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AMALGAMATION OF COMPANIES

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. However, this sense of the term amalgamation has generally fallen out of
popular use, and the terms “merger” or “consolidation” are often used instead. Generally,
Amalgamation is done between two or more companies engaged in the same line of activity or
has some synergy in their operations. Again, the companies may also combine for
diversification of activities or for expansion of services. The transferor company, or weaker
company, is absorbed into the transferee company, or stronger company, forming an entirely
different company. Amalgamation is more common in countries such as India than in the
United States. Amalgamation is done as a method of acquiring cash resources, eliminating
competition, saving on taxes or influencing the economies of large-scale operations.
Amalgamation increases shareholders value, reduces risk by diversification, improves
managerial effectiveness and helps achieve company growth and financial gain. An
amalgamation’s terms are finalized by the companies’ board of directors. The scheme is
prepared and submitted to the High Court for approval. The High Court and Securities and
Exchange Board of India (SEBI) approve the shareholders of the new company. The new
company officially becomes an entity and issues shares to shareholders of the transferor
company. The transferor company is liquidated, and all assets and liabilities are taken over by
the transferee company. There are two types of amalgamation. An amalgamation in the nature
of a merger pools the companies assets and liabilities as well as the shareholders interests and
the business of the companies. All assets of the transferor company become that of the
transferee company. The business of the transferor company is carried on after the
amalgamation. No adjustments are made to book values. Shareholders of the transferor
company holding a minimum of 90% face value of equity shares become shareholders of the
transferee company. An amalgamation in the nature of purchase occurs when conditions for
amalgamation in the nature of merger are not met. One company is acquired by another, and
shareholders of the transferor company do not continue having proportionate share in the equity
of the combined company or the business of the transferor company is not intended to continue.
If the purchase consideration exceeds the net asset value (NAV), the excess amount is recorded

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as goodwill; if not, it is recorded as capital reserves. Even though mergers and acquisitions (M
and A) have been an important element of corporate sector all over the world from several
decades, research on mergers and acquisitions has not been able to provide the complete
knowledge about legal framework of Amalgamation. There is no conclusive evidence on
whether they enhance efficiency or destroy wealth. There is thus an ongoing global debate on
the effects of mergers and acquisitions on industries. Though mergers and acquisitions have
become common in India today but, very little appears to be known about their procedure and
the legal angle in takeovers. This research project attempts to fill this gap in knowledge about
mergers and acquisitions in India.

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Amalgamation: A Brief Overview

Amalgamation of companies means to form one company by merging two or more companies.
It may also mean that one company has acquired another company. However, amalgamation is
different from Merger because neither of the two companies under reference exists as a legal
entity.1 Through the process of amalgamation is a completely new entity is formed to have
combined assets and liabilities of both the companies.2 In India, accounting problems regarding
amalgamations are dealt with in accordance with the Accounting Standard (AS) - 14 issued by
the Institute of Chartered Accountants of India (ICAI).3 In India, Amalgamation is used in the
same sense as Business Combination is used in the USA. In case of amalgamation, as the
transferor company is dissolved, its assets and liabilities find place in the financial statements
of the transferee company, prepared subsequent to the date of amalgamation. Amalgamation is
one of the tools that can help companies avoid competition among them and add to the market
offerings. It is for the mutual advantage of the acquirer and acquired companies. It serves as an
apt method of corporate restructuring to bring about a change for the better and make business
environment competitive.4

There are two types of amalgamation. According to AS-14 amalgamation is divided into the
following two categories for accounting purposes.

