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Amalgamation - Merger - TakeOver of Companies, Business

Amalgamation as defined in section 2(IB) of the income tax act 1961 is coming together of two or more companies with the aim of forming a new company. The proceedings undertaken are the same except that the surviving entity incorporates the asset base of other into its base. The shareholders of the respective companies will now be identified as shareholders of the new amalgamated company. It has gripped the world lately and is an excellent move in formation of a strong, stable and broad company. The initiatives are undertaken mutually for the expansion and growth of the company. The amalgamation may be preferred in the following cases:

  • For expansion of the business or operations of a company
  • For effective and economic handling of the business activities
  • For achieving the targeted goals like growth and success efficiently
  • For Elimination of competition between the companies
  • For potential utilisation of economic, financial and technical resources
  • It may be preferred in case of public interests (by the Central Government in exercise of the powers conferred by section 396).

A company having vulnerable nature may prefer Amalgamation company as security backup. Walking by the phrase “union is strength” the companies adopt potential measures.

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What is Amalgamation?


Amalgamation is defined as the combination of one or more companies into a new entity. It includes:

  1. Two or more companies join to form a new company
  2. Absorption or blending of one by the other

Thereby, amalgamation includes absorption.

However, one should remember that Amalgamation as its name suggests, is nothing but two companies becoming one. On the other hand, Absorption is the process in which the one powerful company takes control over the weaker company.

Generally, Amalgamation is done between two or more companies engaged in the same line of activity or has some synergy in their operations. Again the companies may also combine for diversification of activities or for expansion of services

Transfer or Company means the company which is amalgamated into another company; while Transfer Company means the company into which the transfer or company is amalgamated.

Existing companies A and B are wound up and a new company C is formed to take over the businesses of A and BAmalgamation
Existing company A takes over the business of another existing company B which is wound upAbsorption
A New Company X is formed to take over the business of an existing company Y which is wound up.External reconstruction

How is Amalgamation different from a Merger?


Amalgamation is different from Merger because neither of the two companies under reference exists as a legal entity. Through the process of amalgamation a completely new entity is formed to have combined assets and liabilities of both the companies.

Types of Amalgamation
  1. Amalgamation in the nature of merger:

    In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transfer company. In this case, the business of the transfer or company is intended to be carried on after the amalgamation. There are no adjustments intended to be made to the book values. The other conditions that need to be fulfilled include that the shareholders of the vendor company holding at least 90% face value of equity shares become the shareholders’ of the vendee company.

  2. Amalgamation in the nature of purchase:

    This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied. Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is acquired normally do not continue to have proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.

If the purchase consideration exceeds the net assets value then the excess amount is recorded as the goodwill, while if it is less than the net assets value it is recorded as the capital reserves.