University of Petroleum and Energy Studies

School of Law
Batch: BA. LLB. (IV Semester)
Academic Year: Jan. - May 2018
Subject: Company Law – II
Project Topic: Reverse Merger
Abstract & Synopsis Submission

Submitted to: Mrs. Pooja Kumari .

Submitted by: Amratash, Aditya Singh
 INDEX

 INTRODUCTION
 PROCESS OF MERGER
 REGULATORY FRAMEWORK IN INDIA:

 CASE STUDY
 ADVANTAGE AND DISADVANTAGE
 CHALLENGES
 CONCLUSION
 BIBILOGRAPHY

2
INTRODUCTION:
In today’s global economic world of corporate sector, the world is changing at very faste rate.
Mergers and demergers are one of the important methods adopted by majority of companies in
the modern time to increase or enhance their profits and to enhance streamline their
functioning.
Mergers and acquisitions (“M&A”) has become a popular method for corporates across the
globe to achieve rapid inorganic growth. As a result of globalization and other catalysts,
emerging markets such as India have also witnessed a fair share of M&A activity in various
sectors such as pharmaceuticals, automobiles, finance, telecom etc. In order to achieve better
synergies, various types of strategic corporate restructuring mechanisms are adopted to effect
schemes of mergers and amalgamations. The Companies Act, 1956 does not define the term
‘Merger’ or ‘Amalgamation’. However, it deals with schemes of merger/ acquisition which are
stipulated under Section 391 to 394. Moreover, as per Companies act 2013 Sections 230 to
240 deal with “Merger and Amalgamations.”
A Reverse Merger is a form of corporate restructuring in which a smaller private
company acquires control over a larger public company. Typically, the public company is a
mere shell1 and the shareholders of the private company acquire majority shares and board
control in the public company. The private company’s shareholders exchange their shares in
the private company for shares in the public company, thereby effectively making the private
company a publicly traded company without undergoing the process of initial public offer
(“IPO”).
CONCEPT OF REVERSE MERGER:
Section 18 of SICA1 provided for Reverse Mergers which states that absorption of a healthy
company by a sick company if situation warrants. This type of non-routine merger was carried
for many of the strategic reasons and more importantly to conserve community interest. And
the main objective behind drawing a scheme of a Reverse Merger between the Health Company
and sick company was to attain the benefits provided under the Income Tax Act, 1961.In
furtherance to the recognition of Reverse Mergers under SICA.
The Gujarat High Court in Bihari Mills, In re, Manek Lal Harilal Spinning and
Manufacturing Company Limited2 case had identified various features of Reverse Mergers.

1
Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), (2 ndAmendment 1994)
2
(1985) 58 Comp Cas 6 (Guj)

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This was the first and most important precedent in India with regard to reverse merger, where
court expressly deliberated upon the arrangement of Reverse Merger schemes. However, the
approach of the court was in the context of the already laid down under SICA. This implied
that the SICA had a greater impact on the understanding and implementation of the Reverse
Merger schemes.
According to Bihari Mills decision, the following tests have to be satisfied before an
arrangement can be termed as a Reverse Merger
 If the value of the assets of the healthy company exceeds the value of the loss making or less
profit making company.
 If the net profits attributable to the assets of healthy company exceed those of loss making or
less profit making company.
 If the aggregate value of the consideration being issued by loss making or less profit making
company exceeds the value of the net assets of healthy company.
 If the equity capital to be issued by loss making or less profit making company as
consideration for the acquisition exceeds the amount of the equity share capital of loss making
or less profit making company prior to the acquisition or
 If the issue of shares in loss making or less profit making company would result in a change
in control of loss making or less profit making company through the introduction of a minority
holder or group of holders.
As stated before, the primary objective behind drawing the scheme of a Reverse Merger
between the Healthy Company and sick company was to attain the benefits provided under the
Income Tax Act, 1961.

REVVERSE MERGER AS ALTERNATIVE METHOD TO BECOME

PUBLIC:
Companies instead of hiring an underwriter to sell the company’s shares in an initial public
offering, a private company works with a “shell promoter” to locate the suitable non-operating
or shell public company, private company merges with the shell company (or a newly-formed
subsidiary of the shell company). In this merger, the operating company’s shareholders are
issued a majority stake in the shell company in exchange for their operating company shares.
Then after merger the shell company contains the assets and liabilities of the operating
company and is then controlled by the former operating company shareholders. The shell
company’s name is changed to the name of the operating company, its directors and officers

