Regulating Reverse Merger

An Emerging Model of shifting from Private to Public


In this fast-moving world, where dynamic changes are taking place with every second, it has become a challenge for the corporate to maintain its competitive -edge. Such changes are in the form of changes in technology or continuous change in demand of customers or changing way of doing business. To beat this unavoidable scenario, corporate houses are adopting various business restructuring model to accelerate its growth at a rapid pace.

Merger, Amalgamation, Demerger, Buyback, Slump sale, Takeover are excellent examples of business restructuring practices that are being adopted across the world. With the ease of government regulation and the introduction of liberalization policy in India, restructuring became the part of corporate strategies plan to boost the growth of the economy. Thapar Group, TATA Group, United Beverages Group, Goenka Group, ESSAR Group, Escorts Group are some of the few names who have started the trend of restructuring in India. Since then, there are a vast number of corporates, including Banks and other financial institutions who has opted for restructuring to create a niche for themselves.

Meaning of Reverse Merger

To understand the meaning of “reverse merger”, it is necessary to understand the concept of merger. According to the Companies Act 2013, Merger means combining two or more entities into one which results in the merger of all the assets, liabilities of the entity under one business

Types of Merger

There are six types of merger which are being adopted as per their relevancy. These are enumerated below –

  1. Horizontal Merger – This kind of merger takes place between entities engaged in competing business which are at the same stage of the Industrial process.
  2. Vertical Merger – It refers to the combination of two entities at different stages of the Industrial or Production process.
  3. Congeneric Merger -These are a merger between the entities operating in the same industry but having no common customer-supplier relationship.
  4. Conglomerate Merger – It is a merger between two entities in unrelated industries.
  5. Cash Merger – In this case, the shareholder of one entity receives a case instead of shares in the merged entity.
  6. Reverse Merger – It is also known as “reverse takeover” or “triangular merger”. It is an alternative means to go for Public Issue rather than opting for IPO due to the cumbersome procedure. Alternatively, the reverse merger also takes place when a parent company merges with its subsidiary or a profit-making firm merging into a loss-making one.

Process of Reverse Merger

Precedent conditions –

The Gujarat High Court in “Bihari Mill Case”[1] , has defined the test for determining whether a transaction falls under the ambit of a reverse merger or not. The test considers of following parameters –

  1. If the assets of the holding company exceed the asset of the subsidiary company.
  2. If the net profit of holding company exceed the net profit of the subsidiary company.
  3. If the consideration offered by the subsidiary company exceeds the value of the net asset of holding company.
  4. If the equity share capital to be issued by the subsidiary company as consideration for the acquisition exceeds the amount of the equity capital of the subsidiary company in issue before the acquisition.
  5. If the issue of shares in a subsidiary company would result in a change in control of the subsidiary company through the introduction of a minority holder,

Characteristics of transaction

The transaction mostly structured under Reverse Merger in two ways –

Direct reverse merger

Under this, the public shell company (a company which is specifically created to carry out reverse merger), directly takes over the private company in such a manner that after the completion of transaction Private company’s owner becomes the largest stakeholder of such public company.

Reverse triangular merger

Further, reverse triangular merger is divided into two sub-sets, i.e. “Merger of a wholly-owned subsidiary and the Private company” and “Merger of a wholly-owned subsidiary and its Parent listed company’’. These arrangements are made in such a manner that the shareholder of a private company becomes the largest stakeholder of a public company.

Driving Factors behind the reverse merger

  • It gives greater access to capital which in turn enhances the opportunities to raise funds required for new product development and expansion.
  • An IPO is a time consuming and the more expensive process then a reverse merger. Indeed; it allows company’s executive to focus more on continuous operation and plan for the future operation rather than being consumed with the fulfilment of IPO’s requirement.
  • It is an indirect medium to enter into a capital market where the company fails to fulfil the criteria of SEBI for raising the fund through the public.
  • It allows the company to reap the possible tax advantage resulting in saving of cash outflow.