1) Amalgamation in the nature of merger: The amalgamations where there is a genuine


pooling not merely of the assets and liabilities of the amalgamating companies but also
of the shareholders’ interests and of the businesses of these companies, is called
amalgamations in the nature of ‘merger’. An amalgamation which satisfies all of the
following conditions is considered as amalgamation in the nature of merger.
a) All the assets and liabilities of the transferor company become the assets and
liabilities of the transferee company.
b) Shareholders holding not less than 90 per cent 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

1
Beena, P.L (1998) “Mergers and Amalgamations: An Analysis in the changing structure of Indian Oligopoly”,
unpublished Ph.D. thesis submitted to the Jawaharlal Nehru University, New Delhi.
2
Sen. S.C., Merger, Amalgamation and Takeover, 1969.
3
Ibid.
4
Ibid.

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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: An amalgamation is considered to be in the


nature of purchase when any one or more of the five conditions specified for
amalgamations in the nature of merger as stated above is not satisfied. In this type of
amalgamation, one company acquires another company and the equity shareholders of
the combining entities do not continue to have a proportionate share in the equity of the
combined entity or the business of the company which is acquired is not intended to be
continued after the amalgamation.
Example, X Ltd. acquires the business of Y Ltd. with no intention to continue such
business, it is a case of amalgamation in the nature of purchase and not in the nature of
merger. Similarly, if shareholders of Y Ltd. holding 90% or more of the share capital
do not become shareholders of X Ltd., the amalgamation is in the nature of purchase.
Further, if the assets and liabilities are recorded at revised values in the books of the
transferee company, it is an amalgamation in the nature of purchase.

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Nature and Meaning of Amalgamation

Nowhere in the Companies Act is the term amalgamation defined. It is said to be a term of art
without any clear or precise legal meaning.5 However, Halsbury has attempted a definition
which reads, “Amalgamation is the blending of two or more existing undertaking into one
undertaking with the shareholder of each blending company becoming substantially the
shareholders in the company which is to carry on the blended undertakings”6 In essence “under
a merger two or more companies are merged either de-jure by consolidation of their
undertakings or de-facto by the acquisition of a controlling interest in the share capital of one
by the other or of the capital of both by a new company.” This is the view of Gower. According
to Webster’s Dictionary ‘amalgamation’ means to compound, consolidate or combine the
interest of firms. In Heavy Head and co-vs. Roprer Holdings Ltd., it is stated that, “The effect
of an arrangement would be one of the companies involved to absorb the business and all assets
and liabilities of the other, the latter being then dissolved, or alternatively, both companies
might be absorbed into a new company formed for that purpose. Not only this the Andhra
Pradesh High Court held in S.S. Somajulu vs. Hope Pradhomme and Co, that the word
amalgamation has no definite legal meaning. It contemplates a state of things under which tow
companies are so joined as to form a third entity or one company is absorbed or blended with
another company. Amalgamation doesn’t involve a formation of new company to carry on the
business of old company. According to S.C. Sen the term amalgamation which is used in
relation to companies has no technical meaning and thus falls on one or other of the following
heads7 (a) Transfer of undertaking of an existing company to another existing company, of
which all the members of the transferring company become members, and the subsequent
dissolution of the transferring company. (b) The transfer of undertaking of two or more existing
companies to a new company formed to take over the same, of which all the members of the
transferring company become or have the right to become members, and the subsequent
dissolution of transferring company. (c) the acquisition by one company of the whole of or a
controlling interest in the shares of another company. S. Shiva Ramu has given similar

5
Verma, J.C., Corporate Merger and Acquisition Takeover, 2002.
6
Ibid.
7
Sen. S.C., Merger, Amalgamation and Takeover, 1969.

