While this last one year has been fraught with uncertainty for businesses across the world, one part of the economy that has remained positive is the stock markets. Against this backdrop, a phenomenon that has caught the attention of the investment segment are Special Purpose Acquisition Companies (SPACs). US-listed SPACs raised more than $80 billion in 2020, compared to $13 billion in 2019, and the fund-raising figures in the first two months of 2021 continue to be robust.
While the SPAC structure is similar to that of traditional blank-check companies , there are some technical differences between the two and SPAC regulations provide more flexibility. The way a SPAC structure starts is that a reputed management team with relevant industry experience or investment management expertise sets up a vehicle, either in the US or in a non-US jurisdiction (such as the Cayman Islands) by contributing a small amount of capital as consideration for Founder Shares, which generally end up constituting 20% of the post-IPO capital of a SPAC. The sponsor also generally subscribes to Founder warrants to provide risk capital to the SPAC. Thereafter, the SPAC files an initial registration statement with the Securities and Exchange Commission (SEC) relating to the shares to be offered in the IPO, which will be listed on NASDAQ or NYSE.
After capital is raised for a SPAC, the sponsor begins identifying targets for acquisition. It needs to complete this acquisition within a time frame of 24 months (which can be extended in some cases). Once a target is identified, the SPAC and the target entity combine to enable the target operating entity to be listed. The combination can be either be achieved by a merger or by swapping the shares of the target operating entity with the SPAC or its subsidiary. This process is generally referred to as a de-spac.
A unique feature of the capital structure of a SPAC is that public investors have the option of redeeming their shares before a de-spac if they do not like the identified target (although they can still continue to hold the warrants and exercise these in future). The sponsors, on the other hand, do not have the option of redeeming the shares and they continue to hold these. A SPAC also typically arranges for private funding through a Private Investment in Public Equity (PIPE) transaction just before a de-spac to bridge the gap resulting from redemption of shares by initial investors.
Considerations for Indian businesses
Today, many Indian businesses have achieved significant value and are desirous of going global through an overseas listing, which can give them significant visibility and also provide them access to a larger pool of capital than in India. At the same time, many SPACs that have already raised capital are looking at targets in Asia and are interested in merging with Indian success stories to offer enhanced valuations to their shareholders. The SPAC structure can act as a bridge to help both SPACs and shareholders achieve their objectives. However, there are various tax and regulatory aspects in India that need to be tackled appropriately while looking at SPAC listing. While the government has indicated its intent of allowing Indian companies to be listed directly overseas, and recently exempted Indian companies that may list overseas from Indian compliance- applicable to listed companies, the complete framework is not yet in place and hence options such as swap of shares may need to be considered.
While a swap of shares of an Indian company could create a taxable event for the current shareholders in the absence of a provision for exemption or deferral of such taxes, there could be ways to minimise this impact depending on the shareholding structure. Furthermore, such swapping of shares may also necessitate regulatory approval for Indian resident shareholders and this may need to be factored in from a timelines or structuring perspective. These issues may be somewhat easier to address in case of structures that are headquartered overseas. Another important consideration to be kept in mind is that depending on the way a de-spac is designed, there could be tax implications in India under India Indirect Transfer rules at the time of the de-spac as well as on subsequent trading of listed shares (especially for shareholders with significant shareholdings such as sponsors, promoters and PIPE investors). Indian resident shareholders who may have continued to be citizens of other countries also need to consider tax implications in those countries.
An Indian company looking at getting into a SPAC structure needs to keep in mind that while the process of listing through an SPAC is easier and faster than through a traditional IPO, it still requires a fair bit of disclosures and preparation. For example, the SEC mandates that the target entity’s financials for the requisite number of years are prepared and audited according to the Public Company Accounting Oversight Board’s (PCAOB’s) standards. This may require substantial lead time and needs to be planned appropriately in view of crunched timelines in the SPAC process.
The SPAC opportunity could not have come at a better time for Indian businesses, with increased global recognition, a rapid rise in valuations and the overall intent of Indian regulators to permit global listings. With the right planning and additional support in terms of regulatory relaxations, this structure could allow Indian businesses to quickly become a prominent part of global listed markets.
Views expressed are personal
(Bhavin Shah, Leader, and Himanshu Mandavia, Partner – Deals Tax at PwC India)