Amalgamation Services

When multiple entities combine or unite together to form one separate entity, it is called amalgamation. Amalgamation is a measure for two competing companies to avoid completion among themselves and offer more to the market. This is done for the mutual benefit of the companies in question. 


Amalgamation is said to be an arrangement between two companies for their benefit and to curb completion between them. Two or more companies come together to form a new company or a subsidiary of any one company.

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In amalgamation, two or more companies combine into one by merger or by one taking over the other. Thus, the term amalgamation contemplates two kinds of activities, namely:

  • A new company is formed by joining two or more companies
  • Blending and absorption of one by the other.

The main aim of companies to combine is to secure various benefits like expansion, increasing efficiency, avoiding competition, economies of large scale production.

The merged company is called vendor company or transferor company or amalgamating company while the new company formed for amalgamation is called transferee company or vendee company or .amalgamated company.

The transferee company acquires all the assets and liabilities of the transferor company.

The Accounting standard 14 – Accounting for amalgamations recognizes two types of amalgamation:

Amalgamation in the nature of merger

In this type of amalgamation, along with assets and liabilities, shareholder’s interest and business of the companies are also amalgamated. All the following conditions should be satisfied:

  • All the assets and liabilities of the transferor company are transferred to the transferee company.
  • Shareholders of transferor company having face value not less than 90% are transferred to the transferee company
  • The consideration for amalgamation is essentially discharged by the issue of equity shares in the transferee company, except for cash is paid for fractional shares.
  • The transferee company intends to carry on the business of transferor company
  • No adjustment is made to the book value of the assets and liabilities of the transferor company when amalgamated in the financial statements of the transferee company. However, to adhere to the accounting policies some exceptions may be there.


Amalgamation in the nature of the purchase

If any of the conditions set for amalgamation in the nature of the merger are not satisfied, so then the amalgamation that gets conducted is known as amalgamation in the nature of the purchase. In this kind of amalgamation neither the equity, shareholders continue to be shareholders in the new company nor the business of the transferor company is continued.

The purchase consideration is defined as, 

“aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.”

It is actually the payment made by the transferee company to the transferor company for the purchase of the business. Purchase consideration however does not include any direct cash paid to the creditors or debenture holders. Also same applies to any liability not taken over by the transferee company.

When some potential additional amount is ascertained then it needs to be included in the calculation of purchase consideration.

There are two main methods of accounting for amalgamation namely:

The pooling of Interest method

This method is applied in amalgamation in the nature of the merger. Under this method, the assets, reserves, liabilities of the transferor company are taken over by the transferee company at the existing carrying amount. The only adjustment is done to comply with the difference in accounting policies. Thus the difference of amount between the share capital of the transferor company and the share issued by transferee company is adjusted in reserves


Purchase method

This method is applied in amalgamation in the nature of the purchase. The assets and liabilities are either incorporated at their existing carrying value or the purchase consideration is allocated to each asset and liability on the basis of the fair value dated the amalgamation date.

No reserves other than the statutory reserves are incorporated in the financial statements of the transferee company.

Any positive difference between the purchase consideration and the net assets transferred is recorded as Goodwill while the shortfall is shown as capital reserve. The goodwill is normally amortized over a period of 5 years.

Various reasons for amalgamation are listed below:

  • For acquiring cash resource requirement
  • Amalgamation is proved to be boon for competing companies
  • Tax saving benefits also arise due to amalgamation
  • Large scale operations are possible with additional resources through amalgamation
  • Shareholders value is increased
  • Risk of diversification is reduced
  • Effectiveness and efficiency of management increases
  • Financial growth is achieved
  • The operating cost can be reduced
  • Prices of the goods come to a point of stability
  • The board of directors and top management discuss and decide the terms for amalgamation. VJM & associates LLP help the management to foresee the business opportunities or threat in such amalgamation
  • Approval of the specific High court is required for the amalgamating scheme. VJM & Associate LLP assist for all the legal formalities regarding the same.
  • Approval of shareholders and that of SEBI is also required for the amalgamation process
  • A new company is formed and the issue of shares as per the calculation is done to the shareholders of the transferor company. This calculation is a complicated process and requires an expert knowledge application which is efficiently done at VJM & Associates LLP
  • Liquidation of transferor company and simultaneous taking over by transferee company happens. It is essential to value the asset and liabilities of the transferor company in this amalgamation process. We at VJM & associates LLP assure you the calculation to be fair and meticulous
  • The purchase consideration forms an integral part of the whole amalgamation process. This calculation has to be such that it is cost-effective to both the company. At VJM & associates LLP, we have a dedicated and expert team for calculation of Purchase consideration which is closely monitored by the team head

Though Amalgamation proves to be beneficial in most of the cases, it can also have its own threats like the elimination of healthy competition, additional debt, unfavorable monopoly, etc. Also, the identity of the transferee company is lost.

Before taking the step of amalgamation, all the possible opportunities and threats of the business should be analysed effectively.