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Home >Opinion >Views >Why SPAC-ships remain UFOs in India but should not

The year 2020 witnessed a meteoric rise in special purpose acquisition company (SPAC) activity in the US, with $83 billion being raised from 247 SPACs, representing almost 50% of the 494 initial public offerings (IPOs) that raised capital worth about $174 billion. While SPACs, commonly referred to as ‘blank cheque entities’, have been in global capital markets for some time, they have recently exhibited explosive growth on Wall Street, thanks to technology, headless commerce and similar next-gen companies. The resurgence of SPAC activity is also attributable to the pandemic-induced slowdown.

SPACs are popular because they cut through the rigours of the traditional IPO process, thus offering quick access to capital. In a way, the process flips, as investors invest money first without having any idea about the operating company it would go to, although they do know the target sector. The SPAC then goes public, enlists itself on a bourse as a shell company, and eventually acquires an operating company through a reverse merger or otherwise (commonly referred to as de-SPACing) in 12–24 months. The operating company acquired by a listed SPAC gets indirectly listed (and valued). The promoters of the operating entity may plan a partial or total exit.

From the perspective of investors, SPACs are listed entities with no operating history. Their sole purpose is to raise money for acquiring another company (in an identified industry or segment). Therefore, a SPAC’s reliability is dependent on the credibility of its sponsors. Both risk and uncertainty arise, and if an acquisition is not consummated within a desired time frame, the SPAC must return the funds with interest.

India has the world’s third largest startup ecosystem, being home to over 40,000 startups, with 38 unicorns. These businesses are expected to grow significantly as they widen their avenues of entrepreneurship by accessing the three ‘G’s of global capital, global listing and global recognition.

Indian laws permit cross-border mergers. However, there are complexities in terms of tax and regulatory implications for the parties involved. If the operating company were an Indian company, there could be broadly two feasible options for de-SPACing: One, a merger of an Indian operating company with the SPAC, resulting in existing shareholders of that company receiving shares of the SPAC; and two, a swap of shares between the domestic operating company and the SPAC, so that existing shareholders of the operating company are issued shares of the SPAC.

Under both the options, the Indian operating company becomes a subsidiary of the overseas SPAC. Any such merger or swap of shares must comply with Indian corporate law, foreign direct investment regulations and overseas direct investment regulations under the Foreign Exchange Management Act, 1999, including the Liberalised Remittance Scheme Regulations applicable to individual resident shareholders. Broadly, such restructuring would require the prior approval of the Reserve Bank of India and the relevant ministry. The grant of an approval depends on the specific sector in which the Indian company is operating, and a sanction by the National Company Law Tribunal in case of an overseas merger is a plausible method.

From the perspective of direct taxation, one may need to consider that an outbound merger and/or swap of shares of an Indian operating company is a taxable transaction under Indian income tax laws, with no specific relief or exemption available. This means that tax incidence and liability arises immediately before the actual liquidity event, i.e. before shareholders of the operating company cash in.

The absence of any interim tax relief or a regime designed for SPACs could be a deterrent in propelling the growth of next-generation businesses in India. According to India’s taxation framework for real estate investment trusts and infrastructure investment trusts (or REITs and InvITs), a tax is levied on unitholders upon their exit at the time they sell listed REIT or InvIT units, while tax is deferred on the earlier transaction involving a swap of operating entity’s shares with that of REIT or InvIT units. With this as a model, India could consider a tax-deferral regime to facilitate SPAC transactions. We observed significant growth in capital-raising activity after a relaxation of the tax regime for REITs and InvITs, with more than 70,000 crore raised in the past four years. A similar tax regime with single-window regulatory tax framework would be a welcome move for de-SPACing transactions.

From the perspective of capital markets, while SPACs are trending on Wall Street, there is no reason why Dalal Street cannot join the action. The Securities and Exchange Board of India, as the country’s regulator of capital markets, ought to consider a SPAC regime for India.

Multiple aspects of India’s economy need to be worked on before it can achieve a size of $5 trillion. Startups have an important role to play, and SPACs offer a major opportunity for the country to lift Indian entrepreneurial spirits by opening these new floodgates of capital. To conclude, a SPAC regime could provide a fresh impetus to the country’s confident and hardworking startup ecosystem.

Nikhil Poddar and Sushma Hemnani contributed to this article.

Bhavin Shah and Hemal Uchat are, respectively, leader and partner, mergers & acquisitions tax at PwC India. These are the authors’ personal views.

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