By Kalpesh Maroo & Shruti B V
It’s raining SPACs (particular goal acquisition business)! Capital raising workouts by means of the SPAC route has witnessed an unprecedented surge with a record-breaking fund raise by 298 SPACs of almost US$ 88 billion in the initially quarter of 2021. This is practically double that raised by means of SPACs in the fourth quarter of year 2020 and more than the aggregate funds raised in the course of year 2020 of US$83 billion. These SPAC fund raises have drastically overtaken that raised by means of the conventional IPOs in US.
New avenues for raising capital has usually caught the fancy of providers and investment bankers globally. The conventional IPO course of action in the US has typically posed challenges to providers, in particular new age providers, with cumbersome and highly-priced regulatory processes fraught with uncertainties and whimsical investors. Though not new, SPACs have abruptly caught the fancy of investors and are gaining substantial significance amongst providers, investors and the public at substantial in international markets.
A SPAC is a shell business, typically referred to as a blank cheque business for raising funds in the US, with no any industrial operations but with a defined life of 18-24 months to consummate an acquisition. SPAC is incorporated to raise capital to facilitate acquisition of one or more operating providers. The acquisitions could be in the kind of a merger or outright share buy or any other enterprise mixture permissible. These SPACs, in contrast to conventional IPOs, raise funds from public based on the track record of the Sponsors to the SPAC. The existence of sophisticated sponsors for ongoing assistance of SPACs is one of the essential highlights. In an occasion exactly where the SPAC is unable to make the acquisition, the SPAC can dissolve and return the monies to the public shareholders.
SPACs have been an appealing car for early stage providers engaged in several sectors, predominantly in technologies, media, telecom and wellness care sectors. In India, following the digital boom and an upswing in the startups, numerous providers are desirous of tapping the overseas markets to raise capital for their expansion. Looked at from an Indian company’s point of view, SPACs provide access to more sophisticated investors, bigger capital market place, capability to expand in markets beyond India, significantly less vulnerability to volatile market place situations and capability to obtain international branding and visibility. Additionally, the providers could immediately safe substantial funding by means of participation by private investors in public gives (PIPE). However, thinking about that an accelerated timeline is involved in the SPAC course of action, providers would have to have sufficient and robust preparation to undertake compliances that are essential of a public business, such as complicated economic reporting and registrations.
Recognizing the have to have for Indian providers to straight access international capital markets, the Indian government has taken its initially step by permitting public providers to straight list in the overseas markets. Detailed recommendations in this regard are awaited.
The SPAC acquisitions of Indian target providers could be by means of acquisition of shares or outbound merger or swap of shares. Though these routes are permitted, Indian tax and regulatory laws pose substantial challenges to the providers as properly as for shareholders in the implementation of these routes. Outbound merger of an Indian business with the SPAC, even though permitted, could face regulatory challenges and may well be inefficient from a tax point of view as properly. Moreover, the Indian operations of the business post-merger, could be regarded as a Branch and apart from becoming topic to tax at a larger price, the model would be somewhat significantly less feasible from a regulatory and operational point of view. Another essential concern is the manner in which the founders and promoters of Indian providers would get stakes in the SPAC. As per the current regulatory framework, an RBI approval would be essential if the fair market place worth of the shares acquired by the founders in the SPAC exceeds US$ 2,50,000.
Also, a share sale or share swap transaction attracts capital gains tax in the hands of the shareholders. However, the taxation would be topic to useful provisions beneath the applicable tax treaty, exactly where the shareholders of the business are non-residents. In basic, the promoters who would have acquired the shares of the business at nominal worth may well have to incur substantial capital gains taxes on a share swap and therefore would incur substantial charges even in a case exactly where they are merely exchanging their shares in the Indian providers for shares of the SPAC with no an actual liquidity occasion. Share swaps also call for RBI approval and adherence to compliances beneath FDI and ODI regulations. This may well also lead to round-tripping, which is not permitted by RBI, exactly where resident shareholders are involved. The alter in more than 49% of the shareholding on account of share swap/share transfer would also outcome in the Indian business losing its capability to carry forward and set off its tax losses.
Granting tax exemptions on such structures such as share exchange for shareholders in an Indian business, permitting carry forward of losses for the providers and easing approval norms from exchange handle regulations on SPAC transactions, could make SPACs more viable and as a useful route for Indian firms.
It is essential that the Indian government requires needed methods to unlock the correct prospective of the SPAC route sooner than later, which caters to the specifications of the Indian firms in particular commence-ups and aid them in accessing/raising capital from international investors in a quicker and effective way.
SPACs have definitely caught the fancy of investors at the moment. In the lengthy run, the sustainability of the existing euphoria and their functionality as against the more conventional IPOs, would totally rely on the functionality of several SPACs. In the meanwhile, if the frenzy continues, SPACs will certainly be an choice worth exploring for Indian providers.
(Kalpesh Maroo is a Partner, Deloitte India and Shruti B V is a Senior Manager, Deloitte Touche Tohmatsu India LLP.)