Unit -2
AMALGAMATION, ABSORPTION AND RECONSTRUCTION OF COMPANIES
AMALGAMATION:
Amalgamation is the combination of two existing companies. It is the pooling of assets and liabilities of two companies.
In other words, Amalgamation involves combination of two companies into a new entity. Amalgamation is distinct from merger because neither company involved in the process survives as a legal entity.
Usually, the two companies being amalgamated are of same size and both look out for expansion in the new market.
Why the companies amalgamate?
As said earlier, two companies amalgamate to enter in a new market, geographically or product wise. In other words, amalgamation takes place for the following reasons:
- To diversify the activities
- To gain financially
Example: Maruti Motors of India and Suzuki of Japan were amalgamated in 1982 to form Maruti Suzuki.
ABSORPTION:
Absorption is takeover of one company by another. The company taken over loses its identity.
In the case of Absorption, a small company is taken over by a large company, with an intention to enter a new sector of business, may be related or unrelated to the business of the absorbing company.
Why one company absorbs another?
The Purchasing Company absorbs an existing company to use its strength in the existing market.
Example: Myntra taken over by Flipkart in 2014.
RECONSTRUCTION:
It includes a) Internal Reconstruction and b) External Reconstruction.
Internal Reconstruction is the process in which alterations are done to the Share Capital and some debts are waived off. In this process, the company is neither liquidated nor is a new company formed.
External Reconstruction is the process in which a new company is formed to takeover all the assets and liabilities of the old company. In the process, the old company is liquidated and the new company is formed deliberately to buy the assets and liabilities of the old company.
SYMBOLICALLY AMALGAMATION:
SYMBOLICALLY ABSORPTION:
Difference between Amalgamation and Absorption:
Points | Amalgamation | Absorption |
1. Meaning
2. Minimum number of companies involved
3. Creation of new company
4. Size of entities involved
5. Number of companies liquidated | The process in which two or more companies are wound up to form a new company is called Amalgamation.
Three companies involved. (Eg above – A Ltd, B Ltd, AB Ltd)
In case of Amalgamation, a new company is formed.
The entities are, more or less, of same size.
Minimum 2 companies are liquidated. (Eg above – A Ltd and B Ltd) | The process in which one existing company takes over another existing company is called as Absorption.
Two companies are involved. (Eg above – A Ltd, B Ltd)
In case of Absorption, no new company is formed.
The bigger entity overpowers the smaller entity.
Only 1 company is liquidated.
(Eg above – A Ltd is liquidated) |
