Reverse Merger: The Accelerated Path to Public Listing in India

Contributed by:
Name – Athira Ramesh
E-mail – athira@simplybiz.in

A reverse merger (Reverse Takeover or RTO) is a non-traditional strategy where a private company acquires a smaller, already-listed public entity often a dormant ‘shell company’ to instantly gain access to the public markets. By bypassing the lengthy and capital-intensive Initial Public Offering (IPO) process, the private firm achieves listed status with remarkable speed.
While offering significant advantages, this ‘backdoor’ entry requires meticulous planning and rigorous compliance, particularly given the stringent regulatory oversight by the Indian authorities.

I. The Mechanism: How a Reverse Merger Works

The process begins with the identification of a suitable public shell company that is ‘clean’ (minimal liabilities or legal issues). The core transaction involves a share exchange agreement, granting the private company effective control. The key steps of the transition are:
1. Share Exchange and Control Transfer: The private company’s shareholders receive shares in the listed public shell company, effectively making the private entity’s owners the controlling shareholders of the public entity. There will be requirement of Open offer under SEBI SAST Regulation also as the private company would be acquiring more than 26% stake and control in the listed company.
2. Management Transfer: The management and board of the private company assume control of the merged public entity.
3. Rebranding: The listed company is typically renamed and rebranded to reflect the identity, operations, and assets of the acquired private business.
4. Business Integration: The private firm’s core assets, intellectual property, and operations are fully integrated into the listed entity, making it the primary business activity.

II. Strategic Incentives: Speed, Cost, and Tax Efficiency

Corporate decision-makers opt for an RTO over an IPO primarily for its strategic trade-offs:

The Powerful Tax Benefit (Section 72A)
A major financial driver for RTOs in India, particularly those involving distressed or loss-making public shells, is the potential to utilize accumulated losses. Section 72A of the Income Tax Act, 1961, allows the profitable amalgamating company (the formerly private entity) to carry forward and set off the accumulated losses and unabsorbed depreciation of the loss-making listed company. This creates a significant, immediate tax shield, provided the merged entity meets specific conditions regarding continuity of business.

III. The Indian Regulatory Framework

The transaction is not formally defined as a “Reverse Merger” in Indian law but is treated as an amalgamation and arrangement, governed by two primary bodies:
• The Companies Act, 2013 (CA 2013): Governed by Sections 230 to 232, the core procedural step requires obtaining sanction from the respective benches of the National Company Law Tribunal (NCLT). The NCLT ensures that the scheme is fair to all stakeholders. Critically, Section 232(3)(h) mandates an ‘Opt-Out Provision,’ ensuring dissenting shareholders of the listed shell company are paid the fair value of their shares.
• SEBI Regulations: The market regulator imposes stringent checks to protect public investors:
o SEBI (LODR) Regulations, 2015: Mandates obtaining a prior No-Objection Certificate (NOC) from the Stock Exchanges (BSE/NSE).
o SEBI (ICDR) Regulations, 2018: Classifies RTOs as ‘Indirect Listings,’ imposing mandatory lock-in periods on promoter shares, like a traditional IPO.
o SEBI (SAST) Regulations, 2011 (Takeover Code): While NCLT-approved mergers often receive an exemption from triggering a mandatory Open Offer, the deal structure is scrutinized to ensure compliance. However, open offer un under the Takeover Code will be applicable in the initial stage where the private company acquires more than 26% stake and control in the listed company.

IV. Landmark Indian Examples

Reverse mergers have been used for diverse strategic objectives in the Indian market:
• Strategic Consolidation: The 2002 merger of ICICI Ltd. and ICICI Bank Ltd. saw ICICI Ltd., the financial institution, merge with its retail banking subsidiary, ICICI Bank. This created India’s first modern ‘universal bank,’ unifying their balance sheets.
• Tax Efficiency: The 1994 merger involving Godrej Soaps Ltd. (the profitable private entity) and its smaller, loss-making listed counterpart, Gujarat Godrej Innovative Chemicals (GGIC), was primarily driven by the strategic goal of utilizing GGIC’s accumulated losses for tax advantages.
• Contemporary ‘Reverse Flip’: The quick-commerce startup Kiranakart Technologies (Zepto) executed a complex ‘reverse flip’ maneuver in 2024/2025 to shift its corporate domicile from Singapore back to India via a merger with an Indian entity, setting the stage for a domestic listing.

V. Critical Risks and Post-Merger Challenges

While attractive for its efficiency, the reverse merger pathway carries unique risks that require thorough due diligence:
1. Hidden Liabilities of the Shell Company: The greatest risk lies in the history of the listed shell company. Undisclosed liabilities, tax disputes, or pending litigation that rigorous due diligence failed to uncover can severely strain the merged entity’s finances and reputation post-merger.
2. Valuation and Reputational Deficit: The transaction often suffers from a reputational deficit, as RTOs can be associated with “backdoor” listings or speculative schemes. The valuation and exchange ratio are highly complex and subject to intense scrutiny, especially by the NCLT.
3. Post-Merger Compliance Burden: Private company management is often unprepared for the immense regulatory and compliance burden of a publicly listed entity. This includes rigorous adherence to SEBI’s Listing Obligations and Disclosure Requirements (LODR), insider trading regulations, and the constant need for transparent financial reporting.
4. Lack of Primary Capital: An RTO is a listing mechanism, not typically a direct fundraising event. Unlike an IPO, the company must execute a separate transaction, such as a Qualified Institutions Placement (QIP) or a Private Investment in Public Equity (PIPE), to raise substantial capital after the merger is complete.

Conclusion: Reverse mergers are a sophisticated and indispensable tool for corporate leaders in India seeking rapid public market access. By offering speed, cost control, and crucial tax benefits under Section 72A, they provide an attractive alternative to the IPO grind. However, success hinges on exhaustive due diligence of the shell company and the proactive establishment of robust public company governance from day one.

If you are looking for professional assistance in share issuance, share transfers, stamp duty payments, fundraising transactions or end-to-end compliance management for your company, SimplyBiz offers comprehensive solutions covering all stages of the entity life cycle. To know more or to outsource your compliance requirements, please write to Shilpa Agarwal at shilpa@simplybiz.in.