Want to go public sans the IPO route?
Indian companies are using an innovative way to go public by taking the merger and acquisition route.
By Vivek Sinha, TNN |
NEW DELHI: Indian companies are using an innovative way to go public by taking the merger and acquisition (M&A) route. Now, there is no need to go through the rigours of an initial public offer (IPO) with heavy disclosures or running the risk of your draft prospectus getting rejected by the market regulator.
| MODUS OPERANDI Cos aquire defunct listed firms and merge the operations of privately held entities with it through reverse merger This is done to avoid making the mandatory disclosures before a public issue The main reason is to circumvent the stringent requirements of public listing After merging unlisted companies, promoters come up with big rights issues to raise capital |
The modus operandi is very simple. It involves acquiring a defunct listed company and then merging the operations of a privately held entity through a reverse merger into it.
Market watchers say that one of the prime reasons why companies have been using this window is to avoid making the mandatory disclosures required for coming up with an IPO.
As against the IPO boom of the 90s where the disclosure norms were not as demanding as today, there were a whole host of companies who came with IPOs. Thereafter, trading was suspended in these stocks for non-compliance of mandatory listing agreement.
According to Anil Jindal of Jindal Securities, a Delhi-based dealer with OTC Exchange of India, “The main reason is to circumvent the stringent requirement of listing. After merging their unlisted companies, these promoters then come up with big rights issues to raise capital from the market.”
Since the defunct companies can be acquired for small change this makes perfect cost arbitrage for listing. While the attraction of being a public listed company is not something new, the rise of the stock market valuations over the last one year has spurred more interest in getting listed.
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According to Prithvi Haldea, managing director of Prime Database, which tracks primary market, “Making an initial public offer requires an elaborate process with associated expenses. Many companies have been using the route of acquiring a defunct listed company and then going through a reverse merger. Infact, it is not just the small and medium-sized companies, even large companies have done this to get listed.”
Mr Haldea added that the stock exchanges have taken notice of such activities and have tightened the procedure. However, this hasn’t closed the window and such cases continue.
The current state of the primary market, which has been affected by the market crash last May, is also understood to be a reason why some small-sized companies are looking at this route to get onto the bourse.
While in most cases the acquirer has been a different promoter, there have been cases where a business group has a number of unlisted companies and one defunct listed company. Therein the promoters have merged few unlisted entities with the listed one to revive it.
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