By Kalpesh Maroo & Shruti B V
It’s raining SPACs (special purpose acquisition company)! Capital raising exercises through the SPAC route has witnessed an unprecedented surge with a record-breaking fund raise by 298 SPACs of nearly US$ 88 billion in the first quarter of 2021. This is almost double that raised through SPACs in the fourth quarter of year 2020 and more than the aggregate funds raised during year 2020 of US$83 billion. These SPAC fund raises have significantly overtaken that raised through the traditional IPOs in US.
New avenues for raising capital has always caught the fancy of companies and investment bankers globally. The traditional IPO process in the US has often posed challenges to companies, especially new age companies, with cumbersome and expensive regulatory processes fraught with uncertainties and whimsical investors. Though not new, SPACs have suddenly caught the fancy of investors and are gaining significant importance among companies, investors and the public at large in global markets.
A SPAC is a shell company, often referred to as a blank cheque company for raising funds in the US, without any commercial 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 companies. The acquisitions could be in the form of a merger or outright share purchase or any other business combination permissible. These SPACs, unlike traditional IPOs, raise funds from public based on the track record of the Sponsors to the SPAC. The existence of sophisticated sponsors for ongoing support of SPACs is one of the key highlights. In an event 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 attractive vehicle for early stage companies engaged in various sectors, predominantly in technology, media, telecom and health care sectors. In India, following the digital boom and an upswing in the startups, many companies are desirous of tapping the overseas markets to raise capital for their expansion. Looked at from an Indian company’s perspective, SPACs provide access to more sophisticated investors, larger capital market, ability to expand in markets beyond India, less vulnerability to volatile market conditions and ability to gain global branding and visibility. Additionally, the companies could quickly secure large funding through participation by private investors in public offers (PIPE). However, considering that an accelerated timeline is involved in the SPAC process, companies would need adequate and robust preparation to undertake compliances that are required of a public company, including complex financial reporting and registrations.
Recognizing the need for Indian companies to directly access global capital markets, the Indian government has taken its first step by allowing public companies to directly list in the overseas markets. Detailed guidelines in this regard are awaited.
The SPAC acquisitions of Indian target companies could be through acquisition of shares or outbound merger or swap of shares. Though these routes are permitted, Indian tax and regulatory laws pose significant challenges to the companies as well as for shareholders in the implementation of these routes. Outbound merger of an Indian company with the SPAC, though permitted, could face regulatory challenges and may be inefficient from a tax perspective as well. Moreover, the Indian operations of the company post-merger, could be regarded as a Branch and apart from being subject to tax at a higher rate, the model would be relatively less feasible from a regulatory and operational perspective. Another important issue is the manner in which the founders and promoters of Indian companies would get stakes in the SPAC. As per the existing regulatory framework, an RBI approval would be required if the fair market value 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 subject to beneficial provisions under the applicable tax treaty, where the shareholders of the company are non-residents. In general, the promoters who would have acquired the shares of the company at nominal value may have to incur significant capital gains taxes on a share swap and hence would incur significant costs even in a case where they are merely exchanging their shares in the Indian companies for shares of the SPAC without an actual liquidity event. Share swaps also require RBI approval and adherence to compliances under FDI and ODI regulations. This may also lead to round-tripping, which is not permitted by RBI, where resident shareholders are involved. The change in more than 49% of the shareholding on account of share swap/share transfer would also result in the Indian company losing its ability to carry forward and set off its tax losses.
Granting tax exemptions on such structures including share exchange for shareholders in an Indian company, permitting carry forward of losses for the companies and easing approval norms from exchange control regulations on SPAC transactions, could make SPACs more viable and as a beneficial route for Indian businesses.
It is important that the Indian government takes necessary steps to unlock the true potential of the SPAC route sooner than later, which caters to the requirements of the Indian businesses especially start-ups and help them in accessing/raising capital from global investors in a faster and efficient way.
SPACs have certainly caught the fancy of investors currently. In the long run, the sustainability of the current euphoria and their performance as against the more traditional IPOs, would entirely depend on the performance of various SPACs. In the meanwhile, if the frenzy continues, SPACs will definitely be an option worth exploring for Indian companies.
(Kalpesh Maroo is a Partner, Deloitte India and Shruti B V is a Senior Manager, Deloitte Touche Tohmatsu India LLP.)