INTRODUCTION

The today’s business world is changing at an amazing pace; the requirement for growth at a
steadfast and rapid pace is of utmost importance and thus companies keep finding different ways
which will lead to cope up with the pace of the industry. Mergers and demergers are the ways
adopted by majority of corporations within the trendy time to extend and enhance their profits
and to contour their means of functioning.
Merger is one amongst the foremost common styles of company restructuring programmes that’s
employed by the company world thus on accomplish growth for the corporate as an entire and
therefore maximising its profits. In strict economic sense of the word it suggests that the “union
of 2 or a lot of business interests, firms, undertakings, bodies or the other entities”. In company
business it suggests that, mixing or merger of 2 or a lot of firms by the transfer of all property to
one corporation. Generally, an organization with record of getting a less profit earning or loss
creating blends or amalgamates with a viable company to own advantages of economies of scale
of production and selling network etc of that viable company. As a consequence of this merger
the profit earning company survives and therefore the loss creating company extinguishes its
existence.1 But, in several cases, the sick company’s survival becomes a lot of necessary for
several strategic reasons and to conserve community interest. This kind of non-routine merger is
named a reverse merger.
CONCEPT OF REVERSE MERGERS
Reverse Merger could also be outlined in 2 ways that 1st wherever a company blend/merges with
a subsidiary or investee company and second wherever a profit creating company merges with
the loss creating company. The term Reverse merger has not been outlined below any of the
statutes. However, tribunal has mentioned 3 tests for reverse merger-
i) Assets of transferrer Company being bigger than Transferee Company.
ii) Equity capital to be issued by the transferee company consistent to the acquisition exceeds its
original issued capital.
iii) The modification of management within the transferee company clearly indicated that this
arrangement was an appointment, that was a typical illustration of takeover by reverse bid.
Court control that clear theme of merging a prosperous unit with a sick unit can’t be aforesaid to
be sinning the provisions of section seventy two A of the revenue enhancement Act, 1961 since
the article of this provision is to facilitate the merger of sick industrial unit with a sound one. The
reverse merger is usually adopted for 2 main reasons-
1. it’s an alternate technique for personal firms to travel public, while not looking the long
and complicated method of ancient IPO. During this a personal company acquires a
public entity by owning the bulk of the shares that are held by the general public of a
company. The general public “shell” could be a very important facet of reverse merger

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https://www.wisdomcrux.lawtimesjournal.in/index.php/2017/07/03/reverse-mergers-india/
 transactions that could be a public enterprise carrying Zero assets or liabilities. It is
termed as a “shell” as a result of the sole factor remaining from the present company is its
company shell structure.
2. Tax saving is another advantage of Reverse Mergers. The law ((Section 72A Revenue
Enhancement Act 1961)) provides tax relief for merger of sick firms with healthy and
profitable firms to require the advantage of the transfer of losses.
RM AS different technique to become public
Companies rather than hiring associate in nursing underwriter to sell the company’s shares in
Associate in Nursing initial public providing, a personal company works with a “shell promoter”
to find an acceptable non-operating or shell public company, personal company merges with the
shell company (or a newly-formed subsidiary of the shell company). during this merger, the
operative company’s shareholders square measure issued a majority stake within the shell
company in exchange for his or her operative company shares. Then when merger the shell
company contains the assets and liabilities of the operative company and is then controlled by
the previous operative company shareholders. The shell company’s name is modified to the
name of the operative company, its administrators and officers square measure replaced by the
administrators and officers of the operative company, and its shares still trade on whichever
exchange they were commercialism before the merger, indirectly the company’s company shell
structure is maintained. Hence, the operative company’s business remains controlled by a similar
cluster of shareholders and managed by a similar administrators and officers, however it’s
currently contained inside a public company. In effect, the operative company succeeds the shell
company’s public standing and so indirectly goes public.
Features of Reverse Mergers
Presently Reverse merger in Asian nation remains in its infancy stage thus we tend to might
discuss the options of RM in line with the ideas created and settled in US which is related to
India.2
1. Shell Characteristics
A public shell company may be a company that includes a category of securities registered
underneath the Securities Exchange Act of 1934 (the “Exchange Act”) however has solely
nominal operations and no or nominal assets apart from money and money equivalents. A public
shell company exists as a result of either
(1) it had been a former operative company that went public then for a few reason ceased
operations and liquidated its assets or
(2) It ne’er had any operations however was fashioned from scratch for the precise purpose of
making a public shell.

