Prepared By: Yash Jain

Registration No. 240155665/09/2013

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 PREFACE
As per the Company Secretaries Regulations, 1982, a Trainee is required to prepare a Project
Report in the Final Quarter of his/her training period. The said project report should be
prepared in consultation with the Company Secretary/ies under whom he/she has trained.

Keeping in view this requirement, I have prepared this project report under the guidance of
my seniors and colleagues at Vaish Associates Advocates. The topic chosen by me has had a
significant impact in the current corporate scenario. Also, with the relaxation in the Foreign
Exchange Policy of the Government of India, the repeal of the Foreign Exchange Regulation
Act, 1973 and the introduction of the Foreign Exchange Management Act, 1999, there has
been a sudden inflow of Foreign Collaborators and other foreign companies which not only
set up shop in India, but also later on amalgamate with the Indian collaborated company.

In previous company law i.e. Companies Act, 1956 the power to sanction the scheme of
compromises and arrangements were laid upon the High Court of the state in whose
jurisdiction the registered office of the company involved in the scheme of arrangement is
situated and on the commencement of Companies Act, 2013 the power to sanction the
scheme of arrangement has been shifted upon a specialized authority which is National
Company Law Tribunal (“NCLT”) and an appellate authority has been constituted which
National Company Law Appellate Authority.

The Project Report has been prepared by me after taking into consideration all the possible
areas which may have an impact on amalgamations and mergers, such as the Companies Act,
2013, Income Tax Act, 1961, Central Excise Rules, 1944, the Accounting Standards issued
by the Institute of Chartered Accountants of India, the Foreign Exchange Management Act,
1999 and the Regulations framed by the Reserve Bank of India thereunder, SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 and the Industrial Policy
framed by the Government of India.

The said Project has been prepared after referring various Books on the topic and the
Statutory Legislations enacted by the Parliament.

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 ACKNOWLEDGEMENT
This project is a compilation of the constant endeavor to learn while working and training,
while pursuing a professional course such as the Company Secretaryship. At the outset I
would like to express my sincere acknowledgement to the team of Vaish Associates
Advocates, who has always trained me with great enthusiasm and sincerity.

Further, I would also like to express my gratitude to my professional colleagues at work who
have always helped me while I was pursuing my apprenticeship training.

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 METHODOLOGY
The Training Project Report has been prepared by following a “learn while you work”
approach. The project has been prepared primarily by referring to various reference books,
professional journals, various bare acts of the statutory legislations, reference to various case
laws.

The basic approach in the preparation of this project has been the constant reference to
various professional journals and the ever changing corporate and fiscal legislations as well
as discussion with my fellow professional colleagues.

The best of efforts have been made to make this project as lucid and simple as possible.
Reference to the relevant sections of corporate and fiscal legislations and case laws has been
made at appropriate places to explain the relevant topics thoroughly.

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 TABLE OF CONTENTS

S. No. Particulars Page No.

1. Introduction and Background 6
2. Amalgamations & Mergers – Meaning, Nature & Types 8
Provisions for Amalgamations, Mergers and Acquisitions
under the Foreign Exchange Management Act, 1999 and
the Regulations framed thereunder.
3. Mergers, Amalgamations & De-mergers under the Income 15
Tax Act, 1961 and Tax Benefits available thereunder.
4. Benefits available under the CENVAT Scheme of the 27
Central Excise Rules, 1944
5. Conclusion 28
6. Bibliography 30

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 INTRODUCTION

AMALGAMATION/ MERGER
The Indian Economy is fast changing to adapt itself to the Global Economy and to bring in
foreign capital by relaxing the exchange control norms. This has witnessed new companies
emerging in the corporate scenario either from existing companies or by the floatation of new
companies. It was showed from an article published by the Financial Express that, as on
October 16th, 2018 there were total 17.95 lakhs registered companies.1 However, the
amalgamation of companies as well as the merging of various corporate bodies has been on
the rise recently. However, the completion of amalgamation of two or more companies may
take 6 months to 1 year or even more than one year, as the process of amalgamation is
tedious and elaborate due to the various statutory compliances that have to be adhered to in
the process, such as obtaining the approval of the shareholders of the amalgamating as well as
the amalgamated company. Further, acquisition of shareholding and takeover of companies
has been made possible, but under the supervision of the Securities and Exchange Board of
India. Recently in order to make India a 5 trillion dollar economy in upcoming 6 years, the
Finance Minister of India Mrs. Niramala Sitharaman on August 30th, 2019 announced the
amalgamation of 10 public sector banks into four big banks namely bringing down the total
number of Public Sector Banks in the country to 12 from 27 banks in 2017, upon the
effectiveness of the said amalgamation the central government of India will infuse Rs. 55,000
crores in the public sector banks (including the amalgamated banks) and the names of the
merging banks are as under:2

Punjab National Bank + Oriental Bank of Commerce + United Bank

Canara Bank + Syndicate Banks
Union Bank of India + Andhra Bank + Corporation Bank
Indian Bank + Allahabad Bank

At the onset it is necessary to understand the meaning of the term ‘amalgamation’. It is

interesting to note that the Companies Act, 1956, has not defined the said term. However as
per common business parlance, the term ‘amalgamation’ is understood as the process by
which the undertakings of two or more companies are brought under the ownership of one
company, which may be one of the amalgamating companies or may be a new company
altogether, formed for the purpose of amalgamation. Thus, amalgamation is the blending of
substantially two or more undertakings into one undertaking the shareholders of each
blending company becoming substantially the shareholders of the company which holds the
blended undertakings. Amalgamation may be in the nature of purchase or by the pooling of
interest method. These methods have been discussed in detail later on at the appropriate
places.

The term ‘merger’ is just an extension of the process of amalgamation. In a ‘merger’ two or
more companies merge their entities and the acquiring company takes over all the assets and

1
https://www.financialexpress.com/industry/mca-data-63-of-17-95-lakh-registered-companies-in-india-active-
in-august/1350518/
2
https://gradeup.co/bank-merger-list-india-i and
https://economictimes.indiatimes.com/markets/stocks/news/mega-bank-merger-pnb-obc-and-ubi-to-be-merged-
to-form-2nd-largest-bank/articleshow/70909726.cms

6
liabilities of the transferor company. Further, the consideration for amalgamation is received
by the equity shareholders of the transferor company in the form of equity shares in the
transferee company and in no other form (as per Accounting Standard 14, issued by the
Institute of Chartered Accountants of India). In a merger, the transferor company loses its
identity and it merges itself with the transferee company. Thus, the transferee company takes
over the transferor company and continues to remain in existence, which is not necessarily
the position in the case of amalgamation.

Amalgamations have been in vogue in the United States of America since a long time, but it
is only recently that the Indian corporate sector has realized the importance of amalgamations
and mergers in the process of corporate restructuring, diversification and expansion. The
main advantage of amalgamating two or more companies is that by acquiring the business of
the transferor company, the transferee company obtains possession of not only the assets of
the former, but also obtains the existing know how or may be able to capture a dominant
market share which was previously held by the transferor company. Amalgamation may also
be resorted to by a loss- making company by following the provisions of Section 72A of the
Income Tax Act, 1961, whereunder the accumulated losses and unabsorbed depreciation of
the amalgamating company can be set off against the profits of the amalgamated company
within a period of 8 assesssment years commencing from the relevant assessment year in
which the amalgamation took place. Further there are various provisions in the Income Tax
Act, 1961, whereunder the relevant losses, expenses, etc., of the amalgamating company are
allowed as deductions in computing the business income of the amalgamated company, such
as capital expenditure on family planning by the amalgamating company under Section
36(1)(ix) of the Income Tax Act, 1961, or amortization of preliminary expenses during the
relevant period after the incorporation of the amalgamating company under Section 35D of
the said Act.

Amalgamations and mergers also help to secure synergistic effects by merging of two entities
which may be able to function better together, than as individual entities. Synergy implies the
effect when a merged entity (comprising of two corporate entities) is able to function better
as such, rather than functioning individually, means the amalgamated entity or company will
become stronger than the entities prevalent before the merger. (2+2=5). The amalgamation of
two or more companies into one would result into saving of various costs such as:
1. Overlapping cost;
2. Labour cost;
3. Financing cost etc.

The importance of amalgamations and mergers in the fast-changing corporate scenario can in
no way be undervalued as it is of far reaching consequences. Mergers and Amalgamations
(more popularly known as M & As, for brevity sake in international legal and corporate
parlance) are now quite prevailing in the Indian Corporate Scenario. They help in
restructuring the corporate bodies as well as help in tapping previously untapped resources
and markets. They are a tool for economic and corporate growth as well as expansion.

It may thus be summed up that corporate mergers and amalgamations have come of age and
are an essential ingredient for successful corporate expansion and diversification as well.
They not only help in attaining synergistic effects, but also help in tapping the untapped
market potential. They are thus a key tool for corporate restructuring and growth. They are
thus a key tool for corporate restructuring and growth.

