Amalgamation

What is Amalgamation?

Amalgamation is a process in which two or more companies come together with all their resources, assets, and liabilities to make a new entity. It is different from the merger or acquisition because in this, only one company survives, but in amalgamation, it forms a completely new organization.

The amalgamation meaning in accounting, is the consolidation of the financial statements of both companies. In the process of amalgamation, neither of the involved companies continues to exist as a legal entity. They lose their individual legal persona to create a new legal entity.

The common reasons to do the amalgamation are:

• Expand the reach in the market.
• To diversify the operations.
• To increase the competition in the market.
• To increase efficiency by pooling the resources. 

Working of Amalgamation

Here is the process of how the amalgamation works:

1. Proposal and Approval

• It should be proposed by the boards of directors of the companies that are involved.

• Then, a detailed plan is made and submitted to the regulatory authorities for approval. These authorities include the High Court and the Securities and Exchange Board of India (SEBI). 

2. Forming a new entity

• After the approval of the proposal, the weaker company, known as the transferor, is absorbed into the stronger company, known as the transferee.
• Then, with all the assets, liabilities, and operations, a new entity is formed by them. 

3. Share Issuance

• Under some specific conditions, the shares in the new entity are provided to the shareholders of the transferor company. 

4. Liquidation

• The transferor company is liquidated by the authorities, and all its resources are absorbed by the new organization, which is formed. 

Types of Amalgamation

There are two types of amalgamation:

1. Amalgamation like a Merger

• In this type, the companies pool their resources, interests of the shareholders, assets, and liabilities. 
• The shareholders continue holding their stakes in the new entity, which has been formed. 
• Both companies have to follow and operate under the laws formed according to the new structure.

2. Amalgamation like a Purchase

• The shareholders of the transferor company are not able to meet the requirements for holding the stakes in the new entity.
• In such cases, the transferee company purchases the transferor company. It means only the shareholders of the transferee company own the stakes in the new entity. 

Advantages and Disadvantages of Amalgamation

In this section, the merits and demerits of amalgamation are discussed: 

Advantages of Amalgamation

• Diversification: With the help of diversification, the new entity could expand its activities and the range of services it provides to the customers, as it will have the combined sources of both companies.
• Improved Financial Conditions: As there will be a combination of the assets and liabilities of both companies, the financial condition of the new entity will improve. 
• Tax Advantages: As per the Income Tax Act, 1961, the new entity will help in saving taxes through a combination of assets. The market share of both companies after the amalgamation can increase. 
• Economies of Scale: With the amalgamation of companies, there will be a larger scale for the operations. It will also help in decreasing the cost and increasing the value of the stakes. 
• Improved Competitiveness: The new entity will be able to perform better in the market. The joint resources and strengths result in better positioning in the market. 

Disadvantages of Amalgamation

• Burden of Debt: It can increase the total liabilities of the new entity if one of the companies has more liabilities. It can also result in a loss because of the combined liabilities that exceed the possible profit from the combined assets.
• Behaviour of Monopoly: Amalgamation can result in a monopoly as more companies come together to get a hold of the market. It also removes the healthy competition amongst them. 
• Employment Loss: The amalgamation of the companies requires a limited labour force as compared to the two different companies. It will result in the loss of jobs, especially for the unqualified employees. 
• Problems in Integration: Many problems will arise in integrating the cultures of two companies. Operations and management are also not easy after the integration. 
• Fewer consumer choices: The amalgamation of two similar types of companies would result in fewer products and also in reduced consumer choices in the market.