REVERSE MERGER SCENARIO IN INDIA

With the changing world order and the economic uncertainties the corporates have been facing since the pandemic,there have been a significant rise in unconventional and idiosyncratic corporate restructuring scenarios all over the world for various reasons. Nowadays corporates are aligning towards a different kind of corporate restructuring, in contrast to the traditional ways of restructuring, like a ‘Private Limited’ Company purchase a ‘Public Limited’ Company; or a ‘Subsidiary Company’ acquires its ‘Holding Company’; or a small company in share capital acquiring a large share capital company. Recently Hon’ble National Company Law Tribunal (NCLT) has allowed amalgamation via Reverse Merger of a Quick-commerce company Kiranakart Technologies Private Limited a.k.a Zepto[i] with its Singapore based Holding Company Kiranakart Pte. Ltd, enabling the transfer of its domicile from Singapore to India. Further, Ashok Leyland is also planning to get its vehicle finance unit, Hinduja Leyland Finance (HLF)[ii] listed on the stock exchange via a reverse merger with NXTDigital, a listed media company of the Hinduja Group in order to unlock the true potential of the business.

These unconventional types of arrangements are gaining more and more traction among the corporates, wherein such corporate restructurings not only provides for traditional benefits like economies of scale of production, reduction in cost, entrance to new markets, diversification, increase in market shares, etc but also opens new possibilities wherein the corporates can bypass the large web of compliances and regulations, can benefit themselves of opportunities of tax benefits, or can piggyback on the existing goodwill and reputation of the existing large company.

Such eccentric and atypical form of corporate restructuring is known as ‘Reverse Merger’ or ‘Reverse Takeover’. Although ‘Reverse Merger’ or ‘Reverse Takeover’ is not defined anywhere in the statutes per se, it can be referred to as a type of acquisition where a financially sound, smaller private company acquires a sick public company by purchasing its majority shares in their attempt to bypass the costly, cumbersome, and complex process of “going public” or getting into the process of Initial Public Offers (IPOs). In this process, the healthy private company loses its identity, whereas the unfruitful public company retains its name and identity.

In India, the first ever situation of the arrangement of reverse merger bid under section 394 of the Companies Act, 1956 was observed in the case of ‘Bihari Mills Limited ([1985]58COMPCAS6(GUJ)’. Hon’ble Gujarat High Court, while hearing the petition of amalgamation of Maneklal Harilal Spg. & Mfg. Co. Ltd. (“the transferor company”) with the Bihari Mills Ltd. (“the transferee company”), observed that this is not a usual amalgamation of a sick unit which is non-viable with a healthy or prosperous unit, but precisely the reverse of it. Under such scheme, the entire undertaking of the transferor company is to be merged and vested in the transferee company. Subsequently, in the year 1994, one more case was observed where a financial sound ‘Godrej Soaps Ltd’ merged with its loss making subsidiary namely ‘Gujarat Godrej Innovative chemical’, and adopted its original name ‘Godrej Soaps Ltd’ after the said restructuring.

As deliberated above, a ‘reverse merger’ as an atypical and unorthodox form of corporate structuring is alluring more and more corporates nowadays for following reasons:

1. Quick access to Stock Market

Reverse merger is in effect, offer a more cost-effective way to tap into these public market benefits than going for IPO route. There is a growing trend of companies scouring for listed entities admitted for corporate insolvency before the Hon’ble NCLT, with intentions to acquire them through reverse merger, with an intension to have access to security market in a cost effective and less cumbersome way. Recently, a defunct publicly listed company namely Precision Containeurs Ltd (“Target Company”) which deals in manufacturing of steel and plastic containers, reappeared in news when it was acquired by East India Drums & Barrels Manufacturing Company (“Acquirer Company”)[iii]  in order to avail the benefits of easy access of the security market.

2. Tax Planning and Saving

As per Section 72A of the Income Tax Act, 1961, it provides for carrying forward and setting off accumulated loss and unabsorbed depreciation allowance amalgamation or demerger, etc., although, this benefit is not exclusive for corporate restructuring through Reverse Merger, however financially sound small companies acquire loss making big companies in order to avail the benefit of losses and unabsorbed depreciation of the loss making company by setting off the same with the profits of the Transferee Company.

Recently Hon’ble NCLT Chandigarh have overruled the objections raised by the Income tax Department that the proposed merger between the loss-making company, Panasonic India Private Limited (Transferor Company) with the profit-making company, Panasonic Life Solutions India Private Limited (Transferee Company)[iv] is designed with an intention for tax avoidance by claiming benefit of carry forward losses and unabsorbed depreciation as provided under the provisions of the Income Tax Act, 1961 and approved the merger of both the companies. Hon’ble NCLT while allowing the scheme of the merger have taken into consideration the commercial wisdom of the shareholders who have sanctioned the scheme and also considered the fact that all the terms and conditions will be satisfied by the Transferee Company while availing the benefits of Section 72A of the Income Tax Act, 1961.

3. Benefits of a Public Company

Once a small private company becomes public by way of reverse merger, it in turns avails the benefits of any public limited in a shorter period of time compared to a traditional Public Company, like access to capital market, better liquidity, transparency in the transfer of shares, Capital appreciation, possibility of growth, enhanced creditability etc.

