Project report: Amit kumar

dharmani
Amit Kumar Dharmani
Regn. No. - 421161731/02/2012
9, Gordhan dham Nagar,
Sawer Road,
Ujjain- (M.P.)- 456010

To,
The Senior Director( training, Membership & Legal)
The Institute of Company Secretaries of India,
C-37, Sector 62,
Noida-201309

Sub- Submission of Project Report

Respected Sir/Madam,

With reference to captioned subject, I Amit Kumar Dharmani, bearing registration No.
-421161731/02/2012 have Completed 6 Months CS Articleship Under Practising Company
Secretary Shekhar Ghatpande & co., Company secretaries, Pune & 9 Months CS Articleship
under MCL Global Steel Private Limited, submit herewith Project report on Subject of
“Amalgamation, Merger and takeover & its relevance in Corporate Governance” as per ICSI
Training rules and regulations.

Kindly acknowledge

Thanking You,

Yours Faithfully,

Amit Kumar Dharmani

Regn. No. - 421161731/02/2012

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Company secretataryship training project

report

Project topic:

Merger, amalgamation and takeover and its relevance in corporate

governance

Prepared By-
Name of the student: Amit kumar dharmani
Registration Number: 421161731/02/2012
Trainee of MCL Global steel Private Limited under Dinesh Kumar Agarwal
(Whole Time Director)

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An overview regarding Merger , amalgamation and takeover

Merger: The combining of two or more companies, generally by offering the stockholders of one company
securities in the acquiring company in exchange for the surrender of their stock. Basically, when two companies
become one. This decision is usually mutual between both firms. When one company purchases another company
of an approximately similar size. The two companies come together to become one. A merger is transactions that
result in the transfer of ownership and control of a corporation. Two companies usually agree to merge when they
feel that they can do something together that they cannot do one their own

Acquisition: A corporate action in which a company buys most, if not all, of the target company's ownership
stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth
strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding
on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both.
Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its
agreement to be acquired, whereas hostile acquisitions don't have the same agreement from the target firm and
the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake.
In either case, the acquiring company often offers a premium on the market price of the target company's shares in
order to entice shareholders to sell. For example, News Corp.'s bid to acquire Dow Jones was equal to a 65%
premium over the stock's market price.

Example:

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Takeover: When an acquiring company makes a bid for a target company. If the takeover goes through, the
acquiring company becomes responsible for all of the target company’s operations, holdings and debt. When the
target is a publicly traded company, the acquiring company will make an offer for all of the target’s outstanding
shares. A welcome takeover generally goes smoothly because both companies consider it a positive situation. In
contrast, an unwelcome or hostile takeover can be quite unpleasant. The acquiring firm can use unfavorable tactics
such as a dawn raid (where it buys a substantial stake in the target company as soon as the markets open, causing
the target to lose control of the company before it realizes what is happening). The target firm’s management and
board of directors may strongly resist takeover attempts through tactics such as a poison pill, which lets the
target’s shareholders purchase more shares at a discount in order to dilute the acquirer’s holdings and make a
takeover more expensive.

A takeover is virtually the same as an acquisition, except that “takeover” has a negative connotation, indicating the
target does not wish to be purchased. Why would one company want to buy another company against that
company’s will? The bidder might be seeking to increase its market share or to achieve economies of scale that will
help it reduce its costs and thereby increase its profits. Companies that make attractive takeover targets include
those that have a unique niche in a particular product or service, small companies with viable products or services
but insufficient financing, a similar company in close geographic proximity where combining forces could improve
efficiency and otherwise viable companies that are paying too much for debt that could be refinanced at a lower
cost if a larger company with better credit took over.

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Amalgamations & Mergers : Detailed Introduction

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 230-240 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.

The process of amalgamation is quite a tedious one. It 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 230-240 of the Companies Act, 2013.

An amalgamation may be in the nature of purchase or may be in the nature of merger, as prescribed in Accounting
Standard (AS) – 14, issued by The Institute of Chartered Accountants of India. In the case of a ‘merger’ the
acquiring company continues to exist and the prime feature of a merger is that the corporate identity of the

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merged company is the same as that of the transferee / acquiring company. As per AS-14, in case of
amalgamations where there is a genuine pooling of not only assets and liabilities, but also of the shareholders’
interest and of the business of these companies.

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 specie
of the former.

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Types Of Amalgamation

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:

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

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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.

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.

Method of amalgamation

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Mergers & 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:

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. Their products may or may not be identical. For example, the merger of Tata Oil Mills
Company Ltd., (TOMCO) with Hindustan Lever Ltd., is a horizontal merger.
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 utilise the previously untapped capacities.

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. Under this type of merger, two corporate bodies which
are vertically linked to each other either forward or backward, come together. 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.

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. For example, Mohta Steel Industries merged with
Vardhaman Mills Limited...

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Takeover :

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Consideration.

The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value of
the consideration, an assessment is made of the fair value of its elements. A variety of techniques are applied in
arriving at the fair value. For example, when the consideration includes securities, the value fixed by the statutory
authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference
to the market value of the assets given up. Where the market value of the assets given up cannot be reliably
assessed, such assets may be valued at their respective net book values.