Key Challenges to the reverse merger

  • It results in inadequate disclosure of necessary information to the public.
  • Management of the unlisted company is less likely to be equipped with handling affairs of a public listed company.
  • The valuation was undertaken by the unlisted company generally puts to the less compensatory side to the original shareholder of the public company.

Statutory provisions

Company’s Act, 2013

As per section 232 (h) of Companies Act,13 expressly states that in case of amalgamation between a listed company and an unlisted company, the resultant entity will be treated as an unlisted company until it becomes a listed company. This provision has directly put a restriction on taking the back entrance to the capital market.

SEBI Regulation

As per SEBI (Listing Obligation & Disclosure Requirement),2015, When an unlisted company merges with a listed (surviving entity being the listed company), prior approval of the stock exchange for the scheme of arrangement is a requirement. Further, SEBI has issued a circular dated March,10,2017. It rolled out certain requirements concerning the scheme of the arrangements by listed entities. These requirements are –

  • The listed company is required to give information about the unlisted company, along with the proposal sent to the shareholder.
  • The shareholders of the listed company and the Qualified Institutional buyers of Unlisted company should get at least 25% or more in the shareholding pattern of merged entity.
  • Unlisted entities can be managed only with the listed entities which are listed on the stock exchange having nationwide trading terminals.

Income Tax Act,1961

Section 72A states that the entity created as a result of an amalgamation of the sick company can benefit from the accumulated loss and allowance for depreciation accrued to sick company. However; there are two pre-requisite which need to be fulfilled to reap the benefit under this section. These are –

  • All the property and liabilities of the amalgamating company before the amalgamation is transferred to the amalgamated company as a result of the scheme.
  • Shareholder holding not less than 90% in value of shares in the amalgamating company become shareholder’ s of the amalgamated company as a result of the scheme.

Case Study

India bulls Financial Services Pvt Ltd with India bulls Housing Finance Ltd

The company to be a pure mortgage player and consolidation is in line with that strategy. Promoter’s of Indiabulls financial service will infuse Rs 451 crore of capital into the company in the form of warrants convertible into equity of Rs 218 each. India bull finance service ltd will allot one share of Indiabulls housing finance for every share of the parent company currently held by its shareholder subject to regulatory requirement.

Yatra Online Inc with Terrapin 3 Acquisition Corp. (US-based company)

Online travel firm Yatra Online Inc with Terrapin 3 Acquisition Corp; resulted in the latter becoming a partially owned subsidiary of Yatra. Shares of the new company will start trading on the US stock exchange -Nasdaq. Yatra has raised over $ 92.5 million of primary capital from a global investor. The merged entity “Yatra Online Inc” will also use the additional capital raised to accelerate growth, invest in mobile technology and expand its distribution network.

Godrej Soaps Ltd with Godrej Innovative chemicals ltd

Godrej innovative chemicals ltd which was a loss-making company acquired the profit-making company “Godrej soaps ltd” during the year 1994-95 at an exchange ratio of 1:1 and changed its name to “Godrej Soaps Ltd” after the merger. This merger facilitated the tax saving for Godrej soaps ltd. Godrej soap Ltd’s provision of tax before the merger was Rs 5.75 Cr. It fell drastically to Rs 1.5 Crore after the merger.


Though there are no direct provisions which regulate the operation of the reverse merger but still by the power vested in the hands of SEBI, monitoring of such transaction is done to a large extend. SEBI is responsible for critical analysis of each case independently before granting permission.

Over the period Reverse Merger has gained a momentum of popularity among the business houses because it comprises of features such as less burdened mechanism and time-saving. However, to reap the maximum benefit from this form of restructuring, strict control should be placed the regulatory authorities.


Frequently Asked Questions

  1. What is a merger and explain its various types?
  2. How is a reverse merger being carried out?
  3. What are the benefits and challenges of a reverse merger?
  4. Who are the regulatory authorities?
  5. Discuss a Case study on Implementation of a reverse merger?

[1] 1985 58 CompCas 6 Guj

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