Mergers open doors for rapid inorganic growth, which is aimed at corporations across the world. We have seen what mergers are, their stages, types, and inbound and outbound mergers.
A reverse merger is also known as a reverse IPO (Initial Public Offering), where a private company acquires a publicly listed company.
The public company is a mere shell, and most shareholders are from private companies. We know that there are motives behind any merger, acquisition, or amalgamation, and such motives can be value creation which consists of revenue synergies and cost synergies. Other purposes include diversification, asset acquisition, and tax purposes. IPO can, at many times, be risky, time-consuming as well as expensive for the corporates that want to go public; they tend to choose other rapid growth methods, one of them being reverse mergers.
This article focuses on the procedure of reverse mergers, motives, and challenges that arise in the context of the Indian market and the approach of the judiciary towards the same.
The Procedure Followed
To understand how a reverse merger takes place, we first need to understand the approach of the private companies that aim for a reverse merger. Many public companies have shares already listed on some public stock exchange or over-the-counter (OTC) markets. These public companies are known as shell companies; they become targets of the reverse merger.
Then the private company buys at least 51% of the majority of the shares of the shell company. After this, the shares of the private company are swapped for the new shares of the public company acquired. There is no capital raised in a reverse merger like an IPO. Therefore, less time is required for the paperwork. This way, it becomes easier than a conventional IPO.
The Pros and the Cons
The advantages of a reverse merger include less expenditure as the deal is between a private and public shell company and there is no need to create a hassle. It involves multiple parties like investment banks in between. Although it is referred to as reverse IPOs, the profit is not dependent on the market conditions like in the case of IPOs. The disadvantages are there is risk involved; therefore, due diligence on a reasonable scale is required for the interest of everyone. There is also additional regulatory compliance to be followed in case of reverse mergers, as we will see below.
The Indian Scenario
There are various examples of reverse mergers in
Another example is that of ICICI group, which did a reverse merger with its offspring, ICICI bank, with the aim of becoming the largest bank became second largest in
The Role of Reverse Mergers
If we consider the point of view of a layman, for him or her merger might appear as a mere way to achieve the same goal. Here, it becomes essential for us to understand why reverse mergers are important. One of the many motives is tax saving; there are provisions that permit the combined entity to pay lower taxes.
In
The conditions of Section 322of the Act, which carries forward unabsorbed depreciation, should not be violated. The loss must be from "Profits and Gains from business or Profession" and not under capital gains or speculation. After the amalgamation, the sick company or the shell company should survive. The amalgamation must be in the public interest; in the end, it should be aimed to safeguard the interest of consumers, employees, shareholders, and promoters of the company.
Companies Act and SEBI: A look at the regulatory framework
The Companies Act of 1956 did not restrict or prohibit reverse mergers in any manner, but the Companies Act of 2013 seeks to put certain restrictions on backdoor IPOs or, in other words, reverse mergers. Section 232(h)3 of the Companies Act 2013 states that in case of amalgamation between a listed and an unlisted company, the final entity will be treated as an unlisted company. This provision is significant as it prevents private companies from getting the benefits of publicly listed companies through the backdoor. Under the Companies Act of 2013, listed companies that were supposed to undergo mergers needed approval from the Court and stock exchange.
Now, the
Conclusion
Reverse mergers are also known as backdoor IPO. It opens doors for sick companies to recover, save time, and also provide tax incentives. Earlier, there were no strict regulations over reverse mergers in
Reverse mergers are a quick way of corporate restructuring, but risks come with profit. The
Footnotes
1. The Income Tax Act, 1962, § 72A, No. 43, Acts of
2. The Income Tax Act, 1962, § 32, No. 43, Acts of
3. The Companies Act, 2013, § 232(h), No. 18, Acts of
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
P-24, Green
110016
Tel: 114747 1414
Fax: 114747 1414
E-mail: mondaq@singhania.net
URL: singhania.in
© Mondaq Ltd, 2023 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source