Merger is a financial tool that is used for enhancing long-term

profitability by expanding their operations. Mergers occur when

the merging companies have their mutual consent. The income
tax Act, 1961 of India uses the term amalgamation for merger.
The procedure of amalgamation or merger is long drawn and
involves some important legal dimensions.
Following steps are taken in this procedure:
1. Analysis of proposal by the companies: whenever a proposal for
merger or amalgamation comes up then managements of
concerned companies look into the pros and cons of the scheme.
The likely benefits such as economies of scale, operational
economies, improvement in efficiency, reduction in cost, benefits
of diversification, etc. are clearly evaluated. The likely reaction of
shareholders, creditors and others are also assessed. The taxation
implications are also studied. After going through the whole
analyses work, it is seen whether the scheme will be beneficial or
not. After going through the whole analysis work, it is seen
whether the scheme will be beneficial or not. It is pursued further
only if it will benefit the interested parties otherwise the scheme
is shelved.
2. Determining exchange ratios: The amalgamation or merger
schemes involve exchange of shares. The shareholders of
amalgamated companies are given shares of the amalgamated
company. It is very important that a rational ratio of exchange of
shares should be decided. Normally a number of factors like book
value per share, market value per share, potential earnings, and
value of assets to be taken over are considered for determining
exchange ratios.

3.

Approval

of

board

of

directors:

After

discussing

the

amalgamation scheme thoroughly and negotiating the exchange

ratios, it is put before the respective board of directors for
approval.
4. Approval of share holders: After the approval of the scheme by
the respective board of directors, it must be put before the
shareholders. According to sec.391 of Indian Companies Act, the
amalgamation scheme should me approved at a meeting of the
members or class of the members, as the case may be, of the
respective companies representing there-fourth in value and
majority in number, whether present in person or by proxies. In
case the scheme involves exchange of shares, it is necessary that
is approved by not less than 90% of the shareholders of the
transferor company to deal effectively with the dissenting
shareholders.
5. Consideration of interests of the creditors: The view of creditors
should also be taken into consideration. According to Sce.391,
amalgamation scheme should be approved by majority of
creditors in number and three-fourth in value.
6. Approval of the court: After getting the scheme approved, an
application is filed in the court for its sanction. The court will
consider the view point of all the parties appearing, if any, before
it, before giving its consent. It will see that the interests of all
concerned parties are protected in the amalgamation scheme.
The court may accept, modify or reject an amalgamation scheme
and pass order accordingly. However, it is up to the shareholders
whether to accept the modified scheme or not.
It may be noted that no scheme of amalgamation can go through
unless the registrar of companies sends a report to court to the

effect that the affairs of the company have not been conducted as
to be prejudicial to the interests of its members or to the public
interest.
7. Approval of reserve bank of India: In terms of sec.19(1)(d) of
the foreign exchange regulation Act, 1973, permission of the RBI
is required for the issue of any security to a person resident
outside India Accordingly, in a merger, the transferee company
has to obtain permission before issuing shares in exchange of
shares held in the transferor company. Further, sec 29 restricts
the acquisition of whole or any part of any undertaking in India in
which

non-residents

percentage.

interest

is

more

than

the

specified