Reverse Merger: Features, Challenges and Pros & Cons

Published On: Jun 23, 2020Last Updated: Oct 14, 20234.9 min read

A merger is a legal unification of two companies, consolidating ownership, risk, properties, liabilities, and functions. There is no definition of the term merger in any Act.

A merger usually occurs when a smaller company plates into a greater company by exchanging shares or cash. Yet if the buying business is weaker or lower than the takeover one, it is referred to as a reverse merger. Reverse mergers usually occur by a parent company that fuses into a subsidiary or a profitable business that blends into a losing trade.

Reverse Merger via reverse IPO is a process by which a business with a private limited company registration acquires a public company. A large private corporation shall have to merge with a smaller listed business to go public without an IPO. The shareholders of the Private Limited Company exchange shares for public company shares to ensure that the private company is publicly traded without the IPO process and time and cost-effectiveness.

Reverse mergers are also known as reverse take over (RTO), which are quite common in the US. A few examples of reverse merges in India were when ICICI merged with its arm ICICI bank in 2002 to set up a universal bank to lend both to industry and retail borrowers. Initially, Godrej soaps were profitable with a turnover of Rs. 437 crore. Later on, the company decided on the reverse Merger with a loss-making Gujarat Godrej Innovative chemical Limited. This new firm under Godrej was having a turnover of Rs. 60 crore, and therefore, the Merger led to a Company named Godrej soaps Limited which was turned profitable.

Also Read: Funding in a Private Limited Company: Sources & Mandates

Cross-border reverse Merger occurs once an unlisted public company is attempting to be listed in the foreign stock exchange by merging in that foreign country with a public company.

Features of Reverse Mergers

  • The value of the large company’s assets must surpass the value of the small company’s assets.
  • The net income attributable to the assets of the large company (after all costs are excluded, excluding taxes and except exceptional items) would surpass those of the small business.
  • The share capital to be provided as an acquisition fee shall surpass the small company’s equity share capital before the acquisition.
  • Reverse merger priorities are well established before joining the deal.
  • The fair purchasing value must be met.
  • When the Merger has been reversed, the small corporation is to continue its activities, and the large business ceases to exist.
  • The Merger will be of public concern
  • Ensure that the transaction results in the tax benefits in compliance with the 1961 Income Tax Act.

Reverse Merger benefits from a Tax Perspective

By making these organizations tax benefits, the income tax act of 1961 attempts to promote reverse Merger.

Once Section 72A has been inserted, the body created by the amalgamation of the sick company will benefit from the losses and depreciation allowances accrued to the sick company.

Any conglomeration scheme involving the Merger of a sick company with a safe, profitable business can benefit by continuing losses in compliance with section 72A. Section 72A makes it clear that a financially stable corporation is combined or combined with another corporation. Section 72A is, therefore aimed at making it easier for sick industrial enterprises to reinvigorate by Merger with healthy business enterprises by providing tax-savings opportunities. This can ensure greater employment opportunities and income generation in the public interest.

Also Read: Corporate Tax in India – Overview, Tax Rates & Returns

Challenges of Reverse Merger

1. Risks to shareholders: Foreign experience indicates that shareholders of public corporations often sell their shares with wrong intentions. These can involve intentional failure to report major liabilities, such as ongoing litigation and dishonest corporate governance. Further due diligence is required to defend.

2. Failure to make public disclosure: If retroactive takeovers comply with these disclosure requirements, management flexibility could be reduced, and the business could be harmed by leaking valuable information to competitors, suppliers, customers, and business partners.

3. Organizational transformation problems: Management of an unlisted company may not have enough or no experience in managing the affairs of a listed company. New domestic and external problems will also be faced after the Merger.

Advantages of Reverse Merger

1. A simplified process: Reverse mergers enable a private company to become a public company without increasing capital, simplifying the process dramatically. Although it can take months for traditional IPOs to materialize, reverse Mergers take a few weeks. This saves a lot of management time and money.

2. Minimizes the risk: In the traditional IPO model, the business will not be made public eventually. Managers are willing to spend hundreds of hours planning a typical IPO, but if the conditions on the stock market are unpredictable, the IPO will have to be revoked. The reverse Merger reduces the risk.

3. Less Market Dependent: Because reverse Merger is just a mechanism for the merge between a private company and a public body, or vice versa, the process is less dependent on market conditions. 

Disadvantages of a Reverse Merger

1. Due diligence required: Due diligence of the acquisition company, its management, shareholders, operations, financial institutions, and possible outstanding liabilities (i.e., litigation, environmental issues, safety hazards, labor hazards) must be carried out.

2. Regulatory and enforcement costs: Reverse Merger may place new regulatory and compliance requirements on the acquired entity’s managers who may not be experienced, and this burden can be substantial, and the initial attempt to enforce additional regulations may result in a business that has weak results if managers spend far more time on administrative problems than on running.


Reverse Mergers could provide the ideal way for unlisted companies to enter capital markets without initial public offering (IPO) and move through the tedious criteria of the public problem. According to other situations, a transferred organization can also benefit from taxes in compliance with section 72A of the Revenue Tax Act 1961.

Share This Post:

Shalini Mathur
About the Author

Shalini Mathur

Shalini Mathur is associated with as Operational Executive of the Company, handling various MCA related compliance and various legal drafting.