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Amalgamation and Reconstruction

Meaning of Amalgamation:

Two or more than two joint stock companies may combine their undertakings and become one joint stock company to reap the economies of scale and to reduce or eliminate competition. It may be done either by one of the existing joint stock companies taking over the other combining company or companies, the latter being dissolved or by starting a new joint stock company which takes over all the combining joint stock companies.
For example  There are two joint companies X Ltd. and Y Ltd. Now X Ltd. may take over the business of Y Ltd. which is dissolved or Y Ltd. may absorbed X Ltd. or both X Ltd. and Y Ltd. may be dissolved and the business of both the companies may be taken over by a newly formed joint stock company, say Z Ltd.

Types of Amalgamation:

 Amalgamation may be in the nature of :
1. Merger : Amalgamation in nature of merger is an amalgamation which satisfies all the following conditions:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. 

2. Amalgamation in the nature of purchase is an amalgamation
which does not satisfy any one or more of the conditions mentioned above.

Reconstruction

Reconstruction means reorganization of a company's financial structure. In reconstruction of a company,  the assets and liabilities of the company are revalued, the losses suffered by the company are written off by a deduction of the paid-up value of shares and/or varying of the rights attached to different classes of shares and compounding  with the creditors. if it done without liquidating the company and forming a new company, the process is called internal reconstruction. In case of external reconstruction, the undertaking being carried on by the company is transferred to a newly started company consisting substantially of the same shareholder.

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