2
Das, A. and S. Ghosh, 2004, Reverse Merger: An Empirical Investigation, Economic and

Political Weekly,pg 35
In the former scenario, shell promoters gain management of defunct operative corporations by
shopping for up a majority of their shares. within the latter scenario, shell promoters incubate the
shells—they incorporate an organization, voluntarily register its shares underneath the Exchange
Act, then timely file with the Securities and Exchange Commission (“SEC”) the specified
quarterly, annual and alternative reports. Because the shell has no operations, it becomes fairly
easy and cheap to create these filings. In exchange for lease Associate in Nursing operative
company merge into a shell, the promoter charges the operating company a fee and retains an
ownership interest in the shell post-merger.
There exists a chance that shells may or may not have stock that trades publicly. Typically, the
stock of a former in Operation Company will trade in public. The corporate can have listed its
stock or otherwise expedited commercialism on a public market back when it completed its IPO.
A shell formed from scratch by a shell promoter typically does not have publicly traded stock.
2. Legal Structure and Compliance
An RM is typically structured as a reverse triangular merger. Specifically, the public shell
(“ShellCo”) forms a new, wholly-owned empty subsidiary (“Merger Sub”). Merger Sub then
merges into the private operating company (“OpCo”) pursuant to the applicable state corporate
statute. Upon consummation of the merger, OpCo.’s shares are converted into shares of ShellCo
constituting a majority stake in ShellCo (typically an 80 to 90 percent stake). Following
consummation of the merger, OpCo is a wholly-owned subsidiary of ShellCo and OpCo’s former
shareholders own a majority of the outstanding shares of ShellCo.
Alternatively, the transaction could be structured as a direct merger where ShellCo merges
directly into OpCo. The reverse triangular merger structure is preferable, however, as a result of
it reduces group action prices. Since OpCo survives the group action, there’s no ought to
modification merchant numbers, leader identification numbers, bank accounts, property titles, etc.
to boot, structuring the group action as a reverse triangular merger might eliminate the necessity
of obtaining ShellCo stockholder approval to shut the group action. this is able to enable ShellCo
to avoid holding a shareholders’ meeting and so the time and expense related to filing with the
SEC for review and mailing to its shareholders a close proxy statement and alternative materials
pro re nata by SEC proxy rules.
Whether stockholder approval of ShellCo is needed depends on ShellCo’s state of incorporation
Associate in Nursing whether or not its shares square measure listed on an exchange. the overall
rule underneath state company law is that approval is needed solely from the shareholders of the
businesses which will merge within the group action. In Associate in Nursing RM structured as a
reverse triangular merger, ShellCo stockholder approval wouldn’t be needed as a result of
Merger Sub and not ShellCo are merging with OpCo within the group action. However, many
countries and {also the} stock exchanges also need stockholder approval before an organization
will issue shares constituting over two hundredth of its pre-transaction outstanding
shares.ShellCo would make up these rules, if applicable, as a result of it’ll be supply overrun two
hundredth of its pre-transaction outstandingshares as a part of the RM. Note, however, that
Delaware, among alternative states, doesn’t have a two hundredth rule. Hence, if ShellCo may be
a Delaware corporation Associate in Nursing doesn’t have shares listed on an exchange3,
ShellCo stockholder approval isn’t needed. Merger Sub stockholder approval is obtained from its
sole stockholder, ShellCo, acting through its board. stockholder approval by OpCo is needed,
however since OpCo is personal, it’s not subject to SEC proxy regulations; ordinarily it will get
the requisite stockholder approval quickly through written stockholder consent instead of a
gathering.
Reverse Mergers vs. IPOs:
Reverse Mergers, David Feldman (2009) describes the reverse merger method in-depth and
explains why it’s a viable possibility for little corporations. abundant of the fabric during this
section is taken from his book. amazingly, this is often one among the sole books written on the
topic “Associate in Nursing” though it’s geared toward an yankee audience it’s nonetheless
relevant even to the Indian market, because the method is comparable. variations between the 2
square measure in the main found in regulative necessities and legislation.
A reverse merger is once “a personal company purchases management of a public one, merges
into it, and when the merger is complete becomes a publicly traded company in its own right” . If
the public company has no real ongoing business then it is often referred to as a “shell”. The
reasons for going public this way will become apparent as we go through the advantages and
disadvantages below. Feldman names seven advantages and two disadvantages of RMs when
compared to IPOs.
Advantages
1. Lower cost. One of the puzzles of IPOs is the high underwriting costs. This is avoided in
the RM process. RMs are much less costly and the total cost can often be pre-determined .
In his experience, most RMs cost less than $1 million whereas an IPO will cost at least
three or four times that much, excluding underwriting commissions (2009). For a RM the
biggest cost is generally the price of the shell.
2. Speedier Process. RM takes two to three months; an IPO takes nine to twelve. There are
fewer steps and fewer parties involved. There is also no disclosure document that needs
to be approved by the SEC.
3. Not Dependent on IPO Market for Success As discussed earlier, IPOs follow a wave-like
pattern and prefer to go public when the economy is doing well. This is not an issue for
RMs, because they are not sensitive to the market and that makes them a good choice in
any market condition.
4. Not Susceptible to Changes from Underwriters Regarding Initial Stock Price
Underwriters can choose to change the price at the last minute if the market sentiment
drops just before the IPO. Cancellations of IPOs are also not uncommon.
5. Less Time-Consuming for Company Executives IPOs take time, time that could be used
to run the business. RM is less time- consuming as mentioned earlier and no new
investors need to be found. That means more time for business decisions.

