation in the Nature of Merger:

An amalgamation is considered as ‘Amalgamation in the Nature of

Merger’ if all the following five conditions are satisfied:
1. All the assets and liabilities of the transferor company become the
assets and liabilities of the transferee company after amalgamation.

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

3. The consideration to the shareholders of the transferor company

(who agree to become equity shareholders of the transferee company)
is discharged by the transferee company wholly by issue of equity
shares in the transferee company except that cash may be paid in
respect of any fractional shares.
4. The business of the transferor company is intended to be carried
on, after the amalgamation, by the transferee company.

5. 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:

An amalgamation is in the ‘Nature of Purchase’ if any one or more of

the five conditions specified for Merger is not satisfied. In such kind of
amalgamation shareholders of the company which is acquired
normally do not continue to have a proportionate share in the equity
of the combined company. The transferee company may also not
intend to continue the business of Transferor Company.
 ACCOUNTING FOR AMALGAMATION:

Accounting Standard AS-14 ‘Accounting For Amalgamation’ Issued By The

Institute Of Chartered Accountants Of India States The Procedure For
Accounting For Amalgamation.

As-14 Uses And Defines The Various Terms As Under:

(A) Amalgamation Means An Amalgamation Pursuant to The Provisions Of

The Companies Act, 1956 Or Any Other Statute Which May Be Applicable to
Companies.

(B) Transferor Company Means The Company Which Is Amalgamated Into

Another Company.
(C) Reserve Means Portion of Earnings, Receipts or Other Surplus of An
Enterprise (Whether Capital or Revenue) Appropriated By The
Management For A General or A Specific Purpose Other Than A Provision
For Depreciation or Diminution In The Value of Assets or For Known
Liability.

(D) Consideration For The Amalgamation Means The Aggregate of The

Shares and Other Securities Issued And The Payment Made In The Form of
Cash or Other Assets By The Transferee Company to the Shareholders of
the Transferor Company.
 WHAT IS PURCHASE CONSIDERATION?

Purchase consideration is the amount which is paid by the purchasing

company for the purchase of the business of the vendor company.

In other words consideration for amalgamation means “aggregate of the

shares and other securities issued and payment made in the form of cash
or other assets by the purchasing (transferee) company to the
shareholders of the vendor (transferor) company”.

It should not include the amount of liabilities taken over by the purchasing
company, which will be paid directly by this company.
METHODS OF COMPUTATION OF PURCHASE
CONSIDERATION

Lump-Sum Method Net Assets Method

Net Payment Method Intrinsic Worth Method

1. Lump Sum Method:- When the transferee company agrees to pay a
fixed sum to the transferor company, it is called a lump sum payment of
purchase consideration. For example, if X Ltd. purchases the business of Y
Ltd. and agrees to pay Rs. 25,00,000 in all, it is an example of lump sum
payment.

2. Net Worth (or Net Assets) Method: As per this method, the purchase
consideration is calculated by ascertaining the “Net Worth” of the assets
taken over by the Transferee (Purchaser) company. The net worth is the
Amount Net Asset computed as adding the agreed value of assets taken
over by the transferee (Purchaser) company less agreed value of liabilities
to be assumed by the transferee (Purchaser) company.
 COMPUTATION OF PURCHASE
CONSIDERATION AS PER NET ASSET METHOD
3. NET PAYMENTS METHOD: UNDER THIS METHOD, THE PURCHASE
CONSIDERATION WILL BE THE TOTAL OF PAYMENTS MADE BY
PURCHASING COMPANY TO SECURITY HOLDERS (ONLY SHAREHOLDERS)
OF VENDOR COMPANY, ON ANY BASIS IN ANY FORM. PAYMENT TO
DEBENTURES HOLDER IS NOT CONSIDERED AS PURCHASE
CONSIDERATION. COMPUTATION OF PURCHASE CONSIDERATION AS PER
NET ASSET METHOD:-
4. INTRINSIC VALUE OR SHARE EXCHANGE METHOD:
In this method to Calculate Purchase Consideration Following Method is
Used:

A. Total asset taken over at their agreed values

B. Less: Total liabilities taken over at their agreed amounts
C. Net Assets

Intrinsic Value=
Net Asset Available to the Equity Shareholders/ Number of Equity Shares.
ENTRIES IN THE BOOKS OF VENDOR COMPANY
NO. TRANSACTION /ENTRY AMOUNT
A. CLOSING ASSETS & LIABILITIES ACCOUNTS
(1) Assets transferred
Realisation a/c Dr (total of assets)
To various assets accounts (balances as per B/S)
(2) Liabilities transferred
Various outside liabilities accounts Dr (balance as per B/S)
To Realisation a/c (total)
B. REALISATION OF ASSETS AND PAYMENT OF LIABILITIES
(3) Purchases consideration due
purchasing company’s a/c Dr
To Realisation a/c
(4) Sale of assets not taken over
bank a/c Dr
To Realisation a/c
(5) Payment of a liabilities not taken over
Realisation a/c Dr
To bank a/c
(6) Amount due to preference shareholders

Preference share capital a/c Dr

To pref. shareholders a/c
(7)Profit on realisation

Realisation a/c Dr
To equity shareholders a/c
(8)Loss of realisation

Equity shareholders a/c Dr

To Realisation a/c
(9)Transfer equity share capital

Equity share capital a/c Dr

To equity shareholders a/c
(10)Accumulated losses

Equity shareholders a/ Dr
To profit & loss a/c
To Deferred Revenue Exp. a/c
(11) Accumulated profits / reserves

Profit & loss a/c Dr

General reserve a/c
Particulars Amount

1. EQUITY AND LIABILITIES

(1) Shareholders funds

a. Share capital XXX

b. Reserves and surplus XXX

c. Money received against share warrants XXX

(2) share application money pending allotment XXX

(3) non current liabilities

a. Long term borrowings XXX

b. Deferred tax liabilities XXX

c. Other long term liabilities XXX

d. Long term provisions XXX

(4) Current liabilities

a. Short term borrowings XXX

b. Trade payables XXX

c. Other current liabilities XXX

d. Short term provision XXX

Total XXXX

2. ASSETES

(1) Non current assets

a. Fixed assets XXX

-tangible assets XXX

-intangible assets XXX

-capital work in progress XXX

-intangible assets under development XXX

b. Non current investment XXX

d. Long term loans and advances XXX

e. Other Non current assets XXX

2. Current assets

a. Current investment XXX

b. Inventories XXX

c. Trade receivable XXX

d. Cash and Cash equivalent XXX

e. Short term loans and advances XXX

f. Other current assets XXX

Total XXXX