4
are replaced by the directors and officers of the operating company, and its shares continue to
trade on whichever stock market they were trading prior to the merger, indirectly the
company’s corporate shell structure is retained. Hence, the operating company’s business is
still controlled by the same group of shareholders and managed by the same directors and
officers, but it is now contained within a public company. In effect, the operating company
succeeds the shell company’s public status and therefore indirectly goes public.
REVERSE MERGERS FEATURES:
Presently Reverse merger in India is still in its infancy stage so we may discuss the features of
RM according to the concepts made and settled in US.
Shell Characteristics
A public shell company is a company that has a class of securities registered under the
Securities Exchange Act of 19343 (the “Exchange Act”) but has only nominal operations and
has no or nominal assets other than cash and cash equivalents.4 A public shell company exists
because either
(1) It was a former operating company that went public and then for some reason ceased
operations and liquidated its assets or
(2) It never had any operations but was formed from scratch for the specific purpose of
creating a public shell.5
In the former situation, shell promoters gain control of the defunct operating companies by
buying up a majority of their shares.6 In the latter situation, shell promoters incubate the shells
they incorporate a company, voluntarily register its shares under the Exchange Act, and then
timely file with the Securities and Exchange Commission (“SEC”) the required quarterly,
annual and other reports.7 Because the shell has no operations, it is fairly simple and
inexpensive to make these filings.8 In exchange for letting an operating company merge into
a shell, the promoter charges the operating company a fee and retains an ownership interest
in the shell post-merger.9
Shells may or may not have stock that trades publicly. Typically, the stock of a former operating

3
Securities Exchange Act of 1934 § 1, 15 U.S.C. § 78a (2006)
4
Securities Exchange Act of 1934 § 1, 15 U.S.C. § 78a (2006)
5
FELDMAN, Aden R. Pavkov, Ghouls and Godsends?A Critique of "Reverse Merger" Policy
6
FELDMAN
7
FELDMAN
8
FELDMAN
9
FELDMAN

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company does trade publicly.10 The company will have listed its stock or otherwise facilitated
trading on a public market back when it completed its IPO. A shell formed from a scratch by a
shell promoter typically does not have the publicly traded stock.11

PROCESS OF MERGER AS PER COMPANY ACT 2013:

a. Regulatory or Third party approvals312: The 2013 Act requires service of the notice
of the merger along with documents for example, a copy of the Scheme and valuation
report not only upon the shareholders and creditors but also on various regulators
including the Ministry of Corporate Affairs, SEBI etc. and other sector regulators or
authorities which are likely to be affected by the merger. The Companies Act 2013
provides a 30 days’ time period for the regulators to make representations, failing which
the right would cease to exist.
b. Approval of the Scheme through postal ballot: The Companies Act13 2013, provide
that the shareholders and creditors also have the option to cast vote through postal ballot
while considering a Scheme. This Scheme will offer them a greater flexibility to cast
their votes.
c. Valuation Report: The Companies Act14 2013, mandates annexing of the valuation
report to the notices for the meetings to enable ready access to the shareholders and
creditors.
d. Objections: As per Companies Act15 2013, objections can be raised by shareholders
holding 10% or more equity and creditors whose debt represent 5% or more of the total
debt as per the last audited financial statements.
e. Accounting Standards: As per Companies Act16 2013 Scheme provided for
accounting treatment that would deviate from the prescribed accounting standards

10
FELDMAN
11
FELDMAN
12
Section 230(5) of the 2013 Act
13
Section 230(6) of the 2013 Act
14
232(2) of 2013 Act
15
Proviso to section 230(4) of the 2013 Act
16
Proviso to Section 232(3) of the 2013 Act

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 necessitating a note to this effect in the balance sheet of the company. In case of listed
companies, the listing agreement was amended to provide that an auditor's certificate
stating that the accounting treatment is in accordance with the accounting standards was
required to be filed for seeking approval of the stock exchanges. The certification is
mandatory for both listed and unlisted companies from the auditor.
f. Merger of a listed company into an unlisted one: The Companies Act17 2013
specifically provides for the Tribunal's order to state that the merger of a listed company
into an unlisted company will not ipso facto make the unlisted company listed. It will
continue to be unlisted until the applicable listing regulations and SEBI guidelines in
relation to allotment of shares to public shareholders are complied with.