Many amalgamations recognize that adjustments may have to be made to the consideration in the light of one or
more future events. When the additional payment is probable and can reasonably be estimated at the date of
amalgamation, it is included in the calculation of the
consideration. In all other cases, the adjustment is recognized as soon as the amount is determinable, keeping in
mind AS-4, “Contingencies and Events Occuring after the Balance Sheet Date”.

Treatment of Reserves

In case of “amalgamation in the nature of merger”, the identity of the reserves is preserved and they appear in the
financial statements of the transferee company in the same form in which they appeared in the financial
statements of the transferor company. As a result of preserving the identity, the reserves which are available for
distribution as dividend before the amalgamation would also be available for distribution as dividend after the
amalgamation. The difference between the amount recorded as share capital issued and the amount of share
capital of the transferor company is adjusted in reserves in the financial statements of the transferee company.

If the amalgamation is an “amalgamation in the nature of purchase”, the identity of the reserves, other than the
statutory reserves such as Development Rebate Reserve or Investment Allowance Reserve, is not preserved. The
amount of consideration is deducted from the value of the net assets of the transferor company acquired by the
transferee company. If the result of the computation is negative, the difference is debited to ‘Goodwill’ arising on
amalgamation and is amortised to income on a systematic basis over its useful life. On the other hand, if the result
of the computation is positive, the difference is credited to ‘Capital Reserve’.

Certain reserves may have been created by the transferor company pursuant to the requirements of, or to avail of
the benefits under the Income Tax Act, 1961; for instance, Development Rebate Reserve or the Investment
Allowance Reserve. The Act requires that the identity of the reserves should be preserved for a specified period.

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Similarly, certain other reserves may have been created in the books of the transferor company in terms of the
requirements of other statutes. Though in the case of amalgamation in the nature of purchase, the identity of the
reserves is not preserved, an exception is made in respect of statutory reserves and such reserves retain their
identity in the financial statements of the transferee company, so long as their identity is required to be maintained
to comply with the relevant statute. This exception is made only in those cases where the requirements of the
relevant statute for recording the statutory reserves in the books of the transferee company are complied with. In
such a case the statutory reserves are recorded in the books of the transferee company by a corresponding debit to
a suitable account head such as “Amalgamation Adjustment Account”, which is disclosed as a part of
“Miscellaneous Expenditure” or other similar category in the balance sheet. When the identity of the statutory
reserve is no longer required to be maintained, both reserves and the aforesaid account are reversed.

Treatment of Goodwill.

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is
appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the
nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is,
therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period
not exceeding 5 years unless a somewhat longer period can be justified.

Factors which are considered in estimating the useful life of goodwill arising on amalgamation include, among
others, the following:

(1) The foreseeable life of the business or industry.

(2) The effects of product obsolescence, changes in demand and other economic factors.
(3) The service life expectancies of key individuals or groups of employees.
(4) Expected actions by competitors or potential competitors.
(5) Legal, regulatory or contractual provisions affecting the useful life.

Balance of Profit and Loss Account.

In case of “amalgamation in the nature of merger”, the balance of the profit and loss account appearing in the
financial statements of the transferor company is aggregated with the corresponding balance appearing in the
financial statements of the transferee company. Alternatively, it is transferred to the ‘General Reserve’, if any. In

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case of “amalgamation in the nature of purchase”, the balance of the Profit and Loss Account appearing in the
financial statements of the transferor company, whether debited or credited, loses its identity.

Treatment of Reserves
The scheme of amalgamation sanctioned under the provisions of the Companies act, 2013, or any other statute
may prescribe the treatment to be given to the reserves of the transferor company after its amalgamation. Where
the treatment is so prescribed, the same is followed.

Disclosures to be made in the Financial Statements.

For all amalgamations, the following disclosures are considered appropriate in the first financial statements
following the amalgamation:

(a) Names and general nature of business of the amalgamating companies.

(b) Effective date of amalgamation for accounting purposes.
(c) The method of accounting used to reflect the amalgamation, and
(d) Particulars of the scheme sanctioned under a statute.

For amalgamations accounted for under the “Pooling of Interest Method”, the following additional disclosures are
considered appropriate in the first financial statements following the amalgamation:

(a) Description and number of shares issued, together with the percentage of each company’s equity shares
exchanged to effect the amalgamation.

(b) The amount of any difference between the consideration and the value of net identifiable assets acquired,
and the treatment thereof.

For amalgamations accounted for under the “Purchase Method”, the following additional disclosures are required
to be made in the first financial statements following the amalgamation:

(a) Consideration for the amalgamation and a description of the consideration paid or contingently payable,
and

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(b) The amount of any difference between the consideration and the value of net identifiable assets acquired,
and the treatment thereof including the period of amortisation of any goodwill arising on the
amalgamation.

Final the Balance Sheet Date.

When an amalgamation is effected after the balance sheet date, but before the issuance of the financial
statements of either party to the amalgamation, disclosure is to be made in accordance with the provisions of AS-4,
“Contingencies and Events Occurring after the Balance Sheet Date”. However, the amalgamation is not
incorporated in the financial statements. In certain circumstances, the amalgamation may also provide additional
information affecting the financial statements themselves, for instance, by allowing the going concern assumption
to be maintained.

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