AmalgamationsMerger

What is merger/ amalgamation/

Not defined under the Companies Act, 1956 What is defined under Companies Act? Arrangement- includes a re-organisation of the share C apital of p the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods

What is defined under Income Tax Act? Amalgamation [sec. 2(1B)] Demerger [2(19AA)] Meaning of the terms in common parlance: Amalgamation - combination of two or more independent business corporations into a single enterprise Demerger transfer and vesting of an undertaking of a company into another company Reconstruction- re-organisation of share capital in any manner; varying the rights of shareholders and/or creditors Arrangement- All modes of reorganizing the share capital, including interference with preferential and other special rights attached to shares

Regulatory Framework
Applicable Indian Laws Companies Act, 1956 [Sec 391-394] Listing Agreement Accounting Standard 14 SEBI Takeover Code (in case of acquisition by/of a listed company) Company Court Rules FEMA (in case of merger of companies having foreign capital) Competition Act, 2002 Income Tax Act, 1961
Indian Stamp Act

Accounting standard 14 Accounting for Amalgamations

Amalgamation in the nature of merger is one which satisfies the following conditions: All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. Shareholders not less than 90 percent 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 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 indeed to be made to the books value 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 the accounting policies.

Amalgamation in the nature of purchase is defined as an amalgamation which does not satisfy any one or more of the conditions specified above.

Income-Tax Act, 1961 (Act) defines amalgamation as sec 2(1B)

Amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that::

all the property of the amalgamating company or companies 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; shareholders holding not less than three-fourths(75%) in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation,

and not as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company; Thus, the satisfaction of the above conditions is necessary to ensure tax neutrality of the amalgamation.

IT ACT-75 % shareholders
Amalgamation through merger for preferred tax treatment. Amalgamation through purchase as normal commercial transaction.

AS 14-90% shareholders

Horizotional mergers-same lines of business Vertical merger synergies through value chain RIL

Reliance petrolum

Methods of Accounting

The pooling of interests method (for Amalgamation in the nature of merger) The assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts Reserves of the transferor company appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company.

The balance sheet of the combined entity is arrived at by a line by line addition of the corresponding items in the balance sheets of the combining entities. No asset write-up or write-down. No goodwill.

The purchase method (for Amalgamation in the nature of purchase)

The transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation There is no question of bringing to the books of the transferee the profits/reserves of the transferor The amount of the consideration is deducted from the net assets of the transferor company acquired by the transferee company and the difference, if any, is debited to goodwill or credited to Capital Reserve, as the case may be. Goodwill arising on amalgamation is treated as an asset and amortized over a period of five years.

AS 14

The transferor and the transferee companies have conflicting accounting policies, a uniform accounting policy must be adopted following the amalgamation. Treatment of Reserves on amalgamation.
Amalgamation in the nature of a merger- the identity of the reserves is prescribed and they appear in the financial statements of the transferee company in the same form in which they appeared in the statements of the transferor company.

Balance in the profit and loss account

Amalgamation in the nature of merger- the balance in the profit and loss account appearing in the financial statement of the transferor company is aggregated with the corresponding balance appearing in the financial statement of the transferee company. An alternative method is also provided to transfer it to the General Reserve, if any. Amalgamation in the nature of purchase- balance in the profit and loss account appearing in the financial statement of the transferor company, whether debit or credit, loses its identity.

Standard prescribed certain disclosure to be made in the first financial statements following the amalgamation : Names and general nature of business of the amalgamating companies, Effective date of amalgamation for accounting purposes, The method of accounting used to reflect the amalgamation, Description and number of shares issued, together with the percentage of each companys equity shares exchanged to effect the amalgamation The amount of difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

1. 2. 3. 4.

5.

Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party, Disclosure should be made in accordance with AS 4, Contingencies and Events Occurring After the Balance Sheet Date, The amalgamation should not be Incorporated in the financial statements.

Additional requirements for Listed Companies- clause 24

File the scheme with the SE, for approval, at least a month before it is presented to the Court Explanatory statement u/s 393 should contain pre and post-arrangement or amalgamation (expected) capital Structure shareholding pattern Obtain fairness opinion from an Independent merchant bankers on valuation of assets / shares done by the valuer While submitting the scheme with the SE, also submit an auditors certificate to the effect that the accounting treatment contained in such schemes is in compliance with all the applicable Accounting Standards (added vide Amendment dated April 5, 2010)

Legal/ Statutary approvals

Sections 391 to 394 of the Companies Act, 1956 1. Shareholder approval-75% of the shareholders 2. Creditors/Financial Institutions/Banks approval 3. High Court approvals 4. Reserve Bank of India approval 5. SEBI's Takeover Code for substantial acquisitions of shares in Listed companies

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