The document discusses the accounting treatment and regulatory framework for company amalgamations in India. It provides details on the types of amalgamations, accounting entries in the books of the transferee and transferor companies, and the obligations of acquirers, target company boards, and merchant bankers as per the SEBI Takeover Code regulations governing mergers and acquisitions.

1. Accounting for
Amalgamation &
Legal and Regulatory
Frame Work

2. Introduction
• Amalgamation
Two are more companies join to form
new company
For Ex. A ltd & B ltd C ltd
Amalgamation

3. • Amalgamation is a blending of two or
more existing undertakings into one
undertaking, the shareholders of each
blending company become substantially
the shareholders in the company which is
to carry-on the blended undertakings

4. Accounting for Amalgamation as per
AS 14
• In India, Accounting Standard 14 (AS 14)
“Accounting for Amalgamations” deals with
the accounting to be made in the books of
Transferee Company.
• This AS is applicable where the acquired
company is dissolved & its separate entity
ceased to exist & the purchasing company
continues the business of acquired company

5. Terms used in AS 14
• Amalgamation: it means an amalgamation
pursuant to the provisions of the companies
Act 1956 and , or any other statute which may
be applicable to companies.
• Transferor Company: the company which is
amalgamated into another company [Target
Co.]

6. • Transferee Company: the company into which
a transferor company is amalgamated
[Surviving Co.]
• Purchase Consideration: the aggregate of the
shares & other securities issued & the
payment made in the form of cash or other
assets by the transferee company to the
shareholders of the transferor company

7. Types of Amalgamation
• As per AS-14 there are two types of
amalgamations;
1 Amalgamation in the nature of Merger
2 Amalgamation in the nature of purchase

8. Difference b/w Amalgamation in the
nature of Merger & Purchase
Basis of
difference
Amalgamation in the
nature of Merger
Amalgamation in
the nature of
Purchase
Transfer of
Assets &
Liabilities
There is transfer of all
assets & liabilities
There need not be
transfer of all
assets & liabilities
Equity
shareholders
holding 90%
Equity shareholders
holding 90% equity
shares are same in
both the companies
Equity shareholders
need not be same
in both the
companies

9. Basis of
difference
Amalgamation in the
nature of Merger
Amalgamation in
the nature of
Purchase
Purchase
consideration
Is discharged wholly
by issue of equity
shares
Need not to be
discharged wholly
by issue of equity
shares
Same
business
The business of the
transferor Co is
carried-on by the
transferee Co
The business of the
transferor Co need
not to be carried-on
by the transferee
Co
Recording of
Assets & Liab.
Recorded at their
existing carrying
amounts except where
adjustment is required
Recorded at their
existing carrying
amounts or on the
basis of their fair
values

10. Basis of
difference
Amalgamation in the
nature of Merger
Amalgamation in
the nature of
Purchase
Recording of
Balance of
P&L A/c of
Transferor Co
It should be
aggregated with the
corresponding balance
of transferee Co to the
general reserve
Balance of P&L A/c
losses is identified
& is not recorded at
all
Diff b/w
Purchase
consideration
& Share
Capital/Net
assets of
transfer Co.
Excess of PC over the
share capital of
transferor Co is
debited to Reserves &
excess of share
capital over PC is
credited to Reserves
Excess of PC over
the net assets is
treated as Goodwill
& the excess of net
assets over PC is
treated as capital
Reserve

11. Purchase Consideration [PC]
• It is the price which is paid by the transferee
company to the transferor company for the
amalgamation of business.
• It is the aggregate of the shares & other
securities issued & the payment made in the
form of cash or other assets by the transferee
company to the shareholders of the transferor
company

12. Methods of calculation of PC
• Net payment method
• Net assets method
• Share exchange method

13. Technical terms
• Business: Includes all assets & liabilities
• Trade liabilities: includes trade creditors, bills
payables
• Liabilities: include financial liabilities & liabilities for
expenses i.e. Bank OD, debentures, O/S exp,
provisions for taxation, provident fund etc.
• Accumulated Profits: insurance fund, general
reserve, dividend equalization reserves, accidental
fund, workmen reserve, workmen compensation
fund