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DEMERGER
Demerger means the divorce of and entity. Demerger is a process whereby a companies is
divided into two or more separate companies. A demerger is a corporate restructuring in
which a business is broken into components, either to operate on their own, to be sold or to be
liquidated. A demerger allows a large company, such as a conglomerate, to split off its
various brands or business units to invite or prevent an acquisition, to raise capital by selling
off components that are no longer part of the business’s core product line, or to create
separate legal entities to handle different operations.3

The term demerger is not defined under the provisions of section 230 to 232 of the
Companies Act, 2013, but the demerger is defined under section 2(19AA) of the Income Tax
Act, 1961 as follow:
Section 2(19AA) “demerger”, in relation to companies, means the transfer, pursuant to a
scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (noe section
230 to 232 of the companies Act, 2013, by a demerged company of its one or more
undertakings to any resulting company in such a manner that—
(a) “all the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting company by
virtue of the demerger;

(b) all the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the resulting
company by virtue of the demerger;

(c) the property and the liabilities of the undertaking or undertakings being transferred
by the demerged company are transferred at values appearing in its books of account
immediately before the demerger;

(d) the resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis;

(e) the shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or, its subsidiary) become
shareholders of the resulting company or companies by virtue of the demerger,

Otherwise than as a result of the acquisition of the property or assets of the demerged
company or any undertaking thereof by the resulting company;

(f) the transfer of the undertaking is on a going concern basis

“Demerger in relation to companies, means the transfer of one or more undertakings by a

demerged company to any resulting company in a manner that all assets and liabilities in
respect to the demerged undertaking shall be transferred and vested into the said resulting
company”.

Let’s consider the some examples of demergers in India corporate scenario:

3
https://www.investopedia.com/terms/d/demerger.asp

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1. In the month of march, 2019 the Mumbai bench of National Company Law Tribunal had
approved the composite scheme of arrangement entered into IIFL Group of companies,
the said scheme inter-alia include the demerger of some undertakings of IIFL Holdinga
Limited in two resulting companies namely, IIFL Securities Limited and IIFL Wealth
Management Limited.

2. The composite scheme of arrangement between the Arvind Limited and its group
companies was approved by the Ahmedabad Bench National Company Law Tribunal,
where by the demerged undertaking of Arvind Limited was demerged with and into the
Arvind Fashions Limited and Anveshan Heavy Engineering Limited (the “Resulting
Companies”) and the Resulting Companies had sought listing of the shares issued by
them to the equity shareholders of the Demerged Company.

Now we should discuss the reasons of demerger:

i. Family settlement; (Partition of family Business) [e.g. Demerger of Reliance
Industries Limited into four different Companies];
ii. As a tool to protect the whole company from the hostile takeover attempt [e.g.
Demerger of Larsen & Toubro Limited into Ultratech Cement Ltd., was undertaken to
protect the Larsen and Toubro Ltd. From the hostile takeover attempt by the Grasim.].
iii. Rationalization of various business carried on by a single company.
iv. To run better utilization of resources for the growth of particular business.
v. Disinvestment.

The process of sanction of scheme of amalgamation and demerger in accordance to the

provisions of Companies Act, 2013 is exactly same except the last step. The last step in the
following scenarios would be:

(a) In case of amalgamation- the transferor company shall be dissolved without

confirming any process of winding up.

(b) In case of demerger- especially in case of partial demerger the transferor company
shall not be dissolved without confirming the process of winding up.

The process of sanctioning the scheme of amalgamation and demerger is discussed in the
report hereinafter.

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Amalgamations & Mergers – Meaning, Nature & Types.

 The term ‘amalgamation’ has not been defined anywhere in the Companies Act, 2013
even though the Act has provided for reconstruction and amalgamation of companies
under Section 230 to 232 of the Companies Act, 2013. In a layman’s parlance one can
understand that the term ‘amalgamation’ is a business terminology which indicates the
process by which two or more companies are brought under the ownership of one
company, which may be a new company altogether or may be one of the amalgamating
companies itself. The purpose of amalgamation may be to acquire the business of the
transferor company for the purpose of diversification, capturing a dominant market share
and reduction of competition, or to take over a loss-making company to set off its losses
against the profits of the transferee company and try to revive the same.

Section 230 - Power to compromise or make arrangements with creditors and

members
Section 231 - Power of Tribunal to enforce compromise or arrangement
Section 232 - Merger and amalgamation of companies
Section 234 – Cross Border Merger

 It is essential to differentiate the term amalgamation from the term ‘acquisition ’. In case
of the latter, there is a purchase by one company (referred to as the acquiring company) of
the whole or a part of the shares, or the whole or a part of the assets, of another company
(referred to as the acquired company) in consideration for the payment in cash or by the
issue of shares or other securities in the acquiring company or partly in one form and
partly in the other. The distinguishing feature of an acquisition is that the acquired
company is not dissolved and its separate entity continues to exist. In the case of
acquisition no company, whether the acquirer company or the target company, is
dissolved.

Merger and Amalgamation under Companies Act, 2013

 The process of amalgamation is quite a tedious one. It may commences with the
transferee company making an offer to the transferor company to acquire its
shareholding, valuation of the shares of the amalgamating company for the purpose of
issuing shares to the shareholders of the transferor company and ends with the process of
actually transferring the undertaking of the transferor company after obtaining the Court’s
sanction, if the amalgamation has been effected by a compromise or an arrangement, u/s
230 to 232 of the Companies Act, 2013. Since every scheme of amalgamation /
reconstruction inherently includes certain arrangements, therefore it is compulsory to
follow the procedure u/s 230 and 231 while complying with section 232. Section 232
doesn't have any independent existence apart from section 230 and 231. On the other
hand, section 230 and 231 do have their independent existence apart from section 232, i.e.
in the case of internal compromise class of creditors or members in the company.

 Under the provisions of Companies Act, 1956 the power to sanction the scheme of
amalgamation or demerger was vested into the High Court of the state where the
registered offices of the respective companies were situated, but under the provisions of

10
 Companies Act, 2013, the power of sanctioning the scheme of amalgamation is vested
into the National Company Law Tribunal (“NCLT”) in jurisdiction of which the
registered offices of the Companies involved in the scheme of amalgamation or
arrangement or demerger are situated. Rule 3 (2) of the Companies (Compromises,
Arrangements and Amalgamations) Rules, 2016 (hereinafter referred to as “CAA Rules”)
provides that where the registered offices of the companies are situated in the jurisdiction
of the same NCLT, than the said companies may file joint application to the NCLT. The
same kind of facility was not provided in the provisions of section 230 to 232 of the
Companies Act, 1956, but there were some judicial precedent of various High Courts that
the companies involved may file joint application, if the registered offices of all
companies are situated within the same state, such as by the Madras High Court in W.A.
Beardsell & Co.Ltd., and Mettur Industries Ltd., as well as in the case of Mohan
Exports India Ltd. vs. Tarun Overseas (Pvt.) Ltd. However the Ministry of Corporate
Affairs (Then Department of Company Affairs) had made a Circular dated 5th June, 1973
bearing No.14 of 1973, which stated that where both the companies are situated in the
same State and only one company moves the court under Section 391 of the Companies
Act, 1956, the other company may be made a party to the petition.

The following process clearly shows the connection between the provisions of section 230 Commented [YJ1]: Abhi photo dalni hai
and section 232 of the Companies Act, 2013:

The summarized process of the filing of application with the NCLT under section 230 to 232
of the Companies Act, 2013 is as follow: Commented [YJ2]: Abhi slide dalni hai, and elaborate the
process

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Where any listed company is involved in the proposed scheme of amalgamation than the
company is required to comply with the various provisions SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015.

Regulation-11:- Every listed entity shall comply with all securities laws.

Regulation-37:- The listed entity before filling the draft scheme of amalgamation/
arrangement before the National Company Law Tribunal (“NCLT”) under section 230-232
of the Companies Act, 2013, shall file the same to the stock exchanges where its shares are
listed, for obtaining Observation Letter or No-objection letter, before filing such scheme with
any NCLT.

The said Observation Letter or No-objection letter shall be valid for the period of Six month
from the date of issuance, i.e. the listed company shall undertake to file the draft scheme of
amalgamation/ arrangement with the NCLT within six months from the date of issuance of
Observation Letter or No-objection letter.

However the requirement of obtaining Observation Letter or No-objection letter shall not
applicable to scheme of amalgamation which provides for the merger of wholly owned
subsidiary(ies) with its holding company.