AN ANALYSIS OF THE REGULATORY FRAMEWORK IN INDIA:

THE COMPANIES ACT, 2013 AND SEBI REGULATIONS

Section 391 of the Companies Act 195618 did not impose any prohibitions on Reverse Merger
and hence Reverse Merger was treated at par with the ordinary mergers. However as per the
new governing law, Section 232 (h) of the Companies Act 2013 expressly states that in the
case of amalgamation between a listed company and an unlisted company, the resultant entity
will be treated as an unlisted company. Therefore, Companies Act 2013 seeks to indirectly
prohibits Reverse Mergers or Reverse Turnover by placing restrictions on listing companies by
specifically disallowing backdoor IPOs (which is the main cause behind Reverse Merger). As
a result to this, Companies Act 2013 aims to stop the private unlisted companies from reaping
the benefits of a public listed company by going public through the backdoor mechanism.
Under the provisions of Companies Act 2013 the listed companies undergoing mergers only
required Court approval and in principle approval from stock exchanges. However, as per the
SEBI’s 2013 notification dated on February 4, 201319, listed companies undergoing mergers
need to obtain a mandatory approval from SEBI. Moreover, as per the new notification dated
May 21, 201320, SEBI has been vested with the powers to regulate the schemes which are to
the detriment of public/ minority shareholders due to inadequate disclosures and exaggerated

17
Section 232(3)(h) of the 2013 Act
18
Section 391.
19
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1359986006632.pdf
20
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1369139160079.pdf

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valuations. The impugned Circulars/Notification imposes stringent requirements for the listed
companies which are undergoing mergers. Therefore, any scheme or the purpose of the merger
or amalgamation (including Reverse Merger) between a private unlisted company and a public
listed company will be open to the SEBI’s scrutiny.
Moreover with respect to this, SEBI has subsequently disallowed quite a few companies
attempting to undertake the backdoor IPO through reverse mergers such as Emami Realty and
Zandu Realty21. SEBI has also raised many objections and queries on all of the such type of
the schemes, where, it has observed that the shares of listed public company are issued in a
manner that it skewed in favor of promoters of the unlisted private company. Therefore,
currently although RTOs are not prohibited, they are stringently regulated by the Companies
Act 2013 as well as the SEBI circulars or the notifications.

Although Companies Act 2013 prohibits Reverse Turnover or merger by regulating backdoor
IPOs, it raises another serious concern, i.e. backdoor delisting. Section 232 (h)22 disallows
unlisted companies from acquiring the status of a listed company via RTO. However, it does
not place any restriction on the converse scenario, i.e. when a public listed company seeks to
delist from the stock exchange via RTO with an unlisted company, thereby acquiring the status
of an unlisted company. If the transferee company is an unlisted company, it shall not
automatically become a listed company by merging with a listed company..

SIGNIFICANCE OF INCOME TAX ACT, 1961 IN TERMS OF REVERSE MERGER.

Section 72A of the Income tax, 1961 is there to facilitate for the recovery of sick industrial
undertakings by merging them with sound industrial companies having incentive of tax savings
devising with the sole intention for the benefit of general public through continuing productive
activities, increased employment avenues and revenue generation. Sickness among the
industrial undertakings is matter of grave concern and the section 72A provides for rekindling
financially unfeasible business undertakings. The section provides for the effective course to
facilitate the merger of sick industrial units with healthier ones by providing incentives and
removing impediments in the way of such amalgamation. To save the government from costs
in terms of loss of production and employment and uneconomical burden of taking over and

21
http://www.thehindubusinessline.com/news/emami-calls-off-merger-between-two-group-
firms/article6595707.ece
22
Companies Act 2013

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running unhealthy industrial units are some of the motivating factors for introducing section
72A.

Provisions of section 72A:

1) Amalgamation should be between companies and none of them should be a firm of partners
or sole proprietor.
2) The companies entering into amalgamation should be engaged in either industrial activity
or shipping business, thus companies engaged in trading activities or services shall not be
entitled for taxation benefits under section 72A.
3) After amalgamation the sick or financially unviable company shall survive and other income
generating company shall extinct.
4) One of the merger partners should be financially unviable and have accumulated losses to
qualify for the merger and the other merger partner should be profit earning so that tax relief
to the maximum extent could be achieved.
5) Amalgamation should be in the public interest.
6) Accumulated loss should arise from the Profits and gains from business or profession and
not be loss under the heading Capital gains or speculation.
7) Merger must result into following benefits:
a) Carry forward of accumulated losses of the amalgamated company. b) Carry forward of
unabsorbed depreciation of the amalgamated company. c) Accumulated loss would be allowed
to carry forward for the eight consecutive years.
8) For qualifying, carry forward of losses, the provisions of section 72 of Income Tax Act
should have not been contravened.
9) Similarly for carry forward of unabsorbed depreciation the conditions of section 32 of
Income Tax Act should not have been violated.
10) Specified authority has to be satisfied of the eligibility of the company for the relief under
section 72 of the Income Tax Act. It is only on the recommendation of the specified authority
that Central Government may allow the relief.
11) The company should make an application to a specified authority for the requisite
recommendation of the case to the Central Government for granting the relief.
Hence although Section 72A appears to be conducive to reverse mergers, it primarily
seeks to aid in the revival of the sick industries in public interest. As a result, the scheme is
subject to extensive scrutiny by the Central Government, there is a less probability of latitude
for the abuse of this provision. However, there still exists the possibility of a demerger, wherein