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definition for the merger/amalgamation. He defines in amalgamation a new corporation is
created by uniting companies voluntarily.8

After all these definitions a new question arises. Are amalgamations and mergers synonymous?
Very often, the two expressions “Merger” and “amalgamation” are taken as synonymous but
in fact, a difference, merger is a restricted to a case where the assets and liabilities of the
companies get vested in another company, the company which is merged losing its identity and
its shareholders becoming shareholders of other company. On the other hand, amalgamation is
an arrangement, whereby the assets and liabilities of two or more companies become vested in
another company (Which may or may not be one of the original companies) and which would
have as its shareholders substantially, all the shareholder of the amalgamating companies.
Merger is the whole of which amalgamations is a part. “When companies coalesce or firms
unite in some form the result is variously described as an ‘absorption’, ‘amalgamation’,
‘fusion’, ‘merger’, or ‘takeover’. Although the word amalgamation is commonly used by
businessmen, of recent, the word ‘merger’ has been preferred because it covers a wide range
of ways and means by which the union is achieved”

8
Chandra Ramesh, Company Law, 1978, Central Law agency.

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Legal Provision Relating to Amalgamation in India

An entrepreneur may grow its business either by internal expansion or by external expansion.
In the case of internal expansion, a firm grows gradually over time in the normal case of the
business, through acquisition of new assets, replacement of the technologically obsolete
equipment and the establishment of new lines of products.9 But in external expansion, a firm
running business and grows overnight through corporate combinations. These combinations
are in the form of mergers, acquisitions, amalgamations and takeovers and have now become
important features of corporate restructuring.10 In India, all formations, reorganizations or
combinations of business, either by internal expansion of by external expansion of business
have been viewed from the angle of anti–monopolies and lessening the concentration of
economic power in few hands.11 Merger, takeovers are playing an important role in the external
growth of a number of leading companies all over the world. They have become popular
because of the enhanced competition, breaking of trade barriers, free flow of capital across
countries and globalization of businesses. In the wake of economic reforms, Indian industries
have also started restructuring their operations around their core business activities through
acquisition and takeovers because of their increasing exposure to competition both
domestically and internationally.12 Merger and acquisition activities must adhere to the existing
legal regime which provides existing legal frame work under which merger and amalgamation
activities can be undertaken. These are strategic decisions taken for maximization of a
company’s growth by enhancing its production and marketing operations. They are being used
in a wide essay of fields such as information technology, telecommunications, and business
process outsourcing as well as in traditional businesses in order to gain strength, expand the
customer base, cut competition or enter in to a new market or product segment. Most of the
legal systems have been under review and are being reformulated in accordance with the
emerging corporate scenario in India following are the laws enacted in India dealing with the
Merger and Amalgamation of companies.13 The process of mergers and acquisitions in India
is court driven, long drawn and hence problematic. The process may be initiated through
common agreements between the two parties, but that is not sufficient to provide a legal cover

9
Gupta Sen, Company Law, 2nd Edition, 1990.
10
Ibid.
Beena, P.L (1998) “Mergers and Amalgamations: An Analysis in the changing structure of Indian Oligopoly”,
11

unpublished Ph.D. thesis submitted to the Jawaharlal Nehru University, New Delhi.
12
Ibid
13
Ibid.

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to it. The sanction of the High Court is required for bringing it into effect. The companies Act,
1956 consolidates provisions relating to mergers and acquisitions and other related issues of
compromises, arrangements and reconstructions, however other provisions of the Companies
Act get attracted at different times and in each case of merger and acquisition and the procedure
remains far from simple. The Central Government has role to play in this process and it acts
through an Official Liquidator (OL) or the Regional Director of the Ministry of Company
Affairs. The entire process has to be to the satisfaction of the Court. This sometimes results in
delays.

Different Indian Legal Provisions related to Amalgamation.

 The Companies Act, 1956.

 The Industrial (Development and Regulation) Act, 1951.

 The Monopolies and Restrictive Trade Practice Act 1969.

 The Competition Act, 2002.

 The Foreign Exchange Management Act 1999.

 The Sick Industrial Companies (Special Provisions) Act, 1985.

 The Income Tax Act, 1961.

 The Securities Contracts (Regulation) Act, 1956.

 The Securities and Exchange Board of India Act, 1992.

 The Banking Companies Act, 1949.

 The SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997.

Section 396: Powers of central Government to provide for Amalgamation of companies in


National Interest.