Filling of first motion application with the NCLT

 Application to the NCLT shall be in Form NCLT-1 of the National Company Law
Tribunal Rules, 2016 (“NCLT Rules”), and following documents are required t be
annexed:

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(i) Notice of admission in form NCLT-2, this document contains some of the very
important facts about the proposed scheme e.g. brief details of companies involved,
rationale of the proposed scheme, prayer or relief sought.
(ii) Affidavit verifying petition in form NCLT-6,
(iii) Draft scheme of amalgamation/ arrangement,
(iv) Latest audited financial statement of all companies,
(v) Provisional financial statement, if the last annual accounts of any of the merging
company relate to a financial year ending more than six months before the first
meeting of the company summoned for the purposes of approving the scheme,
(vi) Observation Letter or No-objection letter obtained from stock exchanges,
(vii) Board resolution passed meetings of the board of direction of companies involved,
(viii) List of shareholders and creditors of companies involved, etc.

Order of NCLT on the hearing of First Motion Application:

(i) Fixing the date, time and place of meeting,

(ii) Manner of voting,
(iii) Appointment of chairperson and alternate chairperson (they are generally
advocates),
(iv) Appointment of scrutinizer to scrutinize the process of voting (NCLT generally
appoint a Practicing Company Secretary as scrutinizer, etc.

NCLT may dispense the requirement of holding meetings of creditors, if companies have
obtained consent affidavits from their creditors holding 90% of the total debts of the
companies. NCLT may also dispensed the meetings of shareholders of the companies
involved, if they produce consent affidavits of the shareholders as well. In the Scheme of
arrangement between Jindal Poly Films Limited and Jindal Photo Imaging Limited in CA No.
97/ALD/2019, the Hon’ble NCLT Allahabad bench had dispensed the requirement of
convening the meetings of shareholder and creditors of Jindal Photo Imaging Limited, as it is
a wholly owned subsidiary of Jindal Poly Films Limited.

Where the scheme of amalgamation involve buy-back any securities, than it should be in
compliance of the provisions of section 68 of the Companies Act, 2018.

The tribunal, after satisfying itself that the procedure specified in sub-sections (1) and (2) has
been complied with, may, by order, sanction the compromise or arrangement or by a
subsequent order, make provision for the following matters, namely:—

(a) the transfer to the transferee company of the whole or any part of the undertaking,
property or liabilities of the transferor company from a date to be determined by the parties
unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise (i.e. vesting
of properties of the transferor company into the transferee company);

(b) Consideration- the allotment or appropriation by the transferee company of any

shares, debenture, policies or other like instruments in the company which, under

13
the compromise or arrangement, are to be allotted or appropriated by that company to or for
any person:

Provided that a transferee company shall not, as a result of the compromise or arrangement,
hold any shares in its own name or in the name of any trust whether on its behalf or on behalf
of any of its subsidiary company or associate companies and any such shares shall be
cancelled or extinguished (but before the commencement of Companies Act, 2013 a company
may hold its own shares as treasury stock, in Consolidated Coffee Limited vs. Arun
Kumar Aggarwal);

(c) Effect on legal proceeding of the transferee company- the continuation by or against
the transferee company of any legal proceedings pending by or against any transferor
company on the date of transfer;

(d) dissolution, without winding-up, of any transferor company (only in case of merger and
complete demerger);

(e) the provision to be made for any persons who, within such time and in such manner as
the Tribunal directs, dissent from the compromise or arrangement;

(f) where share capital is held by any non-resident shareholder under the foreign direct
investment norms or guidelines specified by the Central Government or in accordance with
any law for the time being in force, the allotment of shares of the transferee company to such
shareholder shall be in the manner specified in the order;

(g) the transfer of the employees of the transferor company to the transferee company;

(h) where the transferor company is a listed company and the transferee company is an
unlisted company,—

(A) the transferee company shall remain an unlisted company until it becomes a listed
company;

(B) if shareholders of the transferor company decide to opt out of the transferee company,
provision shall be made for payment of the value of shares held by them and other benefits in
accordance with a pre-determined price formula or after a valuation is made, and the
arrangements under this provision may be made by the Tribunal:

Provided that the amount of payment or valuation under this clause for any share shall not be
less than what has been specified by the Securities and Exchange Board under any
regulations framed by it;

(i) where the transferor company is dissolved, the fee, if any, paid by the transferor company
on its authorized capital shall be set-off against any fees payable by the transferee company
on its authorized capital subsequent to the amalgamation; and

(j) Such incidental, consequential and supplemental matters as are deemed necessary to
secure that the merger or amalgamation is fully and effectively carried out:

14
Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a
certificate by the company’s auditor has been filed with the Tribunal to the effect that the
accounting treatment, if any, proposed in the scheme of compromise or arrangement is in
conformity with the accounting standards prescribed under section 133.

15
FAST TRACK MERGER

Section 233 of the Companies Act, 2013, provides for the merger of two or more small
companies or amalgamation of wholly owned subsidiary with and into its holding company.

Small companies had been defined under section 2(85) of the Companies Act, 2013 as a
private company having paid-up share capital upto Rs. 50,00,000 and having a turnover of
Rs. 2,00,00,000. (the Central Government may prescribe such higher paid-up share capital
and turnover but upto the mark of Rs. 10,00,00,000 and Rs. 1,00,00,00,000, respectively.

However, the following companies shall not be considered as small companies:

(i) a holding company or a subsidiary company;
(ii) a company registered under section 8; or
(iii) company or body corporate governed by any special Act.

Simplified procedure of mast track merger under section 233 read with rule 25 of the
Companies (Compromises, Arrangements and Amalgamation) Rules, 2016

Convene Board meeting to decide the following:

 Merger and amalgamation (Section 179(3);
 Finalize the scheme;
 Preparation of declaration of solvency in form CAA-10

File the board resolution in e-form MGT-14 with to Registrar (Section 117)

Companies involved in the scheme shall file the proposed scheme with the jurisdictional
Registrar and official liquidator in form- CAA-9, for the invitation of their objections or
observation.

File declaration of solvency with the Registrar in form CAA-10,

Dispatch 21 days clear days’ notice of general meeting and class meetings to its
members and creditors respectively.

Hold general meeting and class meeting if the following manner:

1. By members holding at least ninety per cent. Of the total number of shares
2. Creditors by majority representing 9/10 th of the value of creditors.

16
 The Transferee Company shall File the application to the following:
1. Central Government (Regional Director) in form CAA-1,
2. Registrar of Companies in form-GNL-1, and (for the purpose of invitation of
observation)
3. Official Liquidator through registered post (for the purpose of invitation of
observation)
4.

ROC and/or OL file any observation If no objections have been filed by

with the RD ROC/ OL
AND/OR And
If in the opinion of RD The scheme is In the opinion of RD the scheme is in
not in the interest of public / creditors the interest of public/creditors

ROC and/or OL file any observation The RD shall confirm the scheme and
with the RD pass order in form CAA-12
AND/OR
If in the opinion of RD The scheme is
not in the interest of public / creditors

File Form INC-28 with the ROC

RD may apply before to National

Company Law Tribunal within 60 days
of the receipt of application in form
CAA-13

NCLT

If NCLT is in the opinion, that the
application should be dealt in
accordance with the provisions of
section 232 off the Companies Act,
2013
If NCLT is in the opinion, that the
application should NOT be dealt in
accordance with the provisions of
section 232 off the Companies Act,
2013

Follow the procedure of section 232 of NCLT shall confirm the scheme
the Companies Act, 2013

17
ACCOUNTING TREATMENT FOR THE AMALGAMATION

Type of amalgamations under AS-14 as issued by The Institute of Chartered Accountants of

India are as follow:
1. Amalgamation in the nature of purchase; and
2. Amalgamation in the nature of merger.

The essential distinguishing accounting feature in case of a ‘merger’ is that the resulting
figures of assets, liabilities, capital and reserves represent the sum total of the relevant figures
of both the amalgamating companies. Further, the business of the amalgamating company is
intended to be carried on by the transferee company. Further in the case of a merger,
shareholders holding not less than 90 % of the face value of the equity shares of the transferor
company (other than the equity shares already held therein immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) should
become equity shareholders of the transferee company by virtue of the amalgamation.

A merger is basically an addition of the assets and liabilities of the amalgamating companies,
whereby all assets and liabilities of the transferor company before the amalgamation become
the assets and liabilities of the transferee company on amalgamation. Further, the
consideration receivable by the equity shareholders of the transferor company is received
only in the form of equity shares in the transferee company, except for the fractional shares
which may be discharged in cash. In the case of a merger, adjustment in the book value of
assets and liabilities of the transferor company, taken over by the transferee company, is not
allowed, except to ensure the uniformity in accounting policies.

Thus, amalgamation in the nature of merger is suited only when the business of the transferor
company is intended to be carried on by the transferee company and the equity shareholders
of the former receive only equity shares in the latter as consideration for the merger. Thus,
amalgamation may be said to be the genus, while merger is a specie of the former.

Amalgamations – Its Types.

Amalgamations are basically of two types, viz, amalgamation in the nature of merger and
amalgamation in the nature of purchase (as per Accounting Standard – 14 issued by The
Institute of Chartered Accountants of India). These types are briefly explained herein below:

1. Amalgamation in the Nature of Merger :-

In the case of amalgamation in the nature of merger, as already discussed above, it can be
so called only when all the following conditions are fulfilled:-

1. All the assets and liabilities of the transferor company become the assets and
liabilities of the transferee company, after amalgamation.