14. • Accumulated losses: debit balance of P&L a/c,
preliminary exp, discount of issue of shares &
debentures, premium on redemption of pref
shares & debentures. These losses are
transferred to equity shareholders
• Provisions: doubtful debts, provisions for
depreciation, & investments may be shown on
the assets side by way of deductions from
particular assets or on the liabilities side.
These provisions are transferred to realization
a/c

15. Net payment method
• According to AS-14, all payments made by the
transferee company only to the shareholders
of the transferor company irrespective of their
form of payment.
• Payments may be made in the form of shares,
debentures or any other securities & cash to
the shareholders

16. • Any payment made by the transferee
company to any other party (creditors or
debenture holders or bank etc) will not form
part of PC
• Payment of liquidation or realization expenses
will not be included in the PC even if these are
expressly stated to be paid by the transferee
company

17. • Understand accounting treatment in case of
amalgamation of companies
• Accounting entries in the books of transferee
company
• Accounting entries in the books of transferor
company
• Preparation of balance sheet under pooling of
interest method and purchase consideration method
in the books of Transferee Company.

18. • The following journal entries are made in the
books of Transferee Company, in case of
amalgamation in the nature of merger:
For recording the purchase consideration:
Business Purchase A/c Dr. (with amt. of purchase
consideration)
To Liquidator of Transferor Co. (Being purchase
consideration becoming due)

19. Sundry Assets A/c Dr. (Book Value)
To Sundry Liabilities A/c (Book Value)
To Provision for Doubtful Debts A/c (Book Value)
To Profit and Loss A/c (Book Value)
To Reserves A/c (Adjusted Value)
To Business Purchase (Purchase Consideration)
(Being assets and liabilities taken over)

20. Sundry Assets A/c Dr. (Book Value)
Profit & Loss A/c (Dr. Balance) Dr. (Balancing
Figure)
To Sundry Liabilities A/c (Book Value)
To Provision for Doubtful Debt A/c
To Business Purchase A/c (Purchase
Consideration)

21. • On discharge of Purchase Consideration:
Liquidator of the Transferor Co Dr. (Purchase
Consideration)
To Share Capital A/c (With face value)
To Securities Premium A/c (With Premium
Amount) To Bank A/c

22. • If the Transferee co. bears the liquidation
expenses:
General Reserve A/c Dr.
To Bank A/c (Liquidation expenses paid by
Transferee Co.)
For the formation expenses of the transferee Co:
Preliminary Expenses A/c Dr.
To Bank A/c (Being formation expenses
paid by Transferee Co.)

23. • Following journal entries are passed in the
books of Transferee Company in case of
Amalgamation in the nature of purchase:
For recording the Purchase Consideration
Business Purchase A/c Dr.(Amt.of purchase
consideration)
To Liquidator of Transferee Co.

24. • For recording the assets and liabilities taken
over if total of debit exceeds the total of
credit:
Sundry Assets A/c Dr. (At revised values)
Goodwill A/c Dr. (Balancing figure)
To Sundry Liabilities (Revised value)
To Business Purchase (Purchase
Consideration)

25. • For recording the assets and liabilities taken
over if total of credit exceed the total of debit:
Sundry Assets A/c Dr. (At revised values)
To Sundry Liabilities A/c (Revised value)
To Business Purchase A/c (Purchase
Consideration)
To Capital Reserve A/c (Balancing figure)
(Being assets and liabilities taken over)

26. • On discharge of purchase consideration:
Liquidator of Transferor Co. Dr. (Purchase
Consideration
To Share Capital A/c (With face value)
To Securities Premium (With
premium amount)
To Bank A/c
(Being Purchase consideration satisfied)

27. • If the Transferee co. bears the Liquidation expenses:
Goodwill A/c Dr.
To Bank A/c
(Being Liquidation expenses paid by Transferee Co.)
For the Formation expenses of the transferee Co: Preliminary Expenses
A/c Dr.
To Bank A/c
(Being Formation expenses paid by transferee Co.)
To record the Statutory Reserve of the Transferee Co: Amalgamation
Adj. A/c Dr.
To Statutory Reserve
(Being record of Statutory Reserve of Transferor Co. by Transferee Co.)

