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Explain the concept of amalgamation
Amalgamation is the process of combining two or more companies into a single company or absorption of one company by another.
In absorption, bigger companies take control over smaller companies. The main difference between an amalgamation and a merger is that in amalgamation, neither of the companies exists. A new company is formed and both company's assets and liabilities are combined.
Types
The types of amalgamation are as follows −
- Merger
In this, in addition to assets and liabilities, shareholder's interest and business are pooled.
The book adjustments are needed, if they want to carry the same business.
- Purchase
In this, shareholders do not have proportionate equity shares in the new company or if they do not want to continue the old business. This method is preferred if conditions for method one are not satisfied.
Reasons
Amalgamation is used due to following reasons −
- Tax benefits.
- Less risk by diversification.
- Decrease competition.
- Finance strength.
- To grow.
- Increase cash.
Procedure
The procedure for amalgamation is as follows −
- Board of directors of amalgamating companies will finalise the terms of amalgamation.
- This report is submitted to the high court.
- Approval of The Securities and Exchange Board of India (SEBI).
- New shares are issued to the shareholders.
- Old company is liquidated and assets and liabilities are transferred to the new company.
Accounting
- Pooling of interest method − Assets, liabilities and reserves are recorded by the transferee company at existing amounts.
- Purchase method − Assets, liabilities are recorded at fair value at amalgamation date.
Computation
- Net asset method − Total assets (fair value) − liabilities = transfer of amount.
- Payments method − Both equity shareholders and preference shareholders are paid in various ways.
Advantages
The advantages of amalgamation are as follows −
- Increase in research and development.
- Stability in prices.
Disadvantages
The disadvantages of amalgamation are as follows −
- Increase in debt.
- Unemployment increases.
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