For most startups, the finish game is ultimately taking the business public. The challenge is listing non-lucrative or barely lucrative technologies commence-ups in India. Venture capital firms and economic investors, as a result, are forced to look for viable exit choices via overseas IPO.
Difficulty in meeting listing criteria of NSE and BSE
Several situations for listing on Indian stock exchanges, especially relating to positive net worth and earnings, are unfeasible for quite a few commence-ups. Most of these firms may perhaps have big money burns and considerable losses, but they may perhaps have amazing development possible. Further, SME platforms and the technologies commence-up-focused platforms such as the Innovators Growth Platform on BSE have not gained momentum. With restricted choices readily available in India, overseas funding by way of an IPO has emerged as an eye-catching option.
Overseas listing permits Indian commence-ups to access bigger and more diversified pools of capital and raise funds at reduced fees, lowering their price of capital and generating them more competitive. Overseas markets may perhaps assistance commence-ups attain more profitable valuations as these markets have a deeper investor ecosystem that understands the dangers involved in a commence-up.
How do organizations list overseas
Historically, quite a few Indian corporates listed their securities abroad via American Depository Receipt (ADRs) or Global Depository Receipt (GDRs). One may perhaps recall the popular ADRs issuance by Infosys in NASDAQ and VSNL in the New York Stock Exchange (NYSE) in 1999 / 2000. Though of late, the Indian corporate appetite for ADRs/GDRs has largely ebbed.
Thankfully, the Indian government has, in current months created it a lot easier to list abroad with the Companies (Second Amendment) Bill, 2019 passed on 04 March 2020, which permits Indian organizations to straight list on particular foreign stock exchanges. A 2018 SEBI committee recommended 10 permissible foreign jurisdictions for Indian organizations to list overseas, like the US, the UK, HK, China, and Japan.
Special Purpose Acquisition Company: Newest kid on the block
SPACs are ‘blank check companies’ that raise revenue by going public with the guarantee that they will use the revenue to obtain a higher-development business. “It’s a back door to going public and avoiding scrutiny,” writes Kathleen Smith, Principal at Renaissance Capital in Marketwatch. Also, SPACs are a good solution for commence-ups as direct IPOs on foreign stock exchanges are realistically accessible only to big Indian corporates or the biggest startups offered the requirement of a big IPO size and higher charge structure of worldwide investment banks.
A SPAC is formed by a sponsor who contributes the capital and undertakes an IPO of what is primarily a shell business. The proceeds of the IPO are held in a trust account till it can be made use of for a possible acquisition, commonly in 18-24 months. The proposed transaction is necessary to be authorized by the SPAC shareholders. Upon receipt of such approval, the SPAC and the target combine into a publicly-traded operating business (“De-SPAC transaction”). The SPAC sponsors are paid via shares in the merged listed business that are commonly locked up for about 12 months and/or contingent upon particular milestones. This incentive structure tends to make the sponsors extended term partners post listing. The business can advantage from its capital market place experience and investor networks.
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SPAC structures are not new to Wall Street and have been about for decades. However, it has lately turn into a rage in the US with practically 250 SPACs going public in 2020 and 67 SPACs hitting the market place in January 2021. Investors are searching for profitable offers whereas organizations are searching to get an a lot easier road to funding. SPACs are also not fully new to India as in 2015, Silver Eagle Acquisition, a SPAC acquired a 30 per cent stake in Videocon d2h for about USD 200 Mn. In 2016, Yatra Online Inc, the parent business of Yatra India, listed on NASDAQ, by way of a reverse-merger with US-based SPAC, Terrapin 3 Acquisition. According to Bloomberg, the Indian on-line delivery platform, Grofers, and India’s top rated solar power producer, ReNew Power, are reportedly taking into consideration the US market place and the SPAC route to go public.
Regulatory Risks to be kept in thoughts though listing abroad by way of SPAC
For Indian commence-ups, SPACs are a great way to go public in a shorter time and tap into a complete new ecosystem of capital. SPACs have reduced market place and execution dangers as they provide relative certainty of valuation. Although, from an Indian target’s viewpoint and that of its shareholders, it may perhaps prove to be a challenge to implement a standard De-SPAC transaction, offered the Indian regulatory regime and its important approvals. A De-SPAC transaction includes a merger of the SPAC and the target, exactly where the combined entity is the SPAC, which becomes an operating entity. In India, this is an outbound merger that ought to comply with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulations), and Section 234 of the Companies Act, 2013, according to an NCLT sanctioned scheme of merger and topic to situations.
The procedure of executing a court-sanctioned merger, getting approvals, giving disclosures to fulfill obligations towards Indian shareholders, and dealing with cross-border taxation difficulties are just some of the considerable challenges facing commence-ups applying the SPAC route to go public. Thus, indirectly listing overseas via SPAC comes with its challenges and any transaction structure requirements to be customized and analyzed in detail. Reacting to the current wave for SPACs, interestingly the International Financial Services Centers Authority has not too long ago issued a consultation paper contemplating SPAC structures in International Financial Services Centres (IFSC) in India, namely, Gujarat. It would be intriguing to see the reaction of the worldwide investing neighborhood to this improvement.
Harsh Bhuta is the Partner of Bhuta Shah & Co LLP. Views expressed are the author’s personal.