28. • ACCOUNTING ENTRIES IN THE BOOKS OF
TRANSFEROR COMPANY
Realization A/c Dr.
To Sundry Assets (Individually)
(Transfer of various assets taken over by the
Transferee Co.)

29. Liabilities A/c Dr.
To Realisation A/c
(Transfer of liabilities to the Realisation A/c)

30. • For Purchase consideration to be paid by the
Transferee Company:
Transferee Company Dr.
To Realisation A/c
(Being Purchase Consideration agreed upon)
For recording Purchase Consideration:
Bank A/c Dr. Shares in Transferee Co Dr.
To Transferee Co.
(Being purchase consideration received)

31. Legal & Regulatory Framework
of M&A

32. • Provisions of Company’s Act 1956 &
2013
• Indian Income Tax Act 1961
• SEBI Take over Code

33. Regulatory framework
• The policy & regulatory framework governing the M&As gradually
evolved in the 1990s. In 1992, the govt created SEBI with powers
vested in it to regulate the Indian Capital Market & to protect
investors’ interest. SEBI took over the functions of the office of the
Controller of Capital Issues(CCI). In Nov 1994, with the view to
regulate the takeovers.

34. • The main objective of the regulations
governing takeovers was to provide greater
transparency in the acquisition of shares &
the take over of ownership & control of
companies through a system based on
disclosure of information.
• Any takeover in India needs to comply with
the provisions of SEBI (Substantial Acquisition
of Shares & Takeovers) Regulations, 1997
(Takeover Code).

35. SEBI Takeover code
• It mandates the acquirer to make public disclosure of his
shareholding or voting rights to the target company as well
as the stock exchange on which its shares are listed, if he
acquires shares or voting rights beyond the predetermined
limit.
• The Takeover Code makes it difficult for the hostile acquirer
to just sneak up on the target company. It forewarns the
company about the advances of an acquirer by mandating
that acquirer make a public disclosure of his shareholding
or voting rights to the company if he acquires shares
beyond a certain specific limit.
• However, the Code does not present any impossible barrier
to a determined hostile acquirer.

36. • It also allows the target company to issue shares pursuant to
public or rights issue in respect of which the offer document
has already been filed with the Registrar of Company or stock
exchanges.
• However, this may be of little respite as the debentures or
warrants contemplated earlier must be issued prior to the
offer period. Further, law does not permit the Board of
Directors of the target company to make such issues without
shareholders’ approval either prior to the offer period or
during the offer period, as it is specially prohibited under
Regulation 23.
• The Takeover Code, along with the SEBI (Disclosure & Investor
Protection) Guidelines 2000 are the nodal regulations on the
preferential allotment of shares or issuance of share warrants
by a listed company.

37. • They impose several restrictions on the preferential allotment
of shares or issuance of share warrants. Under DIP guidelines,
issuing shares & warrants at a discount is not possible.
• The DIP guidelines do not stipulate any pricing restrictions on
the issue of non-convertible preference shares, non-convertible
debentures, notes, bonds, & certificates of deposits.
– thus co., can use a Poison Pill or take advantage of Articles of
Association like Tata (in case of takeover, acquirer can’t use the
brand Tata to issue securities)
• The Takeover Code also restricts the corporate actions of target
companies during the offer period, such as transferring assets
or entering into material contracts & prohibiting issue of any
authorized but unissued securities during the offer period.

