Normally, a small company merges with large company or a sick company with healthy company. However in some cases, reverse merger is done. When a healthy company merges with a sick or a small company is called reverse merger. This may be for various reasons. Some reasons for reverse merger are:
- The transferee company is a sick company and has carry forward losses and transferor Company is profit making company. If transferor Company merges with the sick transferee company, it gets advantage of setting off carry forward losses without any conditions. If sick company merges with healthy company, many restrictions are applicable for allowing set off.
- The transferee company may be listed company. In such case, if transferor Company merges with the listed company, it gets advantages of listed company, without following strict norms of listing of stock exchanges.
In such cases, it is provided that on date of merger, name of transferee Company will be changed to that of transferor company. Thus, outside people even may not know that the transferor company with which they are dealing after merger is not the same as earlier one.
Many times, reverse mergers are also accompanied by reduction in the unwieldy capital of the sick company. This capital reduction helps in unity of the accumulated losses and other assets which are not represented by the share capital of the company. Thus, a capital reduction aim rehabilitation scheme is an ideal antidote (by way of reverse merger) for sick company. For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered into scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994. The scheme involved reduction of share capital of GGICL from Rs. 10 per share to Re. 1 per share and later GSL would be merged with 1 share of GGICL to be allotted to every shareholder of GSL. The post merger company, Godrej Soaps Ltd. (with post-merger turnover of Rs. 611.12 crores) restructured its gross profit of 49.08 crores, higher turnover GSC’s pre-merger profits of Rs. 30 crores. The amalgamated company, GGICL reverted back to the old name of amalgamating company, Godrej Soaps Ltd. Thus, this innovative merger which was by way of forward integration in the name of GGICL was completed with the help of financial institutions like IDBI, IFCI, ICICI, UTI etc. All financial institutions agreed to waive penal interest, liquidate damages besides finding of interest, reschedule outside loans and also lower interest rate on term loans.