1) Where the central Government is satisfied that it is essential in the (Public interest) that
two or more companies should amalgamate, then notwithstanding anything contained
in sections 394 and 395 but subject to provisions of this section, the central Government
may, by order notified in the official gazette provide for amalgamation of those

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companies in to a single company with such constitution; with such property, power,
rights, interests, authorities and privileges ; as may be specified in the order.
2) [The order aforesaid may provide for the continuation by or against the transferee
company of any legal proceedings pending by or against any transferor company and
may also] contain such consequential, incidental and the supplemental provisions as
may, in the opinion of the central Government, be necessary to give effect to the
amalgamation.
3) Every member or creditor (including a debenture holder) of each of the companies
before the amalgamation shall have, as nearly as may be, the same interest in or rights
against the company resulting from the amalgamation as he had in the company of
which he was originally a member or creditor & his rights or interest in or against the
company resulting from the amalgamation are less than his interest in or rights against
the original company, he shall be entitled to the compensation which shall be assessed
by such authority (as may be prescribed)18 and every such assessment not shall be
published in official gazette. The compensation so assessed shall be paid to the member
or creditor concerned by the company resulting from the amalgamation. (3A) Any
person aggrieved by any assessment of compensation made by the prescribed authority
under sub section (3) may, within 30 days from the date of publication of such
assessment in the official gazette prefer an appeal to the Company Law Board and
thereupon the assessment of compensation shall be made by Company Law Board.
4) Copies of every order made under section 395 shall, as soon as may is after it has been
made, be laid before both houses of parliament (section 396).

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Judicial Response to Amalgamations

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. 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. The various courts have defined amalgamation in
different ways In Saraswati Industrial Syndicate Ltd vs. C.I.T. Haryana, Himachal Pradesh
and Delhi. Supreme Court held that ‘Amalgamation’ is a blending of two or more existing
undertaking.14 The shareholders of each blending company become substantially the
shareholders in the company which is to carry on the blended undertakings. There may be
amalgamation either by transfer of two or more undertakings to a new company, or by transfer
of one or more undertaking to an existing company where two companies are merged and are
so joined as two amalgamating companies lose their identity. In the Central India Industries
Ltd. vs. C.I.T15., It was held that amalgamation is an arrangement whereby the assets of two
companies become vested in or under the control of one of the original two companies, which
has its shareholders all or substantially all the shareholders of the two companies. In General
Radio vs. M.A. Khader,16 Supreme Court held, that after amalgamation, transfers company
doesn’t become tenant of premises, even if tenancy rights are transferred to transferee
company. In United Breweries vs. Commission of Execise, it was held that there exist ‘transfer
even if shareholders are same, as transferor company ceases to exist after amalgamation.

In Marshall Sons and Co. (India) Ltd., vs. Income Tax Officer,17 Supreme Court held that every
scheme has to provide a date with effect from which amalgamation shall take place. While
sanctioning the scheme it is open to National Company Law Tribunal to modify the said date
and prescribe such date of amalgamation as it thinks appropriate in the facts and circumstances
of the case. C.I.T. vs. Bombay Dyeing and Mfg. Co. Ltd.18, In this case expenditure on
professional charges of solicitors in connections with amalgamation is allowable business
expenditure in light of finding that amalgamation was necessary for smooth and efficient
conduct of business.

14
Ibid.
15
Ibid.
16
Sen. S.C., Merger, Amalgamation and Takeover, 1969.
17
Beena, P.L (1998) “Mergers and Amalgamations: An Analysis in the changing structure of Indian Oligopoly”,
unpublished Ph.D. thesis submitted to the Jawaharlal Nehru University, New Delhi.
18
Ibid.

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The Supreme Court has in the case of Miheer H.Mafatlal vs Mafatlal Industries Ltd.19, summed
up the scope and ambit of the Jurisdiction of Company Court which it as under:

 The Company Court (Now National Company Law Tribunal) has to see that all statutory
provisions for supporting such a scheme have been compiled with and requisite meetings as
contemplated by section 391 (1) (a) have been held.