38. General obligations of the acquirer
Regulation 22 deals with the general obligations of the
acquirer. Imp ones are given below-
• During the offer period, the acquirer or a
person acting in concert with him is not
entitles to get appointed on the board of the
target company. Further, if any person
representing or having interest in the acquirer
is already on the board of the target company,
such person shall recuse himself & not
participate in any matters relating to the offer

39. • The acquirer shall create an escort account as provided under
regulation 28 on or before the date of the public announcement.
• Escort a/c is meant to be security for the performance by the
acquirer of his obligations under regulation 28 (1).
• Escort amount is to be calculated as follows-
– If the total payment consideration is up to 100 crores, 25%
thereof
– If it is more than 100 crore, 25% of first 100 crore & for the
remaining amount 10% thereof
• Within fifteen days of the closure of the open offer, the acquirer
shall complete all procedures relating to the offer including the
payment of consideration to the shareholders
• In the event of withdrawal of the open offer as permitted under
the regulations, the acquirer shall not be entitled to make an
open offer for the same target company for six months from the
public announcement of withdrawal of the open offer

40. • In the event of non-fulfilment of obligation under the regulations,
the acquirer shall not be entitled to make an open offer for any
listed company for twelve months from the date of closure of the
offer
• In case, an acquirer enters into an agreement that has an effect
of his acquiring shares, which when taken together with the
shares already held by him, in excess of 15%, then that
agreement shall contain a clause that in case the acquirer does
not comply with any provisions of the regulations, the agreement
shall not be acted upon by either party
• If the acquirer does not disclose in the public announcement or in
letter of offer, his intention to dispose of or encumber any assets
of the target company except in the ordinary course of business,
he shall be debarred from doing so for a period of two years after
his acquisition control of the target company

41. General obligations of the board of the
target company
• The board of the target company is prevented from
doing certain things. They are-
– Not to sell, transfer, dispose off or encumber any of the
assets of the company except in the ordinary course of
business
– Not to enter into any material contracts
– Not to issue any authorized but unissued securities
carrying voting rights except out of subsisting obligations in
respect of warrants or convertible securities or allotments
pursuant to the public or the rights issues, where the offer
document has already been filed with the Registrar of
Companies (ROC) or the stock exchange.

42. • It is the obligation of the board of the target company to
provide, within seven days of the specified date or within
seven days of the request from the acquirer, list with details
of shareholders, convertible debenture or warrant holders
eligible to participate in the offer along with the details of
pending transfers
• It is also the obligation of the board to facilitate verification
of acceptances tendered
• The board should not appoint any person representing
acquirer & interested in offer till the merchant banker
issues the certificate that offer has been completed. If the
board has such a member already existing, target firm
should ensure that person is not allowed to participate in
any matter relating to the open offer during the offer
period

43. General obligations of the merchant
banker
In the entire process of the open offer, the merchant banker
plays a very key role. He is the one who is in a position to
ensure that the acquirer is complying with all the provisions
of the takeover regulations. Hence, the regulations cast
upon him certain obligations. They are-
• To ensure before the public announcement that-
– The acquirer is able to implement the offer
– The provisions relating to escrow a/c have been complied with
by the acquirer
– Firm arrangement for funds required for fulfilling his payment
obligations has been made by the acquirer
– The public announcement is made as per the regulations
– Merchant banker’s shareholding, if any, in the target company is
disclosed in the public announcement & the letter of offer

44. • To furnish to SEBI, a due diligence certificate along with the draft
letter of the offer
• To ensure that the public announcement & the letter of offer are
filed with the SEBI & sent to the target company & relevant stock
exchanges
• To ensure that the contents of the public announcement as well
as the letter of offer are true, fair & adequate
• To ensure compliance with SEBI takeover regulations & any other
applicable laws, rules, etc
• Not to deal in target company’s shares from the date of his
appointment till fifteen days after the closure of the offer
• To cause the bank, with whom the escrow account is opened, to
release the balance amount to the acquirer after fulfillment of
all the obligations by the acquirer
• To furnish a final report to SEBI within forty-five days of the
closure of the offer

45. Competitive bid
• Regulation 25 allows any other person other than the original
acquirer to make a public announcement of an open offer for
the acquisition of shares of the target company within
twenty-one days of the first public announcement of the open
offer. Such an offer under regulation 25 is defined as
competitive bid
• In simple words competitive bid can be defined as a bid for
the shares of the same target company addressed to the same
body of shareholders

