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“Amalgamation occurs when two or more companies are joint to form a third entity or one is absorbed into or blended with another.”  Explain and illustrate.


Amalgamation means merger of two or more companies into one new or existing company. Absorption, on the other hand, refers to acquisition of business of one company by another company. The main aim of any company is to make profit, and always a company establishes and goes on with a view of making profit. Whenever a company finds it difficult to run by itself or it wants to merge with other company for more profit amalgamation occurs. There is a difference between amalgamation and merger, merger is jointing of two companies like “Sonyericsson” and amalgamation is joining of two companies and starting a third identity. it seems that legally there is no difference between amalgamation and absorption of companies. According to the Accounting Standard 14, “Accounting for Amalgamations”, amalgamations fall into two broad categories. In the first category are those amalgamations where there is a genuine pooling not merely of the assets and liabilities of the two companies but also of the shareholders’ interests and of the businesses of these companies. Such amalgamations are kn54own as “amalgamation in the nature of merger”. The second type of amalgamations are those which are in effect a mode by which one company acquires another company and as a consequence the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company or the business of the company which is acquired is not intended to be continued. Such amalgamations are known as “amalgamation in the nature of purchase.” Therefore, it can be said that amalgamations include absorption.

Procedure for amalgamation

The beginning to amalgamation may be made through common agreements between the transferor and the transferee but mere agreement does not provide a legal cover to the transaction unless it carries the sanction of company court for which the procedure laid down under section 391 of the Companies Act should be followed for giving effect to amalgamation through the statutory instrument of the court’s sanction. Although chapter V of the Companies Act, 1956 comprising sections 389 to 396-A deals with the issue and related aspects covering arbitration, compromises, arrangements and reconstructions but at different times and under different circumstances in each case of merger and amalgamation application of other provisions of the Companies Act, 1956 and ruled made there-under may necessarily be attracted. So, the procedure does not remain simple or literally confined to chapter V. The procedure is complex, involving not only the compromises or arrangements between the company and its creditors or any class of them or between the company and its members or any class of them but it involves, safeguard of public interest and adherence to public policy.

Steps for merger and amalgamation

Once the merger partner has been identified and terms of merger are settled the procedure summarized in Appendix III can be followed. An explanation to the said steps is given below:

1) Scheme of amalgamation. The scheme of amalgamation should be prepared by the companies, which have arrived at a consensus to merge. There is no specific form prescribed for scheme of amalgamation but scheme should  generally contain the following information:

  • Particulars about transferee and transferor companies
  • Appointed date
  • Main terms of transfer of assets from transferor to transferee with power to execute on behalf or for transferee the deed or documents being given to transferee.
  • Main terms of transfer liabilities from transferor to transferee covering any conditions attached to loans/debentures/ bonds/other liabilities from bank /financial institution/ trustees and listing conditions attached there.
  • Effective date when the scheme will come into effect
  • Conditions as to carrying on the business activities by transferor between ‘appointed date’ and ‘effective date’.
  • Description of happenings and consequences of the scheme coming into effect on effective date.
  • Share capital of Transferor Company specifying authorized capital, issued capital and subscribed and paid up capital.
  • Description of proposed share exchange ratio, any conditions attached thereto, any fractional share certificates to be issued, transferee company’s responsibility to obtain consent of concerned authorities for issue and allotment of shares and listing.
  • Surrender of shares by shareholder of Transferor Company for exchange into new share certificates.
  • Conditions about payment of dividend, ranking of equity shares, pro rata dividend declaration and distribution.
  • Status of employees of the transferor companies from effective date and the status of the provident fund, gratuity fund, super annuity fund or any created or existing for the benefit of the employees.

(2) Approval of Board of Directors for the scheme

Respective Board of Directors for transferor and transferee companies are required to approve the scheme of amalgamation.

(3) Approval of Registrar of High Court to notice for calling the meeting of members/ creditors

Pursuant to the directions of the Court, the transferor as well as the transferee companies shall submit for approval to the Registrar of the respective High Courts the draft notices calling the meetings of the members in Form No. 36 together with a scheme of arrangements and explanations, statement under section 393 of the Companies Act and form of proxy in Form No. 37 of the Companies (Court) Rules to be sent members along with the said notice. Once Registrar has accorded approval to the notice, it should be got signed by the Chairman appointed for meeting by the High Court who shall preside over the proposed meeting of members.

(4) Approval of the scheme by specialized financial institutions/banks/trustees for debentures holders

The Board of Directors should in fact approve the scheme only after it has been cleared by the

financial institutions/banks, which have granted loans to these companies or the debenture trustees to avoid any major change in the meeting of creditors to be convened at the instance of the Company Court’s under section 391 of the Companies Act, 1956.


The steps for merger or amalgamation discussed above are not the only considerations effecting merger but in addition to the above and in relation thereto a number of special formalities are also complied with which have been covered in detail in specific chapters like share valuation and exchange ratio, accounting aspects of funding of reorganization plans, etc. These aspects have been given treatment under different chapters. Readers may refer to relevant chapters in the matter of drafting the scheme of amalgamation, carrying out valuation of the assets of the companies, calculating share exchange ratio, etc. wherever felt necessary.



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