A reverse merger is a transaction in which a publicly listed company merges with an unlisted company, resulting in a combined merged publicly listed company. The unlisted company’s shares are listed on the stock exchange without the traditional initial public offering process, and the transaction is approved by the NCLT under Sections 230 to 232.
The Structure
In a reverse merger, the listed entity is the transferor, and the unlisted entity is the transferee. The shareholders of the unlisted entity receive shares of the listed entity, and the unlisted entity’s business is combined with the listed entity’s business. The transaction is often used to provide liquidity to the unlisted entity’s shareholders and to give the listed entity access to a new business.
The SEBI Safeguards
The reverse merger is exempt from the obligation to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, because the acquisition is made pursuant to a scheme approved by the NCLT. The exemption is a significant advantage, but it does not dispense with the other SEBI requirements.
The listed entity must obtain the no-objection certificate from the stock exchanges, and the application must be accompanied by a valuation report, a fairness opinion from a SEBI-registered merchant banker, a report from the audit committee, and a report from a committee of independent directors recommending the transaction. The public shareholders of the listed entity must approve the scheme, and the pre-scheme share capital of the unlisted entity is subject to lock-in: up to twenty per cent of the post-merger paid-up share capital held by the promoters is locked in for three years, and the remaining shares are locked in for one year.
The NCLT Process
The scheme is filed with the NCLT under Sections 230 to 232, and the Tribunal convenes the meetings of the members and creditors of both the entities. The NCLT considers the SEBI observation letter, the valuation, and the statutory authorities’ objections before sanctioning the scheme.
The Accounting
Under Ind AS 103, a transaction in which the legal acquirer is in substance the acquired business is accounted for as a reverse acquisition. The combined entity’s financial statements reflect the unlisted operating business as the accounting acquirer, and the listed entity is treated as the accounting acquiree.
A technically sound reverse merger is structured to comply with the SEBI safeguards, the NCLT process, and the accounting standards, and it provides a fair exit to the public shareholders.
Call to Action
Anuj Desai & Associates advises companies on reverse mergers—from the SEBI safeguards and the valuation and fairness opinions to the NCLT process, the lock-in, and the Ind AS 103 accounting. If you are considering a reverse merger, we can help you structure the transaction.
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