46. Regulations relating to a competitive bid are-
• Public announcement of a competitive bid can be made
within 21 days of the public announcement of the first
open offer & not thereafter
• There can be no competitive bid in case of a PSU
disinvestment
• Any competitive offer must be made for such a minimum
number of shares so that the shares offered together with
those already held by the competitive bidder shall be equal
to the number of shares that the first bidder would hold if
his offer fully succeeds
• Upon the public announcement of a competitive bid, the
first acquirer has a right to revise upward his offer within 14
days of the public announcement of the competitive offer

47. Upward revision of the offer
Regulation 26 stipulates that the acquirer can make only
upward revision of his offer. However, he can do the same
irrespective of whether there is a competitive bid or not.
Such revision can be made till seven days prior to the
closure of the offer. Further, such a revision shall be subject
to the following conditions-
• Making a public announcement in respect, thereof, in the
same newspapers in which the original public
announcement was made
• Simultaneously informing the SEBI, the target, & the
relevant stock exchanges
• Increasing the value of the escrow a/c as per the regulation

48. Withdrawal of the offer
Regulation 27 stipulates that an open offer, once made, cannot
be withdrawn except-
• In case the required statutory approvals have been refused
• In case the sole acquirer has died before competition of the
offer
• In such other circumstances that, in SEBI’s opinion, merit such
withdrawal

49. Company's act of 1956
• The M&A are subject to the provisions contained in
Section 391 & 396A of the Company’s Act of 1956. In
fact, it is predominant in the procedural aspects of
M&A. it does not define Mergers & acquisitions.
Instead, it considers the term ‘Compromise’,
‘arrangements’ & ‘re-construction’ in section 390 to
394 of chapter 5. the act uses the word
amalgamation without defining it. Thus the word
amalgamation is related to arrangement or re-
construction without legal meaning.

50. • While the other acts are supportive in
nature, the company rules provide the main
guidance for effecting an amalgamation or
a merger or an acquisition. The legal
procedures relating to mergers,
acquisitions, or amalgamations follow
critical processes & the law requires
involvement of the courts in the process of
an amalgamation. The court procedures
relating to an amalgamation are different in
different states. Companies (court) rules
1959 lay down procedures for carrying out
amalgamation. However, the basic
fundamental procedures followed by the
court in all the states are same.

51. Provisions of company’s act 1956 as to Mergers
& re-construction
• Power to compromise or make arrangements
with other creditors & members
• Power of tribunal to enforce compromise &
arrangements
• Other legal provisions

52. Power to compromise or make
arrangements with other creditors &
members
• A compromise or arrangement may be
proposed-
– Between a company & its creditors or any class of
them or
– Between a company & its members or any class of
them
• An application may be sent to the National
Company Law Tribunal by any of the following-
– The company
– Any creditors
– Any members
– Liquidators, in case of winding up of the company

53. • On the receipt of the application, the tribunal may order a
meeting of the creditors or class of creditors, a meeting of
members or class of members
• The tribunal may direct the manner in which such meeting
shall be called, held & conducted
• If a majority in number representing ¾ in value of creditors
or members, as the case may be, present & voting either in
person or by proxy at the meeting agree to any
compromise or arrangement shall be binding on all
creditors, members & on the liquidator in case of winding
up the company
• It shall be binding only after the scheme is sanctioned by
the Tribunal
• The tribunal before sanctioning the scheme shall look into
all material facts relating to the company such as the latest
financial position of the company, the pendency of any
investigation in relation to the company under sections
235 to 251 of the act

54. • The tribunal’s order shall have effect only
after a certified copy of it has been filed
with the registrar of the company
• A copy of every such order shall be
annexed to every copy of the
Memorandum of the company issued after
the certified copy of it has been filed as
above
• If default is made in complying with above
provision, the co., & every officer of the
co., who in default shall be punishable
with a fine

55. Other legal provisions
• Section 393 deals with information as to compromise or
arrangements with creditors & members
• Section 394 deals with provisions for facilitating re-
construction & amalgamation of companies
• Section 394A relates to notice to be given to central
government for applications under section 391 & 394
• Section 395 deals with power & duty to acquire shares of
shareholders dissenting from scheme or contract approved
by majority
• Section 396 deals with power of central govt., to provide
for amalgamation of co.,s in national interest
• Section 396A relates to preservation of books & papers of
amalgamation com.,

