Amalgamation and demerger are two revenue related terms used by corporates. Amalgamation is a process where the assets of two or more companies get joined with another company which may or may not be included in the set of formerly addressed companies. Demerging is the process where some of the assets of a company are acquired by another company.
Amalgamation vs Demerger
The main difference between Amalgamation and Demerger is that in Amalgamation, the merging companies sell all their existing properties to the company that buys them. In the demerger arrangement, only some parts or some of the rights such as undertaking are transferred to another company.
Amalgamation is a process where many companies give up their assets and income to another company and amalgamate with the latter. This may be due to the financial crisis or their loss of interest in the business. When merging occurs only the shareholders who had more than 75% share in the former company can have shares in the merged company.
The demerger is a process in which some of the portions of a company are bought by another company or they just undertake the former company. This process occurs mostly due to financial problems or the shortage of laborers. The shareholders are equally respected in both companies.
Comparison Table Between Amalgamation and Demerger (in Tabular Form)
| Parameter of Comparison | Amalgamation | Demerger |
|---|---|---|
| Process | Amalgamation is the process where two or more companies merge their shares with another company to become a single company. | The demerger is a process in which a company shares some of their rights with another company. |
| Share management | Only the shareholders having 75% or above shares in one of the merging companies can have shares in the merged company. | If a share is invested in a company before demerging, the same amount of share is accessible to the investor from the demerged company after the process. |
| Partition | In amalgamation, the companies are getting legally combined into a new one. | The demerger is a process where the segregation of a company occurs. |
| Labels | The company which merges is called the transferor and the company which has all the merged company is called transferee. | The company which shares its rights is called demerged company and the company that accepts the shares is called the resulting company. |
| Existence | After the process of amalgamation, the earlier companies loss their existence, and only the amalgamated company exists. | The existence of both companies is acceptable. |
What is Amalgamation?
Amalgamation is the process by which two or more companies merge to form a single company. By doing so, the transferors involved in the process transfer all the rights and investments of them to the company which buys them. This company is known as the transferee. This is a legal procedure and all the updated norms are to be followed.
When the process completes, the liabilities as well as the properties of the companies which take the role of transferors, are passed to the transferee. All those norms should be accepted by the transferee and hence, the transferor is free of all the debts. A set of rules and regulations are made up and all these provisions apply to the amalgamated company.
Shareholders are an integral part of an industry. When a company is getting amalgamated with another one, the shareholders who have a share of above 75% share in the amalgamated company, has a chance of having a share in the resulting company. Section 2(1B) of the Income-tax Act 1961 reports amalgamation in India.
What is Demerger?
The demerger is an arrangement where some parts of a company or the undertaking charge of the company are transferred to another company. This results in the distribution of a company and hence the resulting company gets the advantage of operating another institution. Mostly demerging is done when a family asset gets split.
After demerging, the resulting company has to take up the charge of the liabilities and properties of the demerged company. But the resulting company has to only accept these if the part comes under their properties. Demerging is useful in huge industries where a single board of directors is not able to handle the pressure of a company individually. Section 72A(5) of the IT act specifies the rules for demerger in India.
Shareholders are given equal importance in the demerger. The amount of share a person has put in the demerged company is proportionally given to him/her in the resulting company also. This is not applicable if the resulting company is a shareholder in the demerged company. The shareholders having 75% shares in the demerged company automatically become a shareholder of the resulting company.
Main Differences Between Amalgamation and Demerger
- Amalgamation is a process where two or more companies merge to form a single company. The demerger is the process of sharing administration with another company.
- Shareholders with more than 75% of shares in the transferor companies become the shareholders in the transferee during amalgamation. All the shareholders are treated equally in the demerger and proportionality of their shares can be redeemed in the resulting company.
- During amalgamation, the legal process of becoming a single institution is happening while in demerger, a company gets segregated.
- In amalgamation, the merging companies are called transferors and they result in a transferee company. In demerging a demerged company shares its parts with the resulting company.
- After amalgamation, only the transferee exists while, after the demerger, both of the companies can exist.
Conclusion
Amalgamation and demerger are two relevant terms that are used in the business sector. The business field uses these terms often to update the status of the corporate. Amalgamation is the pooling of companies to become a single large company.
There are certain rules and regulations to be followed while amalgamating corporations. The demerger, as the name suggests, is the opposite of the merging of companies. In this process, only certain parts of a company are shared to give special care.
The shareholders are given equal importance in the process of demerging and this process improves the administration of a company. The Revenue department files the norms that have to be followed for these procedures.
References
- https://www.queensu.ca/iigr/sites/webpublish.queensu.ca.iigrwww/files/files/pub/archive/SOTF/StateFed04.pdf#page=131
- https://www.metropolitiques.eu/IMG/pdf/met-harris.pdf