View: Quickening the special purpose | Economic Times

Currently, access to foreign capital markets for Indian companies is possible only through global depository receipts (GDRs), or American depositary receipts (ADRs). These require companies to be listed on the Indian stock exchange(s). While GoI has recently given a go-ahead to the long-pending demand of direct listing of Indian companies in overseas stock exchanges, detailed guidelines are yet to be issued. Meanwhile, special purpose acquisition companies (Spacs), which have seen a significant growth of late, have emerged as an alternative to traditional initial public offerings (IPOs) for investors.Spacs are investment vehicles that raise capital from investors in an IPO to invest or acquire a target, which is generally not identified as on the IPO date. Thus their epithet of ‘blank cheque’ companies. Spacs are backed by sponsors, with well-established track records, who would deploy capital (raised in an IPO) in an attractive asset that has the potential to provide a good return to investors. Sponsors typically have 18-24 months to identify a suitable target and deploy the funds, failing which they have to refund the listing proceeds back to the investors.Spacs have raised a record $82 billion last year, and reportedly an additional $49 billion has been raised in the first two months of this year. Being acquired by a Spac offers private companies a much faster way to go public. Most importantly, it helps them achieve execution and valuation certainty without being subject to market vagaries.Spacs are booming in the US, and this trend is expected to rise across the globe in the coming months. Expectations of a more conducive regulatory environment in some countries is also likely to facilitate the launch of European Spac listings in 2021. Given the global trends, one would also hope Indian regulators may evaluate the Spac regime for Indian capital markets — perhaps on a pilot basis for identified sectors and startups, with suitable checks and balances. There are, however, certain tax and regulatory considerations that need to be addressed before Spac can really take off in India.A Spac transaction could typically be structured either by way of a ‘share swap’ between shareholders of the Indian company and the Spac, or through an ‘outbound merger’ of the Indian entity with the Spac. Under either of the options, where Indian residents are required to swap their current holdings in the Indian target for shares of the Spac, a specific approval from RBI and/or relevant authority may be warranted. This process may be rigorous and depend on closer scrutiny by regulators, merits of each case, etc. Additionally, uncertainty around the timelines for the approval may also create concerns, since Spacs need to deploy their funds within 18-24 months.Another pressure point is taxes. Under current laws, Indian capital gains tax should apply on both ‘shares swap’ and ‘outbound merger’, based on the ‘fair value’ of shares issued by the Spac. In other words, this would result in the continuing shareholders being exposed to Indian taxes even before the exit event for such shareholders, which would result in the Indian promoters or continuing shareholders having to pay taxes even without having monetised, and act as an impediment to access Spac capital.GoI may consider putting in place a detailed policy framework to provide a clear path to access the large pool of Spac capital eagerly waiting to be deployed in emerging companies across sectors. In particular, it should consider allowing such ‘shares swap’ or ‘outbound merger’ under the automatic route (based on the sector they are operating in) and defer the taxes in the hands of the continuing shareholders upon exit from the Spac alone.GoI is expected to issue detailed guidelines with respect to overseas listing of Indian companies soon. Once this is permitted, the possibility of considering an ‘inbound merger’ — merger of a Spac into an Indian company — could also be explored. Besides facilitating the listing of an Indian company overseas, the above option may be tax-neutral for continuing shareholders from an India perspective, and seems permissible under current exchange laws (subject to meeting other conditions). Overseas tax and regulations may also need to be considered.A conducive and clear policy regime should kickstart the Spac journey much sooner, and lead to significant inflow of foreign investment. It can boost Indian entrepreneurs and the startup ecosystem.Singhal is leader, emerging markets technology, media & entertainment and telecommunications, and Sayta is partner, Ernst & Young India