Business Restructing amalgamation vs demerger

Description
This is a PPT explaining Business Restructing presentation covers topics like amalgamation, stock in trade, demerger and compares them.

Business Restructuring

Amalgamation
• Amalgamation is a blending of two or more existing undertakings into one undertaking. • The shareholders of 75% of shares of the blending company become the shareholders in the company • which is to carry on the business of blended undertakings. • There may be amalgamation either by the transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company.

Examples of amalgamation
• Merger of A Ltd. with X Ltd.
– A Ltd. goes out of existence

• Merger of A Ltd. and B Ltd. with X Ltd.
– A Ltd. and B Ltd. go out of existence

• Merger of A Ltd. and B Ltd. into a newly incorporated company X Ltd.
– A Ltd. and B Ltd. go out of existence

• Merger of A Ltd., B Ltd. and C Ltd., into a newly incorporated company X Ltd.
– A Ltd., B Ltd. and C Ltd. go out of existence

• In the aforesaid cases, A Ltd., B Ltd. and C Ltd. are amalgamating companies, while X Ltd. is an amalgamated company.

Conditions for amalgamation
1. All the properties and liabilities of the amalgamating company (A) immediately before the amalgamation should become the property and liabilities of the amalgamated company (X) 2. Shareholders holding atleast 75% (in value) of the shares in the amalgamating company (other than shares already held by the amalgamated company or by its nominee) should become shareholders of the amalgamated company

Example of provision 2
• A Ltd. merges with X Ltd., in a scheme of amalgamation, and immediately before the amalgamation, X Ltd. held 20 per cent of the shares in A Ltd., • shareholders holding not less than 3/4 (in value) of the remaining 80 per cent of the shares in A Ltd., i.e., 60 per cent thereof (3/4 × 80), become shareholders of X Ltd., by virtue of the amalgamation. • Where, however, the whole of the share capital of a company is held by another company, the merger of the two companies will qualify as an amalgamation, if condition no.1 is fulfilled

No ?amalgamation? when:
• Section 2(1B) specifically provides that in the following two cases there is no ?amalgamation? for the purpose of the Income-tax Act, though the element of merger exists : a. where the property of the company which merges is sold to the other company and the merger is a result of a transaction of sale ; b. where the company which merges is wound up in liquidation and the liquidator distributes its property to the other company.

Impact of amalgamation
• Any transfer of capital assets by the amalgamating company to the amalgamated company is not taken as ?transfer? if the following conditions are satisfied— a. the scheme of amalgamation satisfies the conditions of amalgamation; and b. the amalgamated company is Indian company.

ALLOTMENT OF SHARES IN AMALGAMATION
• Any transfer by a shareholder of shares held by him in the amalgamating company shall not be treated as transfer if— a. transfer is made in consideration of allotment to him of shares in the amalgamated company ; and b. amalgamated company is an Indian company. • According to section 49(2), in the above cases, the cost of shares of the amalgamating company shall be cost of shares of the amalgamated company.

Example
• X Ltd., an Indian company, takes over the business of Y Ltd. • Z has purchased 100 shares in Y Ltd. in 1994 for Rs. 60 per share. • As per the scheme of amalgamation, he gets 50 shares in X Ltd. in lieu of 100 shares in Y Ltd. • Consequently, the cost of shares in X Ltd. will be taken as Rs. 120 per share [i.e., Rs. 6,000, being cost of 100 shares in Y Ltd. ÷ 50 shares in X Ltd.]. • the period of holding shall be from the date of acquisition of shares of Y Ltd. • The indexation will start from the date of allotment of shares in Y Ltd. • If the shareholders of X Ltd. are allotted something more besides shares, say bonds or cash, etc., then the shareholders cannot get the benefit under section 47(vii) and such transfer shall be chargeable to capital gains

If capital assets are transferred as stock-in-trade
• X Ltd. purchases an immovable property on April 6, 1984 for Rs. 2,00,000 and spends Rs. 10,000 for making some alterations. • This asset is later on transferred to Y Ltd., which is mainly dealing in immovable property, at Rs. 2,40,000 in the scheme of amalgamation of the two companies. • Y Ltd. sells the stock-in-trade for Rs. 5 lakh on May 6, 2007.

• Business income of Y Ltd. will be Rs. 2.90 lakh (i.e., Rs. 5 lakh minus cost of the capital asset to X Ltd. : Rs. 2 lakh minus improvement expenses : Rs. 10,000).

Carry forward and set-off of loss and depreciation - [Sec. 72A]
• The accumulated loss and the unabsorbed depreciation of the amalgamating company shall be allowed to the amalgamated company if the following conditions are satisfied: 1. There is an amalgamation of a company owning industrial undertaking, ship or a hotel with another company
– Bank with SBI or public sector airlines with another public sector airlines

Meaning of industrial undertaking
• an industrial undertaking is an undertaking engaged in
– the manufacture or processing of goods, or – the manufacture of computer software or – the business of generation or distribution of electricity or any other form of power or – mining or – the construction of ships, aircrafts or rail systems, – the business of providing telecommunication services whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services.

Conditions for carry forward of losses (contd.)
2. The amalgamating company has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years. 3. The amalgamating company has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation. 4. The amalgamated company continues to hold at least three-fourths in the book value of fixed assets of the amalgamating company which is acquired as a result of amalgamation for five years from the effective date of amalgamation. 5. The amalgamated company continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation.

Conditions (contd.)
6. The amalgamated company, shall achieve the level of production of at least 50 per cent of the installed capacity of the amalgamating undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation.

Expenditure on amalgamation/ demerger
[Sec. 35DD] • Expenditure is wholly and exclusively for the purpose of amalgamation • It could also be capital in nature • Cannot be allowed as deduction under any other section, if allowed here • deduction equal to one-fifth of such expenditure is allowed for 5 successive previous years beginning with the previous year in which amalgamation or demerger takes place.

Also to be considered
• Weighted average deduction for scientific research • Amortization of telecom license fees • Amortization of preliminary expenses (5 years) • Amortization of VRS expenses- 5 years • Amortization of expenses on prospecting- 10 years • Recovery of expenses claimed as deductions • Sec. 80IA/IB deductions continue

Demerger
• The company whose undertaking is transferred is known as ?demerged? company. The company to which the undertaking is transferred is known as ?resulting? company. • Entities involved should be companies • Sections 391 to 394 of the Companies Act should be satisfied • It involves transfer of an undertaking

Demerger (contd.)
• All property of the undertaking should be transferred to the resulting company • The resulting company should take over all liabilities of the undertaking • Liabilities/properties are to be transferred at book value • Shares in the resulting company are issued to the shareholders of demerged company • Shareholders holding 75 per cent shares in the demerged company to become shareholders in the resulting company • Transfer should be ongoing concern basis

Amalgamation vs Demerger
The differences between amalgamation and demerger are:
– An amalgamation has a reference to a company as a whole whereas a demerger has a reference to an undertaking of the company. – The amalgamating company will lose its identity in amalgamation whereas the demerged company may continue to exist after demerger. – Demerger stipulates a transfer pursuant to a scheme of arrangement under sections 391 to 394, whereas there is no such requirement in case of amalgamation. – Demerger requires transfer of undertaking on a going-concern basis whereas there is no such explicit requirement under the Act in case of amalgamation.



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