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Special Purpose Acquisition Companies Emerging As Alternative Fundraising Route


In a move toward ensuring the ease of doing business, the government has been making constant efforts to adopt initiatives for boosting businesses by introducing new avenues of fundraising and the listing of securities, as well as framing laws and regulations, to bring in order the growth of the Indian economy.

The special purpose acquisition company (SPAC) is one such initiative of the government that aids in raising money through the IPO (initial public offering) route to acquire businesses. SPAC as a concept was globally well-known in developed countries like the US, the UK and Canada. In a country like ours, it has gained momentum in the past couple of years.

SPAC is a type of company that does not have an operating business but has been formed with the specific objective of acquiring a target company. This concept allows a shell company to go for an IPO without any commercial activity. Units get issued to the investors. Each unit usually comprises either a share or a warrant or fractions of the same to purchase shares at a later date.

After the IPO, the units are separated into shares and warrants, which are then traded on the stock exchanges. Post listing, the SPAC merges or acquires a company, i.e., the target, thereby allowing the target company to benefit from such listing without going through the formalities and rigours of an IPO.

Gradually, lawmakers are recognising SPACs and framing regulations around them to operationalise and bring them into action. International financial services centers (IFSCs) Listing Regulations for the first time brought about a comprehensive framework for the listing of securities at IFSC through SPACs.
Company Law Committee Recommends SPAC

In September 2019, the Company Law Committee also recommended having an enabling provision under the Companies Act, 2013, to allow entrepreneurs to list a SPAC incorporated in India on domestic or global exchanges. Through this, domestic and international sponsors get an opportunity to acquire unlisted companies in India and overseas. SPACs can prove to be profitable for Indian companies to list on overseas exchanges where an overseas investor is keen to invest in a business known to him. This helps companies with the requisite funding for operating the business.

Any Indian shareholder acquiring shares under SPAC, through share swap needs to be mindful of any round-tripping consequences if it entails fund-infusion into India through the SPAC structure. Such a transaction would require prior regulatory clearance, with the commercial rationale behind following such a route being duly explained and convinced to the Regulator. While cross-border mergers are allowed under the Indian Corporate Law, no specific policy framework vis-à-vis mergers involving listed companies exist either under securities law or FEMA. Moreover, a merger is a time-consuming process and could elongate the transaction closure.

SPAC framework from the point of inception to acquiring a target company and completing a merger requires almost twenty-four months’ time frame which is a far-sighted objective to attain. If flexibility is offered to extend the time period, say by seeking approval from existing investors, it will aid in attaining desired objectives of SPAC. Apart from that, the existing limit of the Liberalized Remittance Scheme (USD 2,50,000 per financial year) can prove to be an obstacle for a resident individual who intends to make an investment outside India of higher transaction value.
Adoption and implementation of specific taxability norms in case of SPAC

At the time of merger of the target company into the SPAC, it is unclear of the tax neutrality conditions in the hands of shareholders and company, specifically in the case of outbound mergers (viz., merger of Indian company into a foreign company). Also, plain-vanilla share-swap transactions, other than through a tax-neutral process, are immediately taxable in the hands of the shareholders. This presently poses severe challenges to Indian Op-Co Shareholders pursuing SPAC, as they may need to cough out material cash without having liquidity from the said transaction. Hence, to roll over such tax/ cashflow impact, these shareholders are compelled to resort to other transaction-structuring avenues.

Also, the transfer of SPAC shares from non-resident to non-resident could entail triggering off indirect transfer provisions since the value is derived from underlying shares of an Indian company. Besides, if the key managerial & commercial decisions of a SPAC (despite being a foreign company) are taken in India, then such foreign SPAC may be deemed as an Indian Company under the Place of effective management rules, thereby exposing the SPAC’s global income to Indian taxes.

SPACs are the investors’ sweet spot as it’s better to have funding for investing in the right business, as opposed to identifying a target first and then the deal with the uncertainty of fundraising. The introduction of necessary amendments and a less complex Indian tax and regulatory framework will help the Indian business to globalize internationally.

Ravi Mehta is managing director and head (transaction tax), and Amrita Bhatnagar is associate director (transaction tax) at RBSA Advisors. The views expressed in this article are those of the authors and do not represent the stand of this publication.

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