Topics: “Amalgamation occurs when two or more companies are joined to form a third entity or one is absorbed in to or blended with another”- Explain and illustrate.
Life in the 21st century is one of complex, continuous, and accelerating changes. Challenges resulting from scientific discoveries and global concerns, the demographic slump of lower birth rates in developed countries and the changing workplace are external forces which both create a need and provide an impetus for internal change in individuals and organizations. Nowhere has change been more evident than in the recent restructuring of organizations in both the private and public sector. In the world of business, mergers and acquisitions (M&A’s) have used financial performance as the most common indicator of success. However, the event itself is a “complex human as well as financial [and political] phenomena”.
The pursuit and the growth and the need of access new markets have been and are propelling companies over the world to undertake M&A. Indeed, the phenomenon is becoming part of the strategic architecture of many corporate bodies seeking not only to exploit existing core competencies but also to build new ones for the future. While motives or influences leading to mergers are multiple, varied and complex, there is inherent in the phenomenon of mergers, the potential for concentration of economic power.
In generic sense the term Amalgamation denotes the blending of two or more things into one single unit. The term is generally used to refer to the merger or acquisition (M&A) of two or more corporations into one large corporation. Mergers and acquisitions (M&As) is a phrase used to describe the buying and selling of corporations. In an acquisition one party buys another by acquiring all of its assets. The acquired entity ceases to exist as a corporate body, but the buyer sometimes retains the name of the acquired company, and may use it as its own name. In a merger a new entity is created from the assets of two companies and new stock is issued. Mergers are more common when the parties have similar size and power. A merger suggests mutuality. M&A activity involves both privately held and publicly traded companies. For the merging of schools or regiments the term amalgamation is used.
“Now what is amalgamation? An amalgamation involves, I think, a different idea. There you must have the rolling, somehow or other, of two concerns into one. You must weld two things together and arrive at an amalgam- a blending of two undertakings. It does not necessarily follow that the whole of the two undertakings should pass substantially, all must be parties. The difference between a reconstruction and amalgamation is that in the latter is involved the blending of two concerns one with the other, but not merely the continuance of one concern.
2(a).Mergers and Amalgamation:
According to Oxford Dictionary, the expression “merger” or “amalgamation” means “combining of two commercial companies into one” and “merging of two or more business concerns into one” respectively. Merger is a fusion between two or more enterprises, whereby the identity of on or more is lost and the result is a single enterprise whereas Amalgamation signifies blending of two or more existing undertakings into one undertaking, the blending companies losing their identities and forming themselves into a separate legal identity. Sometimes mergers are also confused with a term acquisition. However, acquisition is the generic term that is used to describe a transfer of ownership whereas merger is technical term for a particular legal procedure wherein two separate entities merge and only one legal entity survives the mergers. Thus, strictly speaking, acquisition will include mergers as well.
According to companies act, 1956, the term amalgamation includes ‘absorption’. The learned judge refers to amalgamation as “a state of things under which either two companies are joined so as to form a third entity or one is absorbed into or blend with another”. Absorption is the combination of two or more companies into an existing company is known as ‘absorption’. In absorption all companies expect one go into liquidation and lose their separate identities.
3. Importance of Amalgamation:
There is a lot of literature that has been written on the subject of why a company should go for M&A actively. Alternatively, the question is also that what is the significance, from a micro-economic perspective, of M&A. According to the researchers, the following are the main advantages and disadvantages for a concern to indulge into M&A activity:
3(a).Synergy in operating economics: When two or more undertakings combine their resources and efforts they may with combined efforts produce better result than two separate undertakings because of the savings in operating costs i.e. combined sales officers, staff, staff facilities, plant management etc.
3(b).Taxation advantages: Mergers take place to have benefits of tax laws and company having accumulated losses may merge with profit earning company that will shield the income from taxation. 
3(c).Other advantages: Amalgamation also offers other advantages like growth, diversification, production capacity reduction, operating efficiencies, procurement of supplies, financial strength.
4. Capital gain and amalgamation:
Under the Income Tax Act, in order for there to a capital gain incidence there has to ‘transfer’ of capital assets. The express use of the terminology of the ‘transfer company’ and ‘transferee company’ under Company Law gives the apparent impression that an amalgamation involves transfer of the assets and liabilities of the business undertaking and the transferor is the amalgamating company, while the transferee is the amalgamated company.