4. Generating Goodwill

For the small private companies looking to grab eyeballs, it tends to capitalize on the past goodwill of now sick or loss-making public companies. By choosing the path of the Reverse Merger, the small companies try to revive the lost reputation of the now unlucrative companies rather than make efforts to build up their own reputation and credibility in the market. As a marketing tool, it is less costly and less tedious to resuscitate the name of a company which was once familiar to the public at large than to aggressively build its own credibility in the market.

REGULATIONS IN INDIA

In the global scenario, corporate restructuring through Reverse Merger is seen as back door access to the security capital market by avoiding the lengthy and cumbersome process of an Initial Public Offer (IPO) and is perceived to be a quicker and cheaper method of “going public”. In the United States of America, Regulation 7050 of the Securities and Exchange Commission (SEC) covers cases where a private operating company acquires an equity interest in a SEC registered company. Whereas, in China, their China Securities Regulatory Commission (CSRC) have clearly defined ‘Reverse Merger’ in CSRC Order No. 73 of 2011 and in the subsequent regulations, the CSRC have raised the regulatory standards on Reverse Mergers to the same level as IPOs.

In India, the term “Reverse Merger/Reverse Takeover” is nowhere mentioned specifically in the rules and regulations as issued by the Ministry of Corporate Affairs (MCA) or Securities and Exchange Board of India (SEBI) and is treated on similar lines with the other forms of Corporate Restructuring. However, there are few rules and regulations concerning corporate restructuring which may fall under the definition of the ‘Reverse Merger’. Details of the same are as follows:

a. As per Section 232(3)(h) of the Companies Act, 2013[v], where the Transferor Company is a Listed Company and the Transferee Company is an Unlisted Company, the Transferee Company shall remain Unlisted Company until the process of corporate restructuring is completed.

It further states that, if the shareholders of the Transferor Company decides to opt out of the Transferee Company, they shall be paid for the value of their shares in accordance with the valuation as carried out under corporate restructuring.

b. The SEBI issued a Master Circular SEBI/HO/CFD/DIL1/CIR/P/2020/249 Dated 22.12.2020[vi], which provides for regulation for merger of a listed company or its division into an unlisted entity, the entire pre scheme share capital of the unlisted issuer seeking listing shall be locked in as follows:

• • • Shares held by Promoters up to the extent of twenty percent (20%) of the post-Merger paid-up capital of the unlisted issuer, shall be locked-in for a period of three years from the date of listing of the shares of the unlisted issuer;

• • • The remaining shares shall be lock-in for a period of one year from the date of listing of the shares of the unlisted issuer;

• • • No additional lock-in shall be applicable if the post scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity.

c. More recently, the MCA brought amendments in the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024[vii] in September 2024. Wherein rule 25A was amended to include that the Transferor Foreign Company incorporated outside India being a holding company and the Transferee Indian Company being a wholly owned subsidiary company incorporated in India, enter into merger or amalgamation, –

• • • Both the companies shall obtain the prior approval of the Reserve Bank of India(RBI);

• • • The transferee Indian company shall comply with the provisions of section 233;

• • • The application shall be made by the transferee Indian company to the Central Government under sect ion the Act and provisions of rule 25 shall apply to such application; and

• • • The declaration referred to in sub-rule (4) shall be made at the stage of making application under section 233 of the Act.

CONCLUSION

Despite the upsurge and growing inclination of new startups and reasonably big unlisted companies for choosing this mechanism for going public in a time-saving manner by bypassing the compliances under the Companies Act, 2013, SEBI Act, 1992, Securities Contract (Regulation) Act, 1956 and Issue of Capital and Disclosure (Requirements) Regulations, 2018, the Central Government and the regulatory authorities are yet to frame proper laws and regulation in this respect.

Although as mentioned above, there are few compliances specially for ‘Reverse Merger’ kind of corporate restructuring like getting approval from RBI for cross border transactions or putting restrictions on the usage of share capital after merger of a listed company with an unlisted company. However, these compliances are far few and between and these provisions are not as cohesive and harmonized as the rules and regulations as developed by the larger economies countries like the USA or China.

The regulatory authorities need to study the acclivity towards the ‘Reverse Merger’ kind of corporate restructuring and it is an opportune moment to frame rules and regulation specifically for this kind of corporate restructuring. Based on the trends and analyzing the reasons for the paradigm shift towards corporate opting for ‘Reverse Merger’, the Central Government may either bring these compliances at par with the compliances as specified for raising money through an IPO by get/Unlisted Companies or may relax the regulations to provide for a cohesive alternate route for new-startups and unlisted companies in their efforts to go public in a timely fashion.

The Article was authored by Mr. Ashutush Das Sir (Senior Partner) and Mr. Aeshwarya Sisodia (Senior Associate) Ms. Kriti Arora (Intern).

Research:

Kriti Arora, Intern, 4^th year, Symbiosis Law School, Pune

Footnotes:

[i] Article in CNBC18. Click Here

[ii] India Today Article. Click Here

[iii] Article. Click Here

[iv] Panasonic India Private Limited and Panasonic Life Solutions India Private Limited. CP(CAA) No. 8/Chd/Hry/2021. Click Here

[v] Section 232(3)(h) of the Companies Act, 2013.

[vi] Master Circular SEBI/HO/CFD/DIL1/CIR/P/2020/249 Dated 22.12.2020. Click Here

[vii] Gazetted Notification bearing No. G.S.R 555 (E) dated 09.09.2024. Click Here