What do you understand by amalgamation of companies?

What do you understand by amalgamation of companies? merits and demerits of amalgamation.

Ans.

MEANING OF AMALGAMATION

In general term, when two or more companies engaged in similar nature of business join together and form a new company for running the business is called “amalgamation of companies”. But now this concept has been classified in two broad categories:

In the first category, the assets and liabilities of transferor company is taken over by the transferee company but it maintains the interests of shareholders of transferor company and the assets, liabilities, capital and reserves are to be incorporated in the accounts of transferee company. This type of amalgamation is called as “merger”.

In the second category the assets and liabilities of transferor company are taken over by the transferee company which results in closing down business of the transferor company and the shareholders of transferor company do not have any interest in the capital of transferee company. This type of amalgamation is known as “purchase”.

DEFINITIONS

Under AS-14 the definition of different words is as follows:

Amalgamation: Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 2013, or any other statute which may be applicable to companies, in which two or more companies amalgamate with each other and maintain their identity.

Tr’ansferor Company: Transferor company means the company which is amalgamated into another company. It was known as vendor company prior to this standard.

Transferee Company: Transferee company means the company into which a trans-feror company is amalgamated. It was known as purchaser company prior to this standard.

Reserve: Reserve means the portion of earnings, receipts or other surplus of any company (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.

Consideration: Consideration for the amalgamation means the 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.

Fair value: Fair value is the amount for which an asset could be exchanged by the mutual consent of both the companies.

MERITS OF AMALGAMATION

(1) Competition is over: When two or more companies doing the same business are in the market then competition is natural but after amalgamation they do not compete with each other.

(2) Economic: When two or more companies join together then most of the expenses are reduced like management expenses, establishment expenses etc. This reduces the expenses of the companies.

(3) More production: When two or more companies amalgamate the production at large Scale becomes possible which increases the production.

(4) Services of experts: When two or more companies amalgamate then it is possible to obtain the services of experts which is not possible in individual status because of high Remuneration of the experts, but it is possible in case of amalgamation.

(5) Control over market: By amalgamation of two or more companies it is possible to control the market because the contribution in total supply of goods in the market is more of amalgamated companies.

(6) Others: The amalgamated companies get all other advantages of combination as it is a form of combination.

(7) Control on business: When two or more companies doing the same business amalgamate then similar trade policies and working are adopted, therefore the trade is controlled.

(8) More capital: The amalgamation of two or more companies can result in more capital, therefore financial problem may not arise.

(9) Easy in distribution: After amalgamation the distribution of products becomes easy because every company is not required to maintain separate distribution channel.

(10) Safeguard in public interest: Sometimes it is difficult for a company to run individually, then the central government can force such companies to amalgamate according to Section 237 of the Indian Companies Act, 2013. For this purpose the government is required to issue orders in the gazette. Thus public interest can be safe guarded.

DEMERITS OF AMALGAMATION

(1) Non-Cooperation: By amalgamation of companies the management of both companies work together, therefore unless they have co-operative attitude there may be difference of opinion which may create non co-operation between them. It can retard the growth of the business.

(2) Managerial Problem: By amalgamation of two or more companies the size of the business is increased. Under such conditions sometimes it becomes difficult to manage a large concern efficiently due to limited managerial capacity of the managers.

(3) Over capitalization: By amalgamation the total capital increases while most of the expenditures is reduced, therefore it may not be possible to utilize all the funds. Therefore problem of over capitalization can be created which is difficult control.

(4) Disadvantages of large production: The amalgamated companies may also require to face the problem of large scale production which may be problem proper distribution, problem of labour, problem of taxation, problem of over production and degradation in quality of products. ete;

(5) Control over supply: Amalgamated concern may try to exploit the customers by creating artificial scarcity of supply in the market. It may create problems to the consumers.

(6) Harmful for small traders: By amalgamation the companies can control over expenditures and market by reducing the price which may create problem to small traders because they can not compete with big companies.

(7) Increase in price: The amalgamation is a form of combination which restricts Competition, therefore monopoly attitude can be adopted by such concern. It may charge higher prices from the customers because of having control over market.