Merger & Acquisitions provisions under Income Tax Act, 1961

When a merger is planned, evaluation of the composition of the boardroom and compatibility of the directors is crucial. Managers who are suddenly deprived of authority can react in a bitter way. Personality clashes between executives in the two companies are bound to arise. This may slow down or prevent integration of the firms. An entrepreneur has a dual role to play— as a leader and as a manager. Leader provides direction and energy while the Manager processes the input and gives the production or output.

These companies operate in the same market and are each other’s competitors. Such consolidation results in the elimination of competition and the extension of the market. Market leaders take over other entities to eliminate competition in the industry. Bringing companies under the same control is profitable and helps create a market monopoly. It is the seller company whose net assets or equity interest is acquired by the acquirer. A company’s risk can be reduced by diversifying its activities into two or more industries.

Acquisition refers a corporate action in which a company buys almost, the target company’s ownership stakes in order to assume control of the target firm. It is often made as part of a company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations . It is often paid in cash, it could be the acquisition of company’s stock, tangible assets, intangible assets, ‘ rights, acquisition of control, and other kinds of obligations. It is also known as a takeover, means the buying company takeover or acquire by another.

The term ‘merger’ is not defined under the Companies Act, 1956 (“CA 1956”), and under Income Tax Act, 1961 (“ITA”). However, the Companies Act, 2013 (“CA 2013”) without strictly defining the term explains the concept. A ‘merger’ is a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business. Helps companies grow their market share by complementing, supplementing, or diversifying their current business lines / products / services etc.

Jhunjhunwala thought he can run the factory and earn profit out of it. He bought his relative’s factory. The factory took a new birth and today it is earning huge profit. “Jhula Vanaspati” is now a reputed brand of ghee in that part of the country. He says business is an opportunity, it involves risk and it is a challenge.

is the result of combination of two or more companies

Internal Expansion and External Expansion are the two ways in which an organisation can expand. Functional based JV is entered into by companies in order to achieve mutual benefit. Project based JV entered into by the companies in order to achieve specific tasks. The basic idea is to pool resources and facilitate innovative ideas and techniques with the common objective of sharing benefits. Flipkart and OLX. Strategic Alliance is an agreement between two or more parties to collaborate/cooperate with each other in order to achieve certain commercial objectives.


To understand both these types in detail let us go through them one by one. The term amalgamation has generally fallen out of popular use in the United States, being replaced with the term’s merger or consolidation even when a new entity is formed. But it is still commonly used in countries such as India.

Basically, synergy may be in the form of increased revenues and/or cost savings. Corporate Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes. Acquisition is a more general term, enveloping in itself a range of acquisition transactions. It could be leading to takeover of a company.

Through the acquisition, Tata Steel Ltd. could combine its low-cost production with the high quality of Corus. It resulted utilization of wide retail and distribution network, technology transfer and enhanced R&D capabilities. Joint Venture is a separate entity formed by two or more companies to undertake commercial activities together. In a joint venture, a new enterprise is formed with participation in ownership, control and management of two or more parties.

  • One of the maj or benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market.
  • It is also known as a takeover, means the buying company takeover or acquire by another.
  • Here, the enterprise thus is able to produce more types of products e.g. not only washing soap, but toilet soaps, shampoos, detergents, washing powders etc. are produced by such enterprises.
  • Low facilitation to highest facilitation by a company then leads to movement from low level to highest level.
  • CO-CENTRIC MERGERS The term Co-centric Merger denotes that the organisations serve the same type of customers.

This results in regulatory delays and increases the risk of deterioration for the business. So care has to be taken to ensure that regulatory hurdles and problems do not crop up, else it may lead to failure. If an enterprise is not sensitive to change in technology then its technology will become outdated and it has to quit the market. It is mainly because the cost of production will become higher compared to other enterprises; this will lead to decrease in demand of this product. Michael Porter gave the value chain analysis concept in his 1985 book ‘The Competitive Advantage’. He suggested that activities within an organisation add value to the service and products that the organisation produces and all these activities should be run at optimum level if the organisation is to gain any real competitive advantage.

Timeline for Companies entering into a Combination

The Liberalisation and Globalization has brought all world together and use of modern technologies we are able to trade all over the world. An entity acquires resources, technology, finance, markets, infrastructure, etc. for its growth through various ways. An entity may enter into new market by merger, acquisition, takeover or business restructuring.

Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.

Let’s see some examples in which an acquirer can obtain control. Amalgamation aids in increasing the combined company’s market share.Market share can be increased by combining the sales of the amalgamated companies as well as increasing the amalgamated company’s market presence . A merger is a process of combining two or more companies/entities to form either a new company or an existing company that absorbs the other target companies. It is, in essence, the process of combining multiple businesses into a single business entity.

is the result of combination of two or more companies

Extension is a result of thoughtful consideration of various factors, including the financial, logistical, even his/her emotional readiness. Franchise requirement include potential franchise partners who can invest Rs lakh, area requirement is about 350 sq ft and the preferred location is a high street traffic areas like market, colleges, business areas and residential catchments. The company is looking to strengthen its pan India franchisee network. To ensure the continued efficiency and profitable functioning and growth of enterprise, extra managerial ability is required. It is necessary for an enterprise to have a plan for growth as without growth the enterprise will be removed from the market and will become extinct. ABC Company may have decided to expand in terms of its production and wanted to raise its sales and turnover.

More The Companies Act, 2013 Questions

If a person / party / group takes control over an enterprise with which it competes, where the parties, or the acquiring person / party / group meet the specified assets/turnover thresholds. Market synergies are similar to revenue synergies in that they both refer to an increased power to negotiate with customers on items. The various competition regulatory bodies have capped this form of synergy to some extent.

is the result of combination of two or more companies

Can you please also provide practical procedure for merger of two Indian private companies for which both the directors and shareholders are same. In Case of application filing u/s 230 for Compromise & Arrangement in relation to reconstruction of the Company is the result of combination of two or more companies or companies involving merger or the amalgamation of any two or more companies should specify the purpose of the scheme. Merging of large sized company into small sized company is also form of Reverse Merger. For example ,merger of Corus with Tata.

The customers cancelled their bookings and there were very few new bookings. As a result the sale of the cars declined and also the profits. The management of the company analysed the problems and decided to take over those two firms because of whom the problems arose. One of them was supplying engines and the other types. The company also launched new discount schemes for its customers. It also decided to employ 200 unemployed young boys and girls to take up the cleaning operations using imported machines inside the factories as well as the surrounding areas.

Types of Amalgamation

Since there are so many franchise options available for an entrepreneur, the franchisor will need to offer all of the above services in order to succeed in the sale of franchises. Mergers, amalgamations and acquisitions are forms of inorganic growth strategy. Such corporate restructuring strategies have one common goal viz. To create synergy. Such synergy effect makes the value of the combined companies greater than the sum of the two parts.

V. a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer. As a matter of practice, frequently the Scheme provided for accounting treatment that would deviate from the prescribed accounting standards necessitating a note to this effect in the balance sheet of the company. This was frowned upon by the tax authorities. The 2013 Act makes such prior certification from an auditor mandatory for both listed and unlisted companies.

Broadening the firm’s product or market mix will result in a higher level of performance. Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer an in-road into the emerging Asian markets. Hence, there would be a powerful combination of high quality development and low cost high growth markets.

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