2. Shareholders holding not less than 90 % of the face value of equity shares of the
transferor company become the equity shareholders of the transferee company by
virtue of the amalgamation.

18
 3. The business of the transferor company is intended to be continued or carried on, after
the amalgamation, by the transferee company.

4. The consideration for the amalgamation receivable by the equity shareholders of the
transferor company is discharged by the transferee company wholly by the issue of
equity shares in the transferee company, except for cash that any be paid in respect of
fractional shares.

5. No adjustments, in the book value of the assets and liabilities of the transferor
company, are intended to be made when they are incorporated in the financial
statements of the transferee company, except to ensure uniformity in accounting
policies.
In the amalgamation in the nature of merger method the assets, liabilities and reserves of
the transferor company shall become the assets, liabilities and reserves of the transferee
company and these shall be added with the current assets, liabilities and reserves of the
transferee company. If the value of shares issued by the transferee company to the
shareholders of the transferor company, is more than the value of share capital of the
transferor company than the difference amount (is a loss to the transferee Company), the
transferee company shall set-off the difference with the capital reserve account, and in
case of profit to the transferee company than the difference amount shall be transferred to
the capital reserve of the transferor company, and the said capital reserve shall not be
utilized by the transferee company for the distribution of dividend, but can be utilized for
the issue of bonus shares.

2. Amalgamation in the Nature of Purchase :-

In the case of amalgamation in the nature of purchase, if the said amalgamation does not
satisfy any of the above criteria, as is mentioned in the case of amalgamation in the nature
of merger, it will be an amalgamation in the nature of purchase. In this case, if all
individual assets and liabilities are not taken over at the existing or agreed value , or if at
least 90 % of the equity shareholders do not become the equity shareholders of the
transferee company, or if the other criteria are not fulfilled, it would be an amalgamation
in the nature of purchase.

While preparing Transferee Company’s balance sheet after merger, the assets and
liabilities of the transferor company so acquired shall be recorded at their agreed value,
and the reserve of the transferor company shall vanish.

The difference between the consideration and the net asset value so acquired shall be
treated as follow:
a) In case of profit- difference shall be transferred to the capital reserve of the transferee
company; and
b) In case of loss – difference shall by treated as goodwill in the balance sheet of the
transferee company.

19
Mergers & Takeovers – Its Types.

Mergers or takeovers are basically horizontal, vertical and conglomerate mergers. These
types or classifications of mergers are explained in brief in the following paragraphs:

1. Horizontal Mergers :-

A horizontal merger or takeover is one which takes place between two companies which
are essentially operating in the same kind of market. This type of merger helps the
transferee company to expand the market share by acquiring the competitive activities.
Their products may or may not be identical. For example, the merger of Tata Oil Mills
Company Ltd., (TOMCO) with Hindustan Lever Ltd. and the merger of BSES (Bombay
Suburban Electric Supply) Ltd. with Orissa Power Supply Company are some of the
example of horizontal merger. Both these companies have similar products and their
market is also of the same kind. This method is resorted to by both companies for
achieving optimum size, carving out greater size of market, curbing the competition,
gaining economies of scale, increasing the competitiveness and reducing the competition
and to utilize the previously untapped capacities.

2. Vertical Mergers :-

A vertical merger or takeover refers to a combination of one or more companies engaged

in production of a particular product at different levels of its product process or supply
chain. Under this type of merger, two corporate bodies which are vertically linked to each
other either forward or backward, come together. Vertical merger is generally resorted to
for achieving operating efficiencies through reliability of imports, better management
control, gaining competing power through controlling input prices and to create an entry
barrier in terms of market and technology, this type of merger may help the transferee
company to reduce the overhead cost (reflecting the profit margin of the transferor
company). Vertical mergers may further be classified as forward and backward mergers.

a) Backward Mergers :-

It refers to merging of a firm with another firm engaged in earlier stages of

production. The merger of Reliance Petrochemicals Limited with Reliance Industries
Limited is a good example of a vertical merger with backward linkage, so far as
reliance Industries is concerned.

b) Forward Mergers :-

This kind of merger refers to the merging of a firm with another engaged in the
subsequent stages of production. For example, if a cement manufacturing company
acquires a company engaged in civil construction activities, it will be a case of
vertical takeover or merger with forward linkage.

2. Conglomerate Mergers :-

Conglomerate mergers or takeovers are also called concentric mergers/takeovers. Under

this type, the concerned companies are in totally unrelated lines of business or markets.

20
 This is used as a tool for diversification of business and to expand the product portfolio of
the transferor company. For example, Mohta Steel Industries merged with Vardhaman
Mills Limited. Conglomerate mergers are expected to bring out stability of income and
profits since the two units belong to different industries. Adverse fluctuations in sales and
profit arising due to trade cycles may not hit uniformly all the industries at the same time.

Reasons for Mergers or Takeovers.

There are several reasons for companies to go in for mergers or takeovers. Some of the major
reasons for such merging or takeovers include the following:-

1. Economies of Scale :-

When two or more companies combine, the larger volume of operations of the merged
entity results in various economies of scale. These economies arise because of the
intensive utilisation of the combined production capacities, distribution channels, research
and development facilities, and a range of other economies. These economies of scale are
more pre-dominant in horizontal mergers as the same kind of resources are available in
the merged entity which can be utilised intensively. In vertical mergers the principal
economies are increased efficiency and control over the production process, better co-
ordination of activities and lower inventory levels.

2. Synergy :-
When two companies merge together, the combined effect of their courses of action is
greater than the sum of the individual companies. The concept of synergy can be
explained in symbolic terms as under:

V(AB) > V(A) + V(B)

Where,
V(AB) = Value of the merged entity.
V(A) = Independent Value of Company / Firm A.
V(B) = Independent Value of Company / Firm B.

The greater value results in higher earnings per share (EPS) for the merged entity.

3. Growth & Diversification:-

Growth and diversification are important corporate objectives. Growth implies expansion
of a firm’s operation in terms of sales, profit and assets. Diversification on the other hand,
means expansion of operation through the merger of the firm in unrelated lines of
business. The company may want to diversify to reduce risks involved with a seasonal
business. Acquisition of a firm engaged in another industry may help the company to
reduce the risks involved with floatation and initial teething problems which are generally
faced by new companies. A merger may be a pre-emptive move to prevent a competitor
from establishing a similar position in that industry. For example, the merger of Tata Oil
Mills Company Limited and Hindustan Lever Limited. It may entail less risk and even
less loss.

4. Tax Savings:-

21
 A profit-making company can acquire a loss-making company and can set-off the
accumulated losses and unabsorbed depreciation of the loss-making company under
Section 72A of the Income Tax Act, 1961. Subject to the acquiring company fulfilling
certain conditions the healthy company’s profits can be set-off against the losses of the
loss-making company. However, the acquiring company is required to carry on the
business of the loss- making company for at least 5 years from the date on which it
amalgamates with the latter. The healthy company besides saving on tax acquires the
manufacturing capacity of the sick company also.

5. Acquisition of Patents, Brand Names, etc.:-

Mergers and takeovers are a relatively easy way to acquire valuable brand names, patents,
technical knowhow, etc. For instance, one of the attractions for Hindustan Lever Limited
in acquiring Tata Oil Mills Company Limited, is the latter’s brand name “ HAMAM ”
which had around 15 percent market share and is a highly popualr soap brand, in the
family soap segment.

6. Higher Debt Capacity :-

A company can enhance its borrowing capacity significantly through a merger. A merged
firm will enjoy a higher debt capacity because the earnings of the merged entity are more
stable than the independent earnings of the merging entities. A higher debt capacity
means advantage and thus higher value of the firm.

7. Avoiding Unhealthy Competition :-

Mergers and takeovers may enable companies to avoid unhealthy competition in a
situation where there are too many players aiming at capturing a limited market. It may be
a short cut to reduce monopolistic or unfair trade practices which are not in the interest of
the public at large.

8. Higher Price Earnings Ratio (P/E Ratio) of Stock :-

The net income of a new company may be capitalized at a low rate, resulting in high
market value for its stock. The stock of large companies is usually more marketable than
that of a small one. These attributes may result in a high price earnings ratio for the stock.

9. Fund raising capacity :-

Mergers or acquisitions open the fund raising capacity of the company to meet its
increasing financial requirements for expansion, diversification and modernisation. A
company may improve its ability to raise funds when it combines with other companies
having a higher liquid assets and low debts.

10. Reduction in Flotation Costs :-

When two firms merge, they can save on the flotation cost of future equity, preference
and debt issues. In general, these costs decrease with the increase in size of the issue, in
terms of percentage.