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a healthy company would acquire a sick company solely for the purpose of the tax evasion23
and after enjoying the tax benefits for couple of years, it would demerge from the sick company
thereby, it would defeat the objective of Section 72A.

ADVANTAGE AND DISADVANTGE OF MERGER:

Being a public company has numerous advantages. A public company generally has more
credit worthiness with customers, suppliers, and capital providers.

ADVANTAGE

 Greater Access to Capital: A primary reason for becoming a public company is to

significantly enhance the opportunities to raise the funds needed for new product
development and expansion. A public company has a much greater access to the capital
markets through stock and debt offerings as well as banks. This access allows the
company to grow, either through internal expansion or through acquisition. This
provides the acquired company’s shareholders with a realistic exit option as well as tax
benefits.
 Timeliness and Expense: An IPO is a time-consuming, expensive process. In a reverse
merger, the process takes significantly less time and money. The reduced time frame
lets key executives concentrate more on continuing operations and planning for the
future and less on meeting with underwriters, lawyers, and outside accountants. The
more management is distracted from their normal duties and functions, the more likely
there will be a detrimental effect on the company’s operations. The extended period of
time in an IPO also helps to increase the risk that market or industry conditions may
deteriorate and eliminate the window of opportunity.

DISADVANTAGE

 Shell’s Concept: The shell company is a “shell” for a reason. Most shells are
companies that have wound down or sold off their operating business, while some were
formed for the sole purpose of being available for the reverse merger opportunities.
Companies strictly adhere to the SEBI rules to avoid sanctions or even prosecution.

23
Mc Dowell and Co. Ltd. v. Commercial Tax Officer, (1985) 3 SCC 230

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  Equity Dilution There is definitely a cost for acquiring a shell. The private company
is putting up its assets, reputation, and business to acquire the shell, but the shell’s
owners want a continuing equity interest in the restructured company. This means that
the private company owner’s equity and voting power are diluted as a result of the
merger. The amount of dilution will depend upon the value of what the two parties are
bringing to the table and their negotiating skills. Under the SEBI Purview In a reverse
merger, the purchasing company avoids the full IPO process.

CASE STUDIES:
CROSS BORDER REVERSE MERGER
A cross border reverse merger occurs when an unlisted private company in one country tries
to get listed on a foreign stock exchange by merging with a public listed company in that
foreign company.24 Section 234 of Companies Act 2013 specifically deals with the cross-
border mergers concerning merger or amalgamation of an Indian company with a foreign
company and vice-versa.
Such mergers would entail two primary conditions;
(i) Requirement for the prior approval of Reserve Bank of India (RBI)
(ii) (ii) Overseas jurisdictions where such cross-border mergers and amalgamations
would be permitted

YATRA ONLINE INC. AND TERRAPIN ACQUISITION CORP.

Yatra Online Inc. (“Yatra”), a prominent Indian online travel company announced its merger
with a U.S. based Terrapin Acquisition Corp (“Terrapin”), on 19th December 2016 a special
purpose acquisition company formed for this objective. Under this purpose, all shares of
Terrapin will be automatically exchanged for Yatra’s ordinary shares on a one-for-one basis
and all warrants to purchase shares stock will automatically become warrants to purchase
Yatra’s ordinary shares on the same terms. The current deal was structured in the form of an
Reverse Merger. A Reverse Merger is essentially a scheme of the amalgamation through which
a private company acquires shares of a public company. Apart from this merger, Yatra was an
unlisted private company, although after the merger it will be able to list its shares in the U.S.
stock exchange because Terrapin was a public listed company prior to the merger and now the

24
Jordan Siegel Yanbo Wang, Cross-Border Reverse Mergers: Causes and Consequences, Harvard Business
School Strategy Unit Working Paper No. 12-089 (2013).