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Investors Stewardship Group, Merger Principles for U.S Listed companies.
 6. Less Dilution, RM less money is raised, during a time when the company supposedly is
undervalued. It is better to raise money when the stock price is higher, because it doesn’t
dilute ownership. Theoretically, new companies on the public market should trade higher
after six months or so if the business grows. That is a big “if” however. Additionally,
underwriters tend to try to take in as much money as possible without regard to how
much the company doing the IPO actually needs (what you might call a “good” problem).
This is because the underwriter takes a percentage fee of what is raised.
7. Underwriters Unnecessary, underwriters try to make a company look as profitable as
possible before the IPO, which sometimes means selling off new subsidiaries that have
not yet started making money. RMs do not have that problem as there are no underwriters
involved.
Disadvantages
1. Less Funding RMs bring in less money than IPOs but that may not be relevant criticism
of the method. Nothing stops the company from taking in new capital once they are
public. This may even be beneficial if the stock price is higher at that point.
2. Market Support is harder to Obtain Underwriters will for some time after the IPO of a
firm act as market makers, as well as trying to hype the stock during and after the
offering. This often results in what Feldman calls a “pop in the stock price” which is
unlikely in a RM because no one is covering the stock. A rise is more likely to come from
years of improved performance rather than what he calls “manufactured support”.
To sum up, the main situations in which RMs are preferable to IPOs is when firms are small,
markets are down, initial injection of money is not the main aim, time is of importance, or
simply when hefty fees wish to be avoided. These are definitely compelling reasons to
perform RMs.
RM IN TAX:
Section 72A of the Income tax, 1961 is meant to facilitate rejuvenation of sick industrial
undertakings by merging with healthier industrial companies having incentive in the form of tax
savings designed with the sole intention to benefit the general public through continued
productive activity, increased employment avenues and generation of revenue. Sickness among
industrial undertakings is a matter of grave national concern and section 72A provides for
reviving financially non-viable business undertakings. The section provides for an effective
course to facilitate the amalgamation of sick industrial units with sound ones by providing
incentives and removing impediments in the way of such amalgamation. to avoid wasting the
govt from social prices in terms of loss of production, employment and uneconomical burden of
taking up and running sick industrial units square measure a number of the motivating factors for
introducing section 72A.
Provisions of section 72A:
1) uniting ought to be between corporations and none of them ought to be a firm of partners or
sole man of affairs.
2) the businesses getting into uniting ought to be engaged in either industrial activity or shipping
business, so corporations engaged in commercialism activities or services shall not be entitled for
taxation edges underneath section 72A.
3) when uniting the sick or financially unviable company shall survive and alternative financial
gain generating company shall extinct.
4) one among the merger partners ought to be financially unviable and have accumulated losses
to qualify for the merger and also the alternative merger partner ought to be profit earning in
order that tax relief to the utmost extent may well be had.
5) uniting ought to be within the public interest.
6) Accumulated loss ought to arise from Profits and gains from business or profession and not be
loss underneath the heading Capital gains or speculation.
7) Merger should result into following benefits: a) carry over of accumulated losses of the
amalgamated company. b) carry over of unabsorbed depreciation of the amalgamated company.
c) Accumulated loss would be allowed to hold forward for eight consecutive years. 8) For
qualifying, carry over of losses, the provisions of section seventy two ought to haven’t been
contravened.
9) equally for carry over of unabsorbed depreciation the conditions of section thirty two mustn’t
are desecrated.
10) specified authority must be happy of the eligibility of the corporate for the relief underneath
section seventy two of the revenue enhancement Act. it’s solely on the advice of the required
authority that Central Government might enable the relief.
11) the corporate ought to build Associate in Nursing application to a specified authority for
requisite recommendation of the case to the Central Government for granting the relief.
Conclusion
Reverse merger is the best way of going public without making an initial public offer (IPO). In
the recent years reverse mergers are gaining a lot of importance worldwide, it is just a matter of
time when it will be considered the best way to go public. In spite of being a time and money
saving method it has a number of shortcomings one of which being the improper way of doing
analysis of the companies the audits are not properly checked. A case of fraud when a Chinese
private company tried to get itself listed in the US stock market opened the eyes of many public
companies and more stringent laws were imposed by the SEC.
India having a very wide and good corporate law structure helps companies to easily go public
by way of reverse mergers but also keeps a check that no fraud is committed. So, in a country
like India reverse mergers can be enjoyed by companies easily and to the fullest.