11. Deployment of Surplus Funds :-

A profit-making company may be having surplus funds which it is not in a position to
deploy profitably. In the present context, many of the companies having a good track
record of profitability are approaching the capital market for raising resources. Funds are
being raised by the issue of debt or equity at a substantial premium. This enables the
companies to reduce the average cost of capital. At the same time, there are companies

22
 which are starved of funds either due to low profitability or rapid rate of expansion.
Mergers and acquisitions enable a company having surplus funds to invest the same in
another company which is starved of the same.

Thus, one can notice that the reasons for the corporate sector being so keen to acquire good
brands and companies with a good market standing or those engaged in a competing line of
business is not without sound reasoning. Acquisition and mergers help a company to be better
equipped to face the challenges of competition and enable competing firms to achieve
synergy of resources and also help in the healthy growth of the market. Therefore, it can be
very aptly said that amalgamations and mergers have enabled companies to take a short cut to
achieving higher profitability and growth. They are an essential feature in the current
corporate scenario.

23
Provisions for Amalgamation, Mergers and Acquisitions under the Foreign Exchange
Management Act, 1999 and the Regulations framed thereunder by the Reserve Bank of
India.
The exposure of FEMA would be applied if the transferee company will issue securities to
the non-resident securities holders of the transferor company.
As per the provisions of the regulations framed by the Reserve Bank of India, under the authority
conferred upon it vide Section 47 of the Foreign Exchange Management Act, 1999, where a
scheme of merger or amalgamation of two or more Indian companies or a reconstruction by way of
a de-merger or otherwise of an Indian company, has been approved by a Court or tribunal in India,
the transferee company or, as the case may be, the new company may issue shares to the
shareholders of the transferor company resident outside India, subject to the following conditions,
namely;

a) The percentage of shareholding of persons resident outside India in the transferee or new
company does not exceed the percentage specified in the approval granted by the Central
Government or the Reserve Bank of India, or specified in the regulations. However,
where the percentage is likely to exceed the percentage specified in the approval or
Regulations, the transferor company or the transferee or new company may, after
obtaining an approval from the Central Government (i.e. the concerned Ministry having
jurisdiction over the company), apply to the Reserve Bank of India for its approval under
these Regulations, i.e., the Foreign Exchange Management (Transfer or Issue of Security
by a Person Resident Outside India) Regulations, 1999.

b) The transferor company or the transferee or new company shall not be engaged in the
agriculture, plantation or real estate business or trading in TDRs.

c) The transferee or new company files a report, within 30 days with the Reserve Bank of
India, giving full details of the shares held by persons resident outside India in the
transferor and the transferee company, before and after the merger or de-merger or
amalgamation, as the case may be, and also furnishes a confirmation that all the terms
and conditions stipulated in the scheme approved by the Court have been complied with.

Thus, it is evident that an Indian Company which merges with or amalgamates with another
Indian Company can issue shares to persons resident outside India, being shareholders of the
transferor company, provided the scheme of amalgamation or reconstruction is sanctioned by
the High Court concerned and further, such issue is not in excess of the upper limit specified
by the Central Government or the Reserve Bank of India.

The Central Government has specified various percentages for different types of industries,
such as telecommunications, software, coal and lignite, hotel and tourism, films, advertising,
mining and trading activities. If an Indian company accepts foreign investment upto the
specified limits, there is no need of obtaining the approval of the reserve Bank of India nor is
there any need of obtaining the Central Government’s approval. For instance, in the case of
software sector, the limit of foreign investment is 100 % of the capital of the company; in the
case of telecommunications it is 49 % for basic, cellular mobile, paging and value added
services and 100 % for manufacturing services, in the case of drugs and pharmaceuticals and
hotel and tourism it is 51 %, in the case of films and exploration and mining of gold and

24
silver it is 100 %, in the case of coal and lignite it is 49 % for investment in Public Sector
Undertakings (PSUs) and 50 % for other than PSUs.

Acquisition of / Investment in Foreign Securities by way of Stock Swap or Exchange of

Shares of an Indian Company.

An Indian Company engaged in the business of Information Technology (IT) and

Entertainment Software, Pharmaceutical Sector or the Biotechnology Sector, may acquire
shares of a foreign company engaged in similar activity in exchange of American Depository
Receipts (ADRs) or Global Depository Receipts (GDRs) issued to the latter in accordance
with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares
(through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder, from time to time, by the Central Government, for the shares so acquired.

However, the following conditions have to be complied with, as per the Foreign Currency
Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme,
1993;-

1) The Indian Company has already made an ADR and/or GDR issue and that such
ADRs and/or GDRs are currently listed on any stock exchange outside India.

2) The investment by the Indian company/ party in the issue of the ADRs and/or
GDRs does not exceed :
a) an amount equivalent to US $ 100 million, or
b) an amount equivalent to 10 times the export earnings of the Indian Party
during the preceeding financial year as reflected in its audited Balance
Sheet, inclusive of all investments made, including those made under
clause (a) above, in the same financial year.

3) At least 80 % of the average turnover of the Indian Party in the preceeding three
financial years is from the activities or sectors in which the Indian Party is
engaged, or the Indian Party has an annual average export earnings of at least
Rs.100 Crores in the previous three financial years from the activities/sectors
mentioned hereinabove.

4) The ADR and/or GDR issue for the purpose of acquisition is backed by
underlying fresh equity shares issued by the Indian Party.

5) The total holding in the Indian Party by persons resident outside India in the
expanded capital base, after the new ADR and/or GDR issue, does not exceed the
sectoral cap prescribed for the investment.

6) The valuation of the shares of the foreign company is made,

a) as per the recommendations of the Investment Banker if the shares are not
listed on any stock exchange, or
b) based on the current market capitalization of the foreign company arrived at
on the basis of monthly average price on any stock exchange abroad for the
three months preceeding the month in which the acquisition is committed and

25
 over and above, the premium, if any, as recommended by the Investment
Broker in its Due Diligence Report, in other cases.

Within 30 days from the date of issue of ADRs and/or GDRs in exchange for the acquisition
of shares of the foreign company, the Indian Party/Company has to submit a report in Form
ODG to the Reserve Bank of India. In case the Indian Party does not satisfy any of the
conditions mentioned in the Scheme referred to above, the application will have to be made
to the Reserve Bank of India in Form ODB.

CROSS BORDER MERGER

In accordance with the provision of section 234 of the Companies Act 2013,
It provides that the provision of section 230-232 of the companies act, 2013, shall be
applicable on the merger and amalgamation involving any foreign company, but the
companies involved are required to obtain prior approval of the Reserve Bank of India.

Section 234(2) of the Companies act, 2013 provides that:

“Subject to the provisions of any other law for the time being in force, a foreign company,
may with the prior approval of the Reserve Bank of India, merge into a company
registered under this Act or vice versa and the terms and conditions of the scheme of
merger may provide, among other things, for the payment of consideration to the
shareholders of the merging company in cash, or in Depository Receipts, or partly in
cash and partly in Depository Receipts, as the case may be, as per the scheme to be
drawn up for the purpose.”

Rule 25A of the Companies (Compromise, Arrangement and Amalgamation) Rules, 2016
(1) Inbound Merger
A foreign company incorporated outside India may merge with an Indian company
after obtaining prior approval of Reserve Bank of India and after complying with the
provisions of sections 230 to 232 of the Act and these rules.
(2) Outbound Merger
(a) A company (Indian Company) may merge with a foreign company incorporated
in any of the jurisdictions specified in Annexure B after obtaining prior approval of
the Reserve Bank of India and after complying with provisions of sections
230 to 232 of the Act and these rules.
(b) The transferee company shall ensure that valuation is conducted by valuers who
are members of a recognized professional body in the jurisdiction of the transferee
company and further that such valuation is in accordance with internationally
accepted principles on accounting and valuation. A declaration to this effect shall be
attached with the application made to Reserve Bank of India for obtaining its
approval under clause (a) of this sub-rule.
(3) The concerned company shall file an application before the Tribunal as per
provisions of section 230 to section 232 of the Act and these rules after obtaining
approvals specified in sub-rule (1) and sub-rule (2), as the case may be.
Explanation 1. For the purposes of this rule the term “company” means a company as
defined in clause (20) of section 2 of the Act and the term “foreign company” means
a company or body corporate incorporated outside India whether having a place of
business in India or not:
Explanation 2. For the purposes of this rule, it is clarified that no amendment shall be
made in this rule without consultation of the Reserve Bank of India.

26
For the purpose of implication of Cross Border merger, the Reserve Bank of India has
notified Foreign Exchange Management (Cross Border Merger) Regulations, 2018, whereby
the RBI has categorized the cross border merger in two different categories which are as
follow:
i. Inbound Merger
In which a foreign entity merge with an Indian Company, the resulting company
would be an Indian company, i.e. all assets and liabilities on the said foreign
company would become the assets and liabilities of the Indian Company.

ii. Outbound Merger

In which an Indian Company merge with a foreign entity, the resulting company
would be a foreign entity, i.e. all assets and liabilities on the said Indian company
would become the assets and liabilities of the Foreign Entity.
As per regulation 5 of FEM (Cross Border Merger) Regulations, 2018 the following
conditions are required to be followed for outbound merger:
(1) a person resident in India may acquire or hold securities of the resultant company
in accordance with the Foreign Exchange Management (Transfer or issue of any
Foreign Security) Regulations, 2004, i.e. compliance of Overseas Direct
Investment norms. [for a resident entity other than an resident individual.