Several jurists hold similar view and rule out the incidence of capital gain tax. The argument is that the transfer of assets of Company A cannot be regarded as a transfer by its shareholders and that an allotment by Company B to the former shareholders of Company A cannot be said to be exchange or transfer. Furthermore, the mergers do not involve ‘relinquishment of the assets’ because relinquishment postulates the continued existence of the asset over which the rights of its holders are relinquished or surrendered, whereas in amalgamation the shares in the transferor company cases to exist only. Section 2(47) refers to the extinguishment of any rights in the capital asset and not the extinguishment of the capital assets.
5. Capital expenditure of the amalgamating company:
In the amalgamation companies the issue regarding the exertion under several heads of income and assets arises. One such often debated head is that of the capital expenditure of amalgamating company. In this regard, section 35 has been in acted which have gone through several amendments often reflecting the industrial policy. However, in this regard, the Act creates two exceptions wherein provisions under section 35(2) (ii) and (iii) have been excluded out of the purview of such a deduction in case of amalgamation.
Under the proviso to section 32, depreciation in respect of buildings, machinery, plant or furniture, being tangible assets or know -how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial right of similar nature being intangible assets, shall be available to the amalgamated company. However, the Finance Act, 1996 has inserted a proviso to section 32, whereby the total depreciation allowable to the amalgamating company and the amalgamated company cannot exceed the normal depreciation allowable under the Act of the amalgamation had not taken place. The deduction shall be appointed between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were by them.
6. Legal Procedures for Merger, Amalgamations and Take-over:
The basis law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly deal with the compromise and arrangement with creditors and members of a company needed for a merger. Section 391 gives the Tribunal the power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. Section 392 gives the power to the Tribunal to enforce and/ or supervise such compromises or arrangements with creditors and members. Section 393 provides for the availability of the information required by the creditors and members of the concerned company when acceding to such an arrangement. Section 394 makes provisions for facilitating reconstruction and amalgamation of companies, by making an appropriate application to the Tribunal. Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the majority.
And Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the companies alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal with the procedures and the requirements to be followed in order to effect amalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central government in the matter of bringing about amalgamations of companies.
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 resources, 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.
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 façade 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. Therefore, it is ripe time for business houses and corporate to watch the Indian market, and grab the opportunity.
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 Cartwright & Cooper, 1994, p. 49.
 S. Chakravarthy, “two heads better than one” Business line (June 17, 2002)
 From a judicial point of view, the meaning of ‘amalgamation’ on contradistinction has been explained by Justice Buckley in Wild vs. South African supply and Cold Storage Company.
 The term has also been defined in Central India Industries vs. CIT, (1975) 99 ITR 211 as 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. However, in Patrakar Prakashan Pvt. Ltd, in Re, (1997) 13 SCL 33 (MP), the court clearly held the definition given in the Income Tax Act is for the purpose of the Act only and is thereby limited in scope.
 See: Cross-border Merger and Amalgamation on www.nishitdesai.com.
 A combination of two or more companies into an existing company is known as ‘absorption’. In absorption all companies expect one go into liquidation and lose their separate identities
 In SS Somayajula v. Hop Prudhommee and co. ltd.
 See: Alan J. Auerbach ET. al., the effect of taxation on the Merger Decision, NBER Working Paper no. 2192 (University of Cambridge, Massachusetts) and Alan J. Auerbach ET. al., Texes and the Merger Decision: An Empirical Analysis, NBER Working Paper no. 1855
 See: J. Fred Watson ET. al., Takeovers, Recostructing & Corporate Governance 13 (3rd ed., Pearson Education Asia, New Delhi, 2002)
 Section 72A of the Income Tax Act provides this incentive.
 The word transfer is defined as ‘ the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. [Section 2(47)].
 See: Section 45 of Company Act.
 For a critical analysis of the salient issues in this regard see, R. Santhanam, Does an Amalgamation Invilves ‘Transfer’?”
 N. A. Palkhiwala ET. al., Kanga and Palkhiwala’s Law and Practice of Income Tax (Mumbai: N. M. Tripathi Pvt. Ltd., 1987)
 See: R. Santhanam, Does an Amalgamation attract Tax of Capital Gains”, (1985)
 Section 35(5) provides that: In pursuance of an agreement of amalgamation, if the amalgamation company transfers to the amalgamated company, any assets representing capital expenditure on scientific research, the provisions of section 35 of the Act will apply to the amalgamated company a they would have applied to the amalgamating company if the letter had not transferred the asset.
 Proviso no. 5 to section 32 of the Act provides for the provisions regarding depreciatin in case of amalgamation. This is also gone through certain changes by virtue of the Finance Act of 1999.
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