Reverse mergers gain ground on the expressway to public markets

The reverse merger route to a public market listing isn’t new. But industry experts are observing a growing trend of companies scouring for listed entities admitted for corporate insolvency, with intentions for a reverse merger.

In 2023-24, at least 26 listed insolvent companies found new owners through the Corporate Insolvency Resolution Process (CIRP), as per official data compiled by Mint. Of these, the likely motivation for the acquisition of at least 10 of the insolvent companies was to get listed through a reverse merger, said the experts.

“This trend is increasingly capturing the imagination of market participants," said Amit Singhania, founder, Areete Law Offices.

“If you find the right target company in (the National Company Law Tribunal), it makes getting listed far easier, quicker and cheaper than going for an IPO," Singhania said. “Executives are bidding for listed companies in NCLT as soon as those get admitted."

East India Drums acquired Precision Containeurs for ₹5 crore against admitted claims of ₹1,000 crore before merging into the defunct company, publicly available documents show. Trading in the shares of Precision Containeurs is currently suspended due to “procedural reasons".

Tapping public market benefits

Typically, companies targeted for reverse mergers have no assets or employees, and hold little value apart from their ‘listed’ status. In many cases, they are defunct.

Although reverse mergers may not result in an immediate fundraise, active trading on the bourses aids acquiring companies in better price discovery for their shares. Besides, the disclosures and compliances required for getting listed help acquiring companies secure better terms while raising debt, experts said.

Reverse mergers, in effect, offer a more cost-effective way to tap into these public market benefits than an initial public offering of shares. While the median acquisition price for the above-mentioned 10 reverse mergers was under ₹2 crore, the estimated expense for an IPO is at least ₹5 crore, the experts pointed out.

Also, an IPO entails hiring investment bankers, lawyers and consultants and a laundry list of regulatory approvals, many of which can be bypassed during a reverse merger. 

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“When juxtaposed with an IPO, reverse mergers can be quicker and cost-effective but there is unlikely to be a fresh infusion of equity capital," said Shankh Sengupta, partner and head of the dispute resolution practice at Trilegal, a law firm. “The key benefit for promoters in these cases is that their shares become liquid by virtue of public trading."

Promoters of the acquiring companies may end up raising capital if they are required to trim their shareholdings to comply with regulations that cap promoters’ stakes in listed companies at 75%. This can be done through a follow-on public offer or a bulk deal.

Typically, resolution applicants retain a 95% stake in a listed company when they acquire it through the CIRP route. Regulations require a minimum 5% public shareholding in these companies for these entities to continue being listed post insolvency resolution.

Also, given that India’s insolvency process is time-consuming, reverse mergers offer a way out for the promoters and creditors of entities stuck in longdrawn bankruptcy proceeding.

A new identity

To be sure, reverse mergers too involve a series of regulatory approvals to house the acquiring business into an insolvent company, which could take a while. 

Trading in the shares of the 10 companies mentioned earlier remains suspended on BSE due to “procedural reasons" as the acquirers obtain regulatory approvals.

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In the case of Cura Technologies Ltd, which was acquired through CIRP in September for ₹67 lakh against admitted claims of ₹14 crore, the new promoters had to change its articles of association. 

The IT company’s main objectives now are to engage in the trading of manufactured goods, investments in stocks and other assets, and lending, among other things, publicly available documents show.