(2) a resident individual may acquire securities outside India provided that the fair
market value of such securities is within the limits prescribed under the
Liberalized Remittance Scheme (“LRS”). [As per LBR scheme, the RBI has
notified that a resident individual may remit upto UDS 2,50,000 in a financial
year for the permitted areas.]

(3) the resultant foreign company shall repay the liabilities and borrowings of the
Indian transferee company, as per the conditions enumerated under the scheme

27
 sanctioned by National Company Law Tribunal. But the resultant foreign
company shall obtain NOC from the Indian Lenders of the Indian transferee
company.

(4) The resultant company may acquire and hold any asset in India which a foreign
company is permitted to acquire under the provisions of the Act, rules or
regulations framed thereunder. Such assets can be transferred in any manner for
undertaking a transaction permissible under the Act or rules or regulations
framed thereunder.

(5) Where the asset or security in India cannot be acquired or held by the resultant
company under the Act, rules or regulations, the resultant company shall sell
such asset or security within a period of two years from the date of sanction of
the Scheme by NCLT and the sale proceeds shall be repatriated outside India
immediately through banking channels. Repayment of Indian liabilities from sale
proceeds of such assets or securities within the period of two years shall be
permissible.

(6) The resultant company may open a Special Non-Resident Rupee Account (SNRR
Account) in accordance with the Foreign Exchange Management (Deposit)
Regulations, 2016 for the purpose of putting through transactions under these
Regulations. The account shall run for a maximum period of two years from the
date of sanction of the Scheme by NCLT.

28
Mergers, Amalgamations and De-mergers under the Income Tax Act, 1961 and Tax
Benefits available thereunder.

The Government of India has made provisions for the amalgamation and de-merger of
companies under the Income tax Act, 1961, in order to provide an impetus for corporate
mergers so as to reap the economies of scale and to provide for better tax planning. The brief
provisions of the Income Tax Act, 1961 are explained in the succeeding paragraphs, with
reference to the provisions of amalgamations and de-mergers thereunder.

Amalgamation – Meaning thereof {Section 2(1B)}

The Income Tax Act, 1961 has defined the term “amalgamation” under Section 2 (1B). the
purpose of providing such a definition is that the benefits are available both to the
amalgamating and the amalgamated companies only when all the conditions mentioned in the
said section have been complied with.

According to Section 2(1B) of the Income tax Act, 1961, “amalgamation” in relation to
companies means the merger of one or more companies with another company or the merger
of two or more companies to form one company in such a manner that –
(i) All the property of the amalgamating company or companies immediately before
the amalgamation becomes the property of the amalgamated company by virtue of
amalgamation.

(ii) All the liabilities of the amalgamating company or companies immediately before
the amalgamation become the liabilities of the amalgamated company by virtue of
amalgamation.

(iii) Shareholders holding not less than three-fourths in value of the shares in the
amalgamating company or companies (other than the shares held therein
immediately before the amalgamation or by a nominee for the amalgamated
company or its subsidiary) become shareholders of the amalgamated company by
virtue of the amalgamation, otherwise than as a result of the acquisition of the
property of one company by another company pursuant to the purchase of such
property by the other company or as a result of distribution of such property to the
other company after the winding up of the first-mentioned company.

Provisions relating to Carry Forward and Set-Off of Accumulated Losses and Unabsorbed
Depreciation in Amalgamation under Section 72A of the Income Tax Act, 1961.

The provisions of the old Section 72A of the Income tax Act, 1961, have been substituted by
a new Section 72A inserted vide the Finance Act, 1999. The provisions of the new Section
72A are to come into force with effect from the Assessment Year 2000 – 2001. Under the
provisions of the new Section 72A, the amalgamated company is entitled to carry forward the
unabsorbed depreciation and brought forward losses of the amalgamating company provided
that the following conditions are fulfilled:

(1) The amalgamation should be of a company owning an industrial undertaking

or a ship.

29
 (2) The amalgamated company holds at least three-fourths of the book value of
the fixed assets of the amalgamating company for a continuous period of 5
years from the date of amalgamation.

(3) The amalgamated company continues the business of the amalgamating

company for a period of 5 years from the date of amalgamation.

(4) The amalgamated company fulfils such other conditions, as may be prescribed
to ensure the revival of the business of the amalgamating company or to
ensure that the amalgamation is for genuine business purpose. For this purpose
the provisions of Rule 9C have to be complied with.

The amalgamated company gets a fresh lease of 8 years to carry forward and set off the
brought forward loss and unabsorbed depreciation of the amalgamating company.

Tax Benefits / Concessions available in case of Amalgamation.

In case of an amalgamation which takes place within the meaning of Section 2(1B), as
explained earlier, the following tax concessions will be available:

(1) Tax benefits / concessions to the amalgamating company.

(2) Tax benefits / concessions to the shareholders of the amalgamating company.
(3) Tax benefits / concessions to the amalgamated company.

Tax Benefits / Concessions to the Amalgamating Company.

(a) Capital Gains Tax not attracted :

According to Section 47(vi), where there is a transfer of any capital asset in the scheme
of amalgamation, by an amalgamating company to the amalgamated company, such
transfer will not be regarded as a transfer for the purpose of capital gains provided the
amalgamated company, to whom the assets have been transferred, is an Indian
company.

(b) Tax Concessions to a Foreign Amalgamating Company :

As per Section 47(via), where a foreign company holds any shares in an Indian
company and transfers the same, in the scheme of amalgamation, to another foreign
company such transaction will not be regarded as a transfer for the purpose of capital
gain under Section 45 of the Income Tax Act, 1961, if the following conditions are
fulfilled :
(i) At least 25 % of the shareholders of the amalgamating foreign company should
continue to remain shareholders of the amalgamated foreign company, and
(56)

(ii) Such transfer does not attract tax on capital gains in the country in which the
amalgamating company is incorporated.

Tax Benefits / Concessions to the Shareholders of the Amalgamating Company .

30
Here a shareholder of an amalgamating company transfers his shares, in a scheme of
amalgamation, such transaction will not be regarded as a transfer for capital gains
purposes, if the following conditions under Section 47(vii) are satisfied :
(i) The transfer of shares is made in consideration of the allotment to him of any share or
shares in the amalgamated company, and
(ii) The amalgamated company is an Indian Company.

Tax Benefits / Concessions available to the Amalgamated Company.

(a) Expenditure on Scientific Research [Section 35(5)] :

Where an amalgamating company transfers any asset represented by capital expenditure
on scientific research to the amalgamated Indian company in a scheme of amalgamation,
the provisions of Section 35 shall become applicable to the amalgamated company.
Consequently,
(i) the unabsorbed capital expenditure on scientific research of the amalgamating
company will be allowed to be carried forward and set off in the hands of the
amalgamated company, and
(ii) if such asset ceases to be used in a previous year for scientific research related to the
business of the amalgamated company and is sold by the amalgamated company
without having being used for other purposes, the sale price, to the extent of the cost
of the asset, shall be treated as business income of the amalgamated company. The
excess of the sale price over the cost of the asset shall be subject to the provisions of
capital gains.

(b) Expenditure for obtaining Licence to operate Telecommunication Services [ Section

35ABB(6)] :
Where in a scheme of amalgamation, the amalgamating company sells or otherwise
transfers its licence to the amalgamated company, being an Indian Company, the
provisions of Section 35ABB which were applicable to the amalgamating company shall
become applicable in the same manner to the amalgamated company. Consequently,
(i) the expenditure on the acquisition of the telecommunication licence, not yet written
off, shall be allowed to the amalgamated company in the same number of balance
instalments.
(ii) where such licence is sold by the amalgamated company, the treatment of the
deficiency/surplus will be same as would have been in the case the amalgamating
company.

(c) Treatment of Preliminary Expenses [ Section 35D(5)] :

Where an amalgamating company merges in a scheme of amalgamation with the
amalgamated company, the amount of preliminary expenses of the amalgamating
company, which have yet not been written off, shall be allowed as deduction to the
amalgamated company in the same manner as would have been allowed to the
amalgamating company.

(d) Treatment of Expenditure on Prospecting , etc., of Certain Minerals [Section

35E(7A)] :
Where an amalgamating company merges in a scheme of amalgamation with the
amalgamated company, the amount of expenditure incurred wholly and exclusively on
prospecting of any mineral or a group of minerals specified in Part A or Part B,

31
 respectively, of the Seventh Schedule or on the development of a mine or other natural
deposit of any such mineral or group of associated minerals, during the year of
commercial production and any one or more of the four years immediately preceeding
that year, of the amalgamating company and the same is yet not written off, it shall be
allowed as deduction to the amalgamated company in the same manner as would have
been allowed to the amalgamating company.