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new entity will also retain the status of a public listed company. As a result of this, Yatra will
be able to list the shares on NASDAQ without undergoing the cumbersome process of an IPO25.
Apart from this in India, there is one more example of a reverse merger was when ICICI
merged with its arm ICICI Bank in 2002.26

CHALLENGES:

THE OTHER TYPE OF MERGER

1. Profit making Company merging into a loss making company: Main reason behind
this merger is the financial position of accompany, Transaction is the acquisition of
loss-making company of a profit making company but structured as if profit making
company is acquired by a loss-making company .In this type of reverse merger, which
is known as a tax friendly reverse merger, as opposed to listing friendly reverse merger,
profit making company merges and goes into a loss-making company to take tax break
of losses of loss-making company without complying with stringent requirements of
tax losses. In such type of transaction capital becomes too large to service the post-
merger unless capital restructuring is also carried out at the same time. Further merged
entity continues to remain saddled with the history of a loss-making company and the
name also, (if a change of name is not carried out at the same time). There are many
examples of such type of reverse merger in India, as in the case of Kirloskar Oil
Engines Limited into KG Khosal Ltd.27
2. Larger company merging into a smaller company: When a larger company merging
into smaller one, Transaction is obviously acquisition of the smaller company by larger
company and internationally it is considered as an amalgamation and not as a merger.
But in any such type of case, the structure is such that larger company merges into
smaller company. Reasons behind this can be listing, tax break or even the reduction of
transaction costs or savings of future tax benefits or legal restrictions in transfer of the
business of the smaller company. For example, if a smaller company is having long-

25
BiswarupGooptu, Yatra completes reverse merger; to start trading on Nasdaq, E.T. Tech, Dec. 21, 2016
http://tech.economictimes.indiatimes.com/news/internet/yatra-completes-reverse-merger-to-start-trading-
onnasdaq/56094792
26
https://www.thehindubusinessline.com/opinion/all-you-wanted-to-know-about-reverse-
merger/article7318779.ece
27
https://economictimes.indiatimes.com/kirloskar-pneumatic-company-ltd/infocompanyhistory/companyid-
13513.cms

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 term tax advantage like the tax benefits or backward area benefits etc with a condition
that such benefits will be lost if the business is transferred to the larger company from
smaller company as the larger company is merging into a smaller one. Thus will help
the larger company in term of tax benefit.

CONCLUSION:
Reverse merger is an alternative method for the private companies to become public, without
going through the long and convoluted process of traditional Initial Public Offering and it is
cost cutting and less time consuming process. In a reverse merger, a private company acquires
a public entity by owning the majority shares of the public entity. The private company takes
on the corporate structure of the public entity, with its own company name. The public “shell”
is a vital aspect of a reverse merger transaction which is a publicly listed company with no
assets or liabilities. It gets the name "shell" because the only thing remaining from the current
company is its corporate shell structure. The primary purpose of the public company is to create
a long-term value for its shareholders, and only a select few companies are able to consistently
perform that task. While the number of reverse mergers increasing day by day in the present
scenario, but many researches and authors have concluded that there are few companies that
succeed in long-term shareholder value by going through the process of the reverse merger.
While the route to the traditional IPO is an expensive as well as more time consuming and
enrooted with many difficulties, it serves an important purpose: to keep companies that
shouldn’t be public out of the public markets if compared to Reverse merger process.
The reverse merger also creates a pathway to a “publicly traded private company” that has a
small market cap, less stock, and a little ability to raise their additional funding. So it is the
better option for the smaller firms or companies to remain a private and can raise their funds
through a private placement or look to do a merger or an acquisition with a larger company to
get the firm or the company to get promoted in Primary or the Secondary Market and which
will help them to increase their profit and stability in the market.

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BIBLOGRAPHY

BOOKS:
a.) Master Guide to Companies Act 2013 & Company Rules – Taxmann‘s
b.) Ramaiya a, guide to the companies act, providing guidance on the Companies Act,
2013 (18th ed. 2015).
c.) Reverse merger and other alternatives to traditional ITOS by David N Feldman

ONLINE RESOURCES:
a) THE INSTITUTE OF COMPANY SECRETARY OF INDIA, Professional
programme, MODULEIII, ELECTIVE PAPERS (June 2017)
b) https://www.investopedia.com/articles/stocks/08/reverse-merger.asp
c) http://huconsultancy.com/reverse-merger/
d) http://shodhganga.inflibnet.ac.in/bitstream/10603/122167/2/11.chapter%20three..p
df
e) SCC Online. Com
f) Manupatra.com
g) Westlaw.com
h) Jstor
i) https://www.icsi.edu/

ARTICLES:
a) http://iosrjournals.org/iosr-jbm/papers/Vol10-issue3/C01032129.pdf
b) http://moritzlaw.osu.edu/students/groups/osblj/files/2013/04/2-14.pdf

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