Amalgamation of companies refers to the procedure of combining two or more companies into a completely new legal entity. In this process, the new organisation takes over all the assets and liabilities of the original companies.
In simpler terms, the meaning of amalgamation of companies is the creation of a completely new company. It is totally different from a merger or acquisition, where at least one of the original companies survives.
Amalgamation of Companies Examples
For instance, there are two companies, ABC Pvt. Ltd. and XYZ Pvt. Ltd. Both belong to the manufacturing industry.
Due to current market conditions, both entities are experiencing a decline in business. So they decided to combine through the amalgamation process.
Now, they form a new entity with the name ABCXYZ Pvt. Ltd. This company takes over all the assets and liabilities of the two merging companies.
Different Types of Amalgamation
1. Amalgamation Resembling a Merger
In this amalgamation process, the financially stronger or larger-sized company acquires the smaller or weaker company. It happens by absorbing all the assets and liabilities of both companies.
When considering shareholders of both companies, they can continue to hold their stakes in the entirely newly formed organisation.
2. Amalgamation Resembling a Purchase
In this process, shareholders of smaller or weaker companies fail to meet the criteria for holding shares in this new company.
Hence, this amalgamation resembles a purchase. This amalgamation of companies is carried out by a stronger (transferee) entity.
Objectives of Amalgamation of Companies
The primary objectives of company amalgamation are:
- Eliminating competition and creating a stronger position in the market.
- Increasing market share, allowing this new entity to become larger with more profits and increased sales.
- Getting exposure to new geographical or product markets.
- Reducing costs by properly utilising all the assets and resources of both companies.
For amalgamation, those two companies need to create a detailed plan and submit it to the High Court and the SEBI for approval. Once approved, the transferee takes over the transferor.
