Issues in Mergers & Demergers

CoolAvenues Newswire | May 22,2014 11:25 am IST

Amalgamation:

 

Meaning

Amalgamation has different meanings and connotations under the following: -

1. Common parlance.

2. Companies Act 1956.

3. Income-tax Act 1961.

4. Accounting Standards (AS - 14).

 

Common parlance
Amalgamation means merger of one or more companies with another company or the merger of two or more companies to form one company.

 

The Companies Act 1956
A merger or amalgamation has not been specifically defined under the Companies Act.
 

A merger of two companies involves a scheme of restructuring under the Companies Act, 1956 *. The process involves the following approvals: -

 

Approval of the Board of Directors of the two companies.

Approval of the shareholders of the two companies in a general meeting.

Approval of the High Courts of relevant jurisdiction.

 

The High Courts within whose jurisdiction the registered offices of the companies are situated should approve the scheme of merger. This process could typically take six to eight months.

 

The Income-tax Act 1961
The Income-tax Act provides for capital gains tax exemption to a company being amalgamated into another company, and also to the shareholders of the amalgamating company **. The following conditions have to be satisfied to classify a transaction as an 'amalgamation' under the Act ***: -

 

  • * Section 391 of the Companies Act, 1956.
  • ** Section 47(vi) and 47(vii) of the Income-tax Act, 1961.
  • *** Section 2(1B) of the Income-tax Act, 1961. 

All the property of the amalgamating company immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;

 

All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; and

Shareholders holding not less than three-fourths in value of the shares in the amalgamating company become shareholders of the amalgamated company by virtue of the amalgamation.

 

Accounting Standards
As per para 3 of AS -14: -

Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute, which may be applicable to companies.

 

Amalgamation in the nature of merger is an amalgamation, which satisfies all the following conditions: -

 

All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee 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 shares 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 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.


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