SPACs: Bidding goodbye to traditional Initial Public Offers, but will it work for Indian firms?

A SPAC is a shell firm, sometimes called a clean cheque firm for elevating funds within the US, with none business operations however with an outlined lifetime of 18-24 months to consummate an acquisition.

By Kalpesh Maroo & Shruti B V

It’s raining SPACs (particular objective acquisition firm)! Capital elevating workout routines by the SPAC route has witnessed an unprecedented surge with a record-breaking fund elevate by 298 SPACs of practically US$ 88 billion within the first quarter of 2021.  That is nearly double that raised by SPACs within the fourth quarter of yr 2020 and greater than the mixture funds raised throughout yr 2020 of US$83 billion. These SPAC fund raises have considerably overtaken that raised by the normal IPOs in US.  

New avenues for elevating capital has at all times caught the flowery of firms and funding bankers globally.  The normal IPO course of within the US has usually posed challenges to firms, particularly new age firms, with cumbersome and costly regulatory processes fraught with uncertainties and eccentric traders.  Although not new, SPACs have immediately caught the flowery of traders and are gaining important significance amongst firms, traders and the general public at giant in world markets.

A SPAC is a shell firm, sometimes called a clean cheque firm for elevating funds within the US, with none business operations however with an outlined lifetime of 18-24 months to consummate an acquisition. SPAC is included to boost capital to facilitate acquisition of a number of working firms.  The acquisitions might be within the type of a merger or outright share buy or another enterprise mixture permissible.  These SPACs, in contrast to conventional IPOs, elevate funds from public primarily based on the observe file of the Sponsors to the SPAC.  The existence of subtle sponsors for ongoing help of SPACs is without doubt one of the key highlights. In an occasion the place the SPAC is unable to make the acquisition, the SPAC can dissolve and return the monies to the general public shareholders.

SPACs have been a lovely automobile for early stage firms engaged in varied sectors, predominantly in expertise, media, telecom and well being care sectors. In India, following the digital growth and an upswing within the startups, many firms are desirous of tapping the abroad markets to boost capital for his or her enlargement. Checked out from an Indian firm’s perspective, SPACs present entry to extra subtle traders, bigger capital market, capacity to broaden in markets past India, much less vulnerability to unstable market circumstances and talent to realize world branding and visibility. Moreover, the businesses might shortly safe giant funding by participation by personal traders in public gives (PIPE).  Nevertheless, contemplating that an accelerated timeline is concerned within the SPAC course of, firms would wish satisfactory and strong preparation to undertake compliances which can be required of a public firm, together with complicated monetary reporting and registrations.

Recognizing the necessity for Indian firms to instantly access global capital markets, the Indian authorities has taken its first step by permitting public firms to instantly record within the abroad markets. Detailed pointers on this regard are awaited. 

The SPAC acquisitions of Indian goal firms might be by acquisition of shares or outbound merger or swap of shares.  Although these routes are permitted, Indian tax and regulatory legal guidelines pose important challenges to the businesses in addition to for shareholders within the implementation of those routes. Outbound merger of an Indian firm with the SPAC, although permitted, might face regulatory challenges and could also be inefficient from a tax perspective as nicely. Furthermore, the Indian operations of the corporate post-merger, might be considered a Department and other than being topic to tax at the next charge, the mannequin could be comparatively much less possible from a regulatory and operational perspective. One other vital challenge is the way through which the founders and promoters of Indian firms would get stakes within the SPAC.  As per the present regulatory framework, an RBI approval could be required if the honest market worth of the shares acquired by the founders within the SPAC exceeds US$ 2,50,000.  

Additionally, a share sale or share swap transaction attracts capital positive aspects tax within the arms of the shareholders.  Nevertheless, the taxation could be topic to helpful provisions below the relevant tax treaty, the place the shareholders of the corporate are non-residents.  Basically, the promoters who would have acquired the shares of the corporate at nominal worth might should incur important capital positive aspects taxes on a share swap and therefore would incur important prices even in a case the place they’re merely exchanging their shares within the Indian firms for shares of the SPAC with out an precise liquidity occasion. Share swaps additionally require RBI approval and adherence to compliances below FDI and ODI laws. This may occasionally additionally result in round-tripping, which isn’t permitted by RBI, the place resident shareholders are concerned. The change in additional than 49% of the shareholding on account of share swap/share switch would additionally consequence within the Indian firm dropping its capacity to hold ahead and set off its tax losses. 

Granting tax exemptions on such constructions together with share alternate for shareholders in an Indian firm, allowing carry ahead of losses for the businesses and easing approval norms from alternate management laws on SPAC transactions, might make SPACs extra viable and as a helpful route for Indian companies. 

It is vital that the Indian authorities takes essential steps to unlock the true potential of the SPAC route ahead of later, which caters to the necessities of the Indian companies particularly start-ups and assist them in accessing/elevating capital from world traders in a sooner and environment friendly means.

SPACs have definitely caught the flowery of traders presently.  In the long term, the sustainability of the present euphoria and their efficiency as in opposition to the extra conventional IPOs, would completely rely on the efficiency of varied SPACs.  In the mean time, if the frenzy continues, SPACs will certainly be an possibility price exploring for Indian firms. 

 (Kalpesh Maroo is a Associate, Deloitte India and Shruti B V is a Senior Supervisor, Deloitte Touche Tohmatsu India LLP.)