(e) Treatment of capital Expenditure on Family Planning [ Section 36 (1) (ix)] :

Where the asset representing the capital expenditure on family planning is transferred by
the amalgamating company to the Indian amalgamated company, in a scheme of
amalgamation, the provisions of Section 36 (1) (ix) shall become applicable to the
amalgamated company. Consequently,
(i) the capital expenditure on family planning not yet written off shall be allowable to the
amalgamated company in the same number of balance instalments;
(ii) where such assets are sold by the amalgamated company, the treatment of the
deficiency/surplus will be the same as would have been in the case of amalgamating
company.

(f) Treatment of Bad Debts [Section 36 (1) (vii)] :

Where due to amalgamation, the debts of the amalgamating company have been taken
over by the amalgamated company and subsequently such debt or part of the debt
becomes bad, such bad debt will be allowed as a deduction to the amalgamated company.
(CIT vs. T. Veerabhadra Rao, K. Koteswara Rao & Co.)

(g) Amortisation of Expenditure in case of Amalgamation [Section 35DD] :

From the assessment year 2000 – 2001 and onwards, where an assessee being an Indian
company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and
exclusively for the purposes of amalgamation or de-merger of an undertaking, the
assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure
for each of the five successive previous years beginning with the previous year in which
the amalgamation or de-merger takes place. Further, no deduction shall be allowed in
respect of the said expenditure under any other provision of the Income Tax Act, 1961.

(h) Carry forward and set-off of business losses and unabsorbed depreciation of the
amalgamating company [Section 72A] :
In addition to the above benefits / concessions, the amalgamated company shall be
allowed to carry forward and set off the unabsorbed depreciation and brought forward
losses of the amalgamating company if all the conditions mentioned in Section 72A are
satisfied. The set off and carry forward will be allowed for a period of 8 years form the
year in which the amalgamation takes place.

Tax Planning in case of Amalgamation.

Tax planning in case of amalgamation is of vital significance. The benefit of tax concession is
allowed to the amalgamating and amalgamated company only when the amalgamation
satisfies the conditions provided under Section 2(1B) of the Income Tax Act, 1961. One of
the conditions laid down is that all the assets and liabilities of the amalgamating company, as
on the date of amalgamation should be taken over by the amalgamated company. If some
assets or liabilities of the amalgamated company are not proposed to be taken over by the

32
amalgamated company, the same should be disposed off or discharged by the amalgamating
company before the amalgamation takes place.

Similarly, there is a condition that at least 75 percent of the shareholders of the amalgamating
company should become the shareholders of the amalgamated company. If more than 25
percent of the shareholders of the amalgamating company are not willing to become the
shareholders of the amalgamated company, then such shares of the dissenting shareholders
may be purchased by the other shareholders or by the amalgamated company, before the
amalgamation, so that at the time of amalgamation the condition of 75 percent of the
shareholders becoming shareholders of the amalgamated company is satisfied.

The amalgamated company can carry forward and set off the business loss and unabsorbed
depreciation of the amalgamating company only when certain conditions are satisfied, under
Section 72A of the Act. Where it is not possible to satisfy such conditions the company may
opt for a “Reverse Merger”, i.e., instead of the loss making company being merged with the
profit making company, the profit making company merges with the loss making company.
In this case the loss making company, which is the amalgamated company will be able to set
off its accumulated losses and unabsorbed depreciation against the profits of the profit
making company which has been merged with the former.

The benefit under Section 47(vii) shall be allowed only when the shareholders of the
amalgamating company are allowed shares of the amalgamated company in lieu of shares
held by them in the amalgamating company. If the shareholders are allotted something more
than shares in the amalgamated company, for instance, bonds or debentures, no benefit will
be allowed under Section 47(vii) of the Act.

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De-merger – Meaning Thereof {Section 2(19AA)}

The term “de-merger” in relation to companies means the transfer, pursuant to a scheme of
arrangement under Sections 391 to 394 of the Companies Act, 1956 by a de-merged company
of one or more of its undertakings to any resulting company in such a manner that –
(i) all the property of the undertaking, being transferred by the de-merged company
immediately before the de-merger, becomes the property of the resulting company by
virtue of the de-merger.

(ii) all the liabilities relatable to the undertaking, being transferred by the de-merged
company, immediately before the de-merger, becomes the liabilities of the resulting
company by virtue of the de-merger.

(iii) the property and the liabilities of the undertaking or undertakings being transferred by
the de-merged company are transferred at values appearing in its books of account
immediately before the de-merger.

(iv) the resulting company issues, in consideration of the de-merger, its shares to the
shareholders of the de-merged company on a proportionate basis.

(v) the shareholders holding not less than three-fourths in value of the shares in the de-
merged company become the shareholders of the resulting company or companies by
virtue of the de-merger, otherwise than a result of the acquisition of the property or
assets of the demerged company or any undertaking thereof by the resulting
company.

(vi) the transfer of the undertaking is on a going concern basis.

(vii) the de-merger is in accordance with the conditions, if any, notified under Section
72A(5) by the Central Government, in this behalf.

The term “undertaking” includes any part of an undertaking, or a unit or division of an

undertaking or a business activity taken as a whole, but does not include individual assets or
liabilities or any combination thereof not constituting a business activity.

The term “liabilities” shall include the following –

(1) The liabilities which arise out of the activities or operations of the undertaking

(1) The specific loans or borrowings (including debentures) raised, incurred and utilized
solely for the activities or operations of the undertakings.

(2) In cases, other than the above referred, so much of the amounts of the general or
multipurpose borrowings, if any, of the demerged company as stand in the same
proportion which the value of the assets transferred in a de-merger bears to the total
value of the assets of such demerged company immediately before the de-merger.

The term ‘resulting company” under Section 2 (41A) of the Income Tax Act, 1961, means
one or more companies to which the undertaking of the demerged company is transferred in a
de-merger and, the resulting company in consideration of such transfer of undertaking, issues
shares to the shareholders of the demerged company and includes any authority or body or

34
local authority or public sector company or a company established, constituted or formed as a
result of de-merger.

Tax Benefits / Concessions available in case of De-merger.

If any de-merger takes place within the meaning of Section 2 (19AA) of the Income Tax Act,
1961, the following tax concessions shall be available:

(1) Tax benefits / concessions to the de-merged company.

(2) Tax benefits / concessions to the shareholders of the de-merged company.
(3) Tax benefits / concessions to the resulting company.

Tax Benefits / Concessions to De-merged Company.

The following concessions are available to the de-merged company :

(1) Capital Gains Tax not attracted [ Section 47(vib) ] :

Where there is a transfer of any capital asset in a de-merger by the demerged company to
the resulting company, such a transfer will not be regarded as a transfer for the purpose of
capital gain provided the resulting company is an Indian company.

(2) Tax Concession to a Foreign Demerged Company [ Section 47 (vic) ] :

Where a foreign company holds any shares in an Indian company and transfers the same,
in a de-merger, to another resulting foreign company, such transaction will not be
regarded as transfer for the purpose of capital gain under Section 45, if the following
conditions are satisfied :
(a) at least 75 % of the shareholders of the de-merged foreign company continue to
remain the shareholders of the resulting foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the de-
merged foreign company is incorporated.

(3) Reserves for Shipping Business :

Where a ship acquired out of the reserve is transferred in a scheme of de-merger, even
within the period of eight years of acquisition there will be no deemed profits to the
demerged company.

Tax Benefits / Concessions to the Shareholders of the De-merged Company.

As per Section 47 (vid) of the Income Tax Act, 1961, any transfer or issue of shares by the
resulting company, in a scheme of de-merger to the shareholders of the de-merged company
shall not be regarded as a transfer if the transfer or issue is made in consideration of de-
merger of the undertaking.

In the case of de-merger the existing shareholder of the de-merged company will now hold
shares in the resulting company as well as in the de-merged company. In case the shareholder

35
transfers any of the above shares subsequent to the de-merger, the cost of such shares shall be
calculated as under:-

(1) Cost of Acquisition of Shares in the Resulting Company [ Section 47 (2C) ] :

It shall be the amount which bears to the cost of acquisition of shares held by the assessee
in the de-merged company the same proportion as the net book value of the assets
transferred in a de-merger bears to the net worth of the de-merged company immediately
before the de-merger.

(2) Cost of Acquisition of Shares in the Demerged Company [Section 47 (2D) ] :

The cost of acquisition of the original shares held by the shareholder in the demerged
company shall be deemed to have been reduced by the amount as so arrived at under
Section 47 (2C) above.

In case of a capital asset, being a share or shares in an Indian company, which becomes
the property of the assessee in consideration of a de-merger, there shall be included the
period for which the share or shares held in the demerged company were held by the
assessee .

Tax Benefits / Concessions to the Resulting Company.

