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CORPORATE FINANCE

PRIVATE COMPANY GOING PUBLIC: BACKDOOR LISTING vs IPO

INTRODUCTION

Capital market is a market for all kinds of funds, whether long term equity funds or debt funds,
whether raised in the country or outside it. The capital market not only reflects the general
condition of the economy, but also smoothens and accelerates the process of economic growth.

In order to raise the capital that is needed by the company to start its business activities or expand
its business areas, it more often than not approaches the public. It is done by the company by
undergoing the process of issuance of shares which is performed in the primary market. The
primary market in the simplest terms can be defined as a market where the securities are sold in
order to raise the funds or the capital required by the company. It is a market where investors can
get first crack at a new security issuance. It is the largest source of funds with long or indefinite
maturity for the company

Requirements of funds in order to finance the business activities motivates small of entrepreneurs
to approach the new issue market. By getting listed on Stock Exchange the company is recognized
globally and enhances its reach to the public. Because of these benefits, many companies have
entered the primary market to earn profit by converting its capital, which is basically a private
capital, into a public one, releasing securities to the public. This phenomena is known as public
issue.

They believe that the listing of shares will enhance the worth of their holdings in totality.
Moreover, the company, being listed, can yield for itself further capital without undertaking any
obligation by issue of more shares by way of rights issue or bonus issue. This regular ability to
raise large amounts of capital from the general market, rather than having to seek and negotiate
with individual investors, is a key incentive for many companies seeking to list.
STATEMENT OF PROBLEM

A standard IPO, on the other hand, can be hampered by market conditions, owing to its long
execution time frame of a year or more affecting the involvement of investment banking
syndicates - since they will reject further participation in less-than-desirable market conditions.

Its importance requires further consideration, since it is an over-arching advantage the back door
listing has over the average IPO filing. The time saved by avoiding the extended filing period of
the initial public offering process, is an undeniable plus of a back door listing. These types of
mergers offer a very fast speed of completion, sometimes taking no more than a few weeks for the
successful conclusion of the back door listing.

However, even the most casual stock market observer knows the newsworthy significance of an
IPO (Initial Public Offering). This particular process is known for not only putting a company in
the public spotlight, but it could land it on the financial jackpot as well!

The mere act of becoming a publicly traded company through an IPO raises a company's profile
significantly, taking it to the proverbial next level. Such a transaction may quickly come and go in
the media, but what builds a successful campaign to raise capital is the proper timing and
preparation work to complete the market offering.

The deliberations when considering the formation of a public company could include various
alternatives to the standard IPO, such as a DPO (Direct Public Offering) and a back door listing.
So which option would be preferable is a biggest question, that needs a comparative analysis upon
the complications and consequential benefits in the regulations. However, no matter what process
is chosen as the instrument for market entry, it needs to be accomplished by an expertise that has
the experience to assist and guide the enterprise through the process of becoming a publicly traded
company

SCOPE, OBJECTIVES AND SIGNIFICANCE

Recently in the year a major change occurred with the amendment of the Companies Act. We see
new concepts and ways of conducting business are emerging every day. One such example is
backdoor listing, sometimes also referred to as reverse merger. This method of going public has
taken shape recently and aims to help a Company go public without having to deal with the detailed
procedure provides or under the various legislations of the country such as, Companies Act, 2013,
Regulations of SEBI, etc. With a view to highlight the concept of backdoor listing, the paper
compares the same with the traditional procedure of going public by Initial Public Offer( IPO )
The paper first discusses the significance of the market structure and the role it plays in the life
and business activities of any company along with the importance in raising capital or the business.
Next, the paper examines the process of IPO and how it allows highlighting its use in raising
capital. Further, the paper explores the newly developed concept of backdoor listing as an
alternative method of going public and raising capital therefore.

RESEARCH QUESTION

1. Whether backdoor listing or initial public offering, which is more preferable for a private
company, when going public, for raising capital?
2. Why initial public offering regulations are so cumbersome? Can it be simplified?
3. If there is a check on backdoor listings, would the companies prefer IPOs?

TENTATIVE CHAPTERISATION

I. Chapter 1 Introduction
II. Chapter 2 Initial Public Offerings
a) Meaning And Features
b) The Process Of Making An Ipo
III. Chapter 3 Backdoor Listings
a) Meaning And Features
b) The Appraisal Of Backdoor Listings
c) Advantages And Disadvantages Of Backdoor Listings
IV. Chapter 4 Current Position In India
a) Companies Act, 1956
b) Companies Act, 2013
V. Chapter 5 Conclusion
BIBLIOGRAPHY

Brown, Philip R. and Ferguson, Andrew and Lam, Peter, Choice between Alternative
Routes to Go Public: Backdoor Listing versus IPO, Available at SSRN:
https://ssrn.com/abstract==1897816 or http://dx.doi.org/10.2139/ssm.1897816.
IPO AND NEW LISTING, https://www.nseindia.com/corporates /content/
ipo_listing.htm.
BACK DOOR LISTING AND ITS REGULATION IN INDIA,
https://lawdecodedblog.wordpress.com/2015/07/16/backdoor-listing-and-its-regulationin-
india/

THE BACK DOOR LISTING: TAKING A COMPANY PUBLIC THROUGH A


REVERSE TAKE OVER, http://www.fasken.com/back-door-listing-going-public-
reverse-with-take-over/
Kati Agarwal, MERGERS AND ACQUISITIONS: NEW RULES OF THE OLD GAME,
Global journal of Engineering, Science & Social Science Studies, Volume 01, Issue 06,
May 2015 ISSN 2394-3084, available online at www.gjesss.co.in