56. income TAX ACT 1961 FOR M&a
• In order to qualify as amalgamation within the
meaning of it act 1961, the following 3 conditions
need to be satisfied-
– All the properties of the amalgamating company should
become properties of the amalgamated co., by virtue of
amalgamation
– All liabilities of the amalgamating company should become
liabilities of the amalgamated co., by virtue of
amalgamation
– SHs who own more than ¾ of the shares in the
amalgamating co., should become SHs of amalgamated
co., by virtue of amalgamation

57. Tax benefits in respect of M&A
• The following are tax concessions cum
incentives available as per section 2(1B)
of IT Act 1961-
– Tax concession to the amalgamating
company
– Tax concession to the SHs of the
amalgamating co.,
– Tax concession to the amalgamated com.,

58. Tax concession to amalgamating
company
• The following are tax concessions available to
the amalgamating co.,
– Capital gains tax are not attracted according to
Section47(6) of the IT Act provided the
amalgamated co., to whom such capital assets are
transferred is an Indian co.,
– As per section 47 of the IT act any foreign co.,
holds shares of an Indian co., & transfers its
holding to an another foreign co., then such
transfer is not attracted for tax

59. Tax concession to the SHs of an
amalgamating company
• As per section 47(7) of IT Act, if a shareholder
transfers his holdings to another co., in a
scheme of amalgamation, such transfer is not
regarded as a transfer for capital gain purpose.
But following two conditions need to be
satisfied-
– The transfer of shares is made in consideration of
allotment to him of any shares in amalgamated
co.,
– The amalgamated co., is an Indian co.,

60. Tax concession to the amalgamated company
• If the amalgamation satisfies all the three conditions
laid down in section 2 (1B) & the amalgamated co., is
an Indian com., then amalgamated co., is eligible for
the following tax concession-
– Expenditure on scientific research (Section 35(5) which are
not written off, are allowed to carry forward & set off
against the profits of amalgamated co.,
– Expenditure on acquisition of patent right or copy right
(section 35A(6) which are not set off by amalgamating co.,,
are allowed to carry forward & depreciation are allowed to
charge in the same manner to the amalgamated co.,

61. – Expenditure on Know-how (section
35AB(3)) are allowed to charge depreciation
by amalgamated co.,
– Expenditure for obtaining license (Section
35ABB(6)) are also allowed carry forward &
set off against its useful life
– Amortization of expenditure in case of
amalgamation (Section 35D) – such
expenses are allowed to carry forward &
amalgamated com., shall be allowed to
deduct 1/5th of such expenditure for next 5
successive years beginning from the same
previous year, in which amalgamation takes
place

62. – Treatment of Bad debts (Section 36(1) (7))-
debts of amalgamating com., if taken over
by amalgamated co., & if such debt or a part
of such debt becomes bad, such bad debts
will be allowed as a deduction to the
amalgamated com.,
– Carry forward & set off of business losses &
Unabsorbed depreciation of amalgamating
co., are allowed
– Treatment of preliminary expenses (section
35D(5)) are also treated in the same manner
where amalgamated co., is allowed to carry
forward & set off/write off

63. Provisions of competition act
• The competition law committee was set up under
the chairmanship of SVS Raghavan for evolution
of sound corporate governance practices from
the perspective of consumers. The salient
proposals of the committee regarding M&A were-
– Dismantling of MRTP commission & its replacement
by the establishment of a new Competition Law
Regulatory Authority named COMPETITION
COMMISSION OF INDIA (CCI) to enact & implement
the Indian Competition Act in replacement of MRTP
Act

64. – Mandatory pre-notification to the proposed
CCI for all cases of mergers where the assets
of the merged entity exceeds Rs 500 crores,
or if the assets of the business group to
which the merged co., belongs exceed Rs
2000 crores. The proposed commission will
have 90 days from the date of notification to
either accept or reject the merger
– Predatory pricing not be always taken
adversely as lower prices by a firm
sometimes constitute a gain for consumers
– Agreement both between competitors
(horizontal agreement) and actual or
potential relationship between buyers and
sellers (vertical agreement) to be covered