The resulting company shall be eligible for tax concessions only if the following two
conditions are satisfied, namely;
(a) The de-merger satisfies all the conditions laid down in Section 2 (19AA), and
(b) The resulting company is an Indian company.

In general the following tax concessions are available to the resulting company :

(a) Expenditure for obtaining Licence to Operate Telecommunication services [

Section 35ABB(7) ] :
Where in a scheme of de-merger, the demerged company sells or otherwise transfers its
licence to the resulting company, the provisions of Section 35ABB which were
applicable to the demerged company shall become applicable in the same manner to the
resulting company. Consequently;
(1) The expenditure on acquisition of licence, not yet written off, shall be allowed
to the resulting company in the same number of balance instalments.
(2) Where such licence is sold by the resulting company, the treatment of the
deficiency or surplus as the case may be, will be the same as would have been
allowed in the case of the demerged company.

(b) Amortisation of Preliminary Expenses [ Section 35D(5A) ] :

Where the undertaking of an Indian company which is entitled to deduction of
preliminary expenses is transferred before the expiry of ten years or five years, as the
case may be, to another company in a scheme of de-merger, the preliminary expenses of
such undertaking which are not yet written off shall be allowed as deduction to the
resulting company in the same manner as would have been allowed to the demerged
company. The demerged company will not be entitled to the deduction thereafter.

36
(c) Treatment of Expenditure on Prospecting of Certain Minerals [ Section 35E(7A) ]
:
Where the undertaking of an Indian company which is entitled to deduction on account
of prospecting of minerals, is transferred before the expiry of 10 years to another
company in a scheme of de-merger, such expenditure of prospecting of minerals which
is not yet written off shall be allowed as deduction to the resulting company as would
have been allowed to the demerged company. The demerged company will not be
entitled to the deduction thereafter.

(d) Treatment of Bad Debts [ Section 36(1)(vii) ] :

Where due to de-merger the debts of the demerged company have been taken over by
the resulting company and subsequently such debt or a part thereof becomes bad, such
bad debt will be allowed as a deduction to the resulting company.

(e) Amortisation of Expenditure in case of De-merger [ Section 35DD ] :

Where an assessee, being an Indian company, incurs any expenditure, on or after the 1 st
day of April, 1999, wholly and exclusively for the purposes of de-merger of an
undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth
of such expenditure for each of the five successive previous years beginning with the
previous year in which the de-merger takes place. No deduction will be allowed
for such purpose, under any other section of the Income Tax Act, 1961.

(f) Set Off and Carry Forward of Business Losses and Unabsorbed Depreciation of
the Demerged Company [ Section 72A(4) and (5) ] :
The accumulated losses and unabsorbed depreciation, in a de-merger, should be allowed
to be carried forward by the resulting company if these are directly relatable to the
undertaking proposed to be transferred. Where it is not possible to relate these to the
undertaking, such losses and depreciation shall be apportioned between the demerged
company and the resulting company in proportion of the assets coming to the share of
each as a result of the de-merger.

37
CONCLUSION

Corporate restructuring is very common in today’s corporate scenario. It has provided a

means to eliminate competition within the four corners of the legal framework, it helps to
achieve better operational effectiveness and also helps in presenting a true and fair view of
the state of the company. Mergers due to their synergistic effects are gaining popularity in
India. To cite a few examples, the merger of Tata Oil Mills Company Limited (TOMCO)
with Hindustan Lever Limited (HLL) is a classic example of a horizontal merger which was
effected to gain synergistic effects. The merger of Mohta Steel Industries with Vardhaman
Mills Limited is another example of a conglomerate merger which was effected to bring
about stability of income and profits.

While adopting a scheme of merger or takeover, it has to be noted that a listed company has
to abide with the provisions of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeover) Regulations, 1997. Further, the provisions of Section
108A to 108I of the Companies Act, 1956, have also to be considered in certain cases where
it is proposed to acquire a prescribed percentage of the paid-up share capital of a company or
to effect a transfer of a prescribed percentage of the subscribed share capital of a particular
company. The accounting standard prescribed by the Institute of Chartered Accountants of
India (i.e., Accounting Standard – 14) has also to be complied with in effecting the merger or
amalgamation, as the case may be, since the same is mandatory for all companies. Care has to
be taken to ensure that accounting for the merger or amalgamation is done as per the
prescribed accounting standard.

Acquisitions and takeovers are healthy conditions in advanced countries from the point of
view of efficient utilization of resources and resource allocation but at the same time certain
activities of the “asset-strippers” are changing who obtain control of companies only to wind
them up and make quick profit for themselves. To safeguard the interest of the investors and
shareholders, the Governmental agencies have viewed mergers and takeovers as a subject of
regulation and control. In England, the City Code was evolved with this end in view, in the
year 1968. In 1981, the City Code was revised and it contains general principles which
should be adhered to in all probabilities. The following are the four rules of the City Code,
which are the main principles of general nature:

(1) All the shareholders of the same class should be treated equally.

(2) Shareholders should be given adequate information to form a proper judgement.

(3) Directors of the offerree company (whose shares are being bid for) should act in the
best interest of their shareholders and obtain independent advice.

(4) Creation of false market in shares should be avoided.

It may also be concluded that in order to implement a good and effective scheme of
amalgamation or in order to effect a merger it is essential to first of all select the proper
transferee company or target company, as the case may be, and also to see that the company
is worth acquiring. The tax implications under the Income Tax Act, 1961 and the CENVAT
Scheme (under the Central Excise Rules, 1944) have also to be considered in order to gain
the maximum benefit in order to go ahead with the merger or amalgamation, as the case may
be. Since, the procedure is complex it would always be advisable to first consult a Chartered

38
Accountant, the legal advisor and the Company Secretary of the company concerned, before
going ahead with the scheme of amalgamation or merger. External advise from tax
consultants and solicitors may also be taken in order to have a sound base for the
amalgamation / merger. The share valuation and valuation of the concerns is also an essential
step in the process of corporate mergers and amalgamations. It is the duty of the Chartered
Accountant to see that the appropriate valuation method is used and that all the relevant
accounting standards are adhered to while effecting the scheme of amalgamation or merger.

Thus, amalgamations and mergers are a boon to the corporate world, but also have an adverse
effect on the economy at times due to excessive monopolization and cartelisation. However,
it may be noted that the Government has taken the necessary measures and made the
necessary provisions to prevent interconnection of undertakings under the MRTP Act, 1969.
In order to achieve a balance between the good and adverse effects of amalgamations and
mergers it must be seen that the underlying reason for the same considered while evaluating
the scheme by the Court. The Court cannot refuse the scheme, if it is in the bona fide interest
of the companies and approved by the requisite majority of the shareholders.

Therefore, though a complex and elaborate process, amalgamations and mergers are indeed
essential in the present economic scenario of the country so as to attain economy and utilize
the resources in an efficient and effective manner, so as to optimize production and achieve a
general reduction in the cost of production, thus resulting in the optimisation of price level in
the economy.

39
BIBLIOGRAPHY

Corporate Laws and Practice – I : ICSI Publication

Corporate Laws (Bare Act) : Taxmann Publishers

Guide to the Companies Act : A. Ramaiya

www.google.com

40
 Convene Board meeting to decide the following:
 Merger and amalgamation (Section 179(3);
 Finalize the scheme;
 Preparation of declaration of solvency in form CAA-10

File the board resolution in e-form MGT-14 with to Registrar (Section 117)

Companies involved in the scheme shall file the proposed scheme with the jurisdictional
Registrar and official liquidator in form- CAA-9, for the invitation of their objections or
observation.

File declaration of solvency with the Registrar in form CAA-10,

Dispatch 21 days clear days’ notice of general meeting and class meetings to its
members and creditors respectively.

Hold general meeting and class meeting if the following manner:

 By members holding at least ninety per cent. Of the total number of shares
 Creditors by majority representing 9/10 th of the value of creditors.

The Transferee Company shall File the application to the following:

 Central Government (Regional Director) in form CAA-1,
 Registrar of Companies in form-GNL-1, and (for the purpose of invitation of
observation)
 Official Liquidator through registered post (for the purpose of invitation of
observation)


ROC and/or OL file any observation If no objections have been filed by

with the RD ROC/ OL
AND/OR And
If in the opinion of RD The scheme is In the opinion of RD the scheme is in
not in the interest of public / creditors the interest of public/creditors

41
 ROC and/or OL file any observation The RD shall confirm the scheme and
with the RD pass order in form CAA-12
AND/OR
If in the opinion of RD The scheme is
not in the interest of public / creditors

File Form INC-28 with the ROC

RD may apply before to National

Company Law Tribunal within 60 days
of the receipt of application in form
CAA-13

NCLT

If NCLT is in the opinion, that the
application should be dealt in
accordance with the provisions of
section 232 off the Companies Act,
2013
If NCLT is in the opinion, that the
application should NOT be dealt in
accordance with the provisions of
section 232 off the Companies Act,
2013

Follow the procedure of section 232 of NCLT shall confirm the scheme
the Companies Act, 2013

42