 Scheme is backed up by requisite majority vote as required by section 391 (2).

 That majority decision of concerned class of creditors or voters is Just and fair to the class as
a whole.

 That all necessary material as required under section 391 (1) (a) is placed before the voters
at the concerned meeting under section 391 (1).

 Applicant seeking sanction for such a scheme has placed all necessary material contemplated
by proviso to sub section 391 (2).

 That the proposed scheme is not contrary to the public policy and is Just, fair and reasonable.

In Sadanand S. Varde vs. State of Maharashtra,20 Bombay High Court held that the Court
cannot sit in Judgement over the correctness of on order made under section 391 by Company
Court which has become final, conclusive and binding. In Webb’s form Mechanization Pvt.
Ltd., vs. Official Liquidator,21 Karnataka High Court held that amalgamation provides for
merger of transferor company with transferee company. The transferor company gets dissolved
on amalgamation. Hence though no winding up is indeed, report of the official liquidator is
required in case of amalgamation. The object of calling for report under section 394(1) (2) is
to satisfy the Company Court (Now NCLT) that shareholder Interest and public interest are not
prejudicially affected by amalgamation.

19
Ibid.
20
Kumar Naresh, Takeover and Merger: Need for Mode Code Chartered Secretary, Sep. 1994.
21
Ibid

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Conclusion

In real terms, the rationale behind mergers and acquisitions is that the two companies are more
valuable, profitable than individual companies and that the shareholder value is also over and
above that of the sum of the two companies. Despite negative studies and resistance from the
economists, M&A’s continue to be an important tool behind growth of a company. Reason
being, the expansion is not limited by internal recourses, no drain on working capital can use
exchange of stocks, is attractive as tax benefit and above all can consolidate industry- increase
firm’s market power. With the FDI policies becoming more liberalized, mergers, acquisitions
and alliance talks are heating up in India and are growing with an ever increasing cadence.
They are no more limited to one particular type of business. The list of past and anticipated
mergers covers every size and variety of business mergers are on the increase over the whole
marketplace, providing platforms for the small companies being acquired by bigger ones. The
basic reason behind mergers and acquisitions is that organizations merge and form a single
entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain
competitive advantage. In simple terminology, mergers are considered as an important tool by
companies for purpose of expanding their operation and increasing their profits, which in
facade depends on the kind of companies being merged. Indian markets have witnessed
burgeoning trend in mergers which may be due to business consolidation by large industrial
houses, consolidation of business by multinationals operating in India, increasing competition
against imports and acquisition activities. With the growth of business activities there grew
different forms of business organization like Sole Traders, Partnerships and the company form
of business organization. The evolution of these forms of business organizations are not very
old and owe their origin to England, as it was in seventeenth and eighteenth century where a
Body Corporate or company could be brought into existence by a Royal Charter or by Special
Act of the Parliament. With the passage of time, in order to achieve faster growth of corporate
business the companies started to explore and exploit various means of business activities. Very
often, the two expressions “Merger” and “Amalgamation” are taken as synonymous. But there
is, in fact, a difference. Merger is restricted to a case where the assets and liabilities of the
companies get vested in another company, the company which is merged losing its identity and
its shareholders becoming shareholders of other company. On the other hand, amalgamation is
an arrangement, where by the assets and liabilities of two or more companies become vested
in another company (which may or may not be one of the original companies) and which would
have as its shareholders substantially, all the shareholders of the amalgamating companies. The

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Constitution of India defines acquisition as the Act by which the person acquires property in a
thing. In India, laws regarding mergers and acquisition have been borrowed from the British
system and the provisions relating to merger and acquisition given in the Companies Act, 1956
have been borrowed from the United Kingdom Companies Act, 1948.

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