Sidharrth Shankar & Madhurima Mukherjee
The year 2020 saw stellar performances by capital markets across the globe. One of the most exciting stories in the monetary marketplace was the resurrection of the ‘Special Purpose Acquisition Vehicles (SPACs)’. In the mercurial globe of equity capital markets, practically nothing is more captivating than the believed of a swift and (comparatively painless) fund-raising. Yet, IPOs stay the predominant system of fund-raising from the public.
Like all Wall Street idioms, SPAC, as well, is complicated-sounding jargon, which means merely a ‘blind pool of cash’. In truth, SPACs are normally colloquially referred to as ‘blank-check companies’. A SPAC is a particular objective acquisition firm, which is formed for the objective of raising capital via an IPO to use the funds so raised to obtain an operating enterprise.
In a regular IPO, the target firm is subjected to a time-consuming approach involving roadshows, pitch meetings, and intense scrutiny of the company’s monetary statements and other regulatory mandatory disclosures. This approach is simplified in a SPAC exactly where the funds are initial deposited in the kitty, with no even identifying the target. This tends to make SPACs a specifically desirable choice for start out-ups and technologies corporations, which choose a privately negotiated deal more than cost-discovery in a regular IPO approach.
Typically, a SPAC transaction has two components. First, a management group sets up a SPAC by identifying a certain sector and formulating a enterprise strategy. The SPAC then goes via the common US.IPO approach with the US Securities and Exchange Commission, and undertaking a roadshow followed by an underwriting. The IPO proceeds are held in a trust account till released to fund the enterprise mixture or used to redeem shares of the SPAC.
The second portion of the approach, typically known as a ‘De-SPAC transaction’, ordinarily entails the identification of a possible acquisition target. The SPAC then pursues the acquisition and negotiates a merger or obtain agreement. Following the announcement of signing, the SPAC undertakes a mandatory shareholders’ vote. If a SPAC shareholder does not approve the transaction, the shares and warrants held by such shareholder can be redeemed for money. If the acquisition is authorized by the shareholders, and the other situations in the acquisition agreement are happy, the SPAC and the target combine into a publicly-traded operating firm.
India has caught the worldwide frenzy of SPACs in 2020, with ReNew Power’s agreement to merge with a SPAC, resulting in a publicly-listed firm on the NASDAQ. However, the idea is not new. Early examples are the SPAC of Trans-India Acquisition Corp, which acquired Solar Semiconductor in 2008. Another instance is Phoenix India Acquisition Corp, which acquired Citius Power in 2008. In 2016, Yatra Online Inc, the parent firm of Yatra India, was listed on NASDAQ by way of a reverse-merger with US-based Terrapin 3 Acquisition.
While SPACs could have the possible to grow to be the definite exit technique for Indian tech-unicorns, the myriad of Indian laws gives many points of consideration. For instance, De-SPAC transactions structured as ‘outbound mergers’ demand compliance with the Companies Act, 2013 and the foreign exchange laws. Under the foreign exchange regulations, an ‘outbound merger’ signifies a transaction exactly where the resultant firm is a foreign firm. In a common De-SPAC transaction, the shareholders of the Indian firm acquire shares of the combined entity as merger consideration. Resident person shareholders ought to comply with the limits specified below the Liberalized Remittance Scheme (LRS) framed by the Reserve Bank of India (RBI) when participating in such transactions (set at USD 250,000 per monetary year at the moment). Hence, RBI approval would be expected if the target has Indian resident shareholders, as shares to be acquired by resident people pursuant to a De-SPAC merger are most likely to be more than the LRS limit.
Alternatively, the ‘De-SPAC transaction’ could also be structured as a share swap in between SPAC and the shareholders of the Indian firm. A merger with an overseas holding firm would be the easiest and most time-effective choice. However, to take into consideration such an choice, the Indian target firm ought to, initial, have an overseas holding firm, which is not frequent. Such structures could also necessitate approval from the RBI and the NCLT.
To sum up, a ‘cookie-cutter’ method can not be followed when undertaking SPAC transactions involving Indian corporations. The transaction depends on the information and situations of the deal. As with all capital marketplace transactions, structures and methodologies will evolve and be fine-tuned. But, for now, Indian firms reaching out to worldwide investors via De-SPAC could be right here to remain.
Authors are with J Sagar Associates
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