Regulatory changes required for making SPACs a successful regime

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Special purpose acquisition companies, or SPACs, have seen a resurgence in the recent past and the year 2020 specifically, was a blockbuster year. Indian companies which had hitherto restricted choices for raising capital overseas, are now actively considering SPAC as one of the options to raise funds. However, the current framework of regulations and tax laws in India do not facilitate an easy or smooth process to raise funds. Indian companies and promoters have to face a myriad set of challenges on the tax and regulatory fronts if they were to raise capital through the SPAC route.

India considering SPAC regime

In the backdrop of an unprecedented momentum in SPAC capital raises, many countries are in the process of introducing SPAC regimes by making suitable amendments to securities and tax laws. Indian authorities too have been actively considering introducing a specific SPAC regime. In this regard, the International Financial Services Centres Authority, in its consultation paper on proposed IFSCA (Issuance and Listing of Securities) Regulations, 2021, has proposed a framework for listing of SPAC on recognized stock exchanges. Market regulator SEBI had formed a group of experts to examine the feasibility of introducing SPAC-like structures in India under the Primary Market Advisory Committee and is expected to come up with the draft framework for SPACs shortly.

Some of the key aspects which are expected to be addressed in the framework by SEBI are guidance on listing procedures, eligibility criteria, offer size, governance structure, investor protection mechanism, etc.

IPO route difficult for early stage companies

Traditionally, the IPO route in India has posed challenges for early stage companies to go through listing process and meet the rigorous conditions laid down for IPOs. On the other hand, investors keen on participating in the growth story of emerging growth companies have been unable to find an entry into the company until post the IPO stage unless they invest as a venture capital / private equity fund. This has invariably pushed investors to make investments in companies at higher valuations. With SPACs gaining visibility and interest in India, a specific framework for SPAC could open doors to a new path of listing which provides flexibility and relaxation to Indian companies as well as to the investors, compared to the traditional IPO.

It is expected that current IPO listing eligibility criteria such as minimum net worth, profitability, tangible asset etc., would be relaxed as SPACs are essentially blank check / shell companies with no operations. Further, SPACs have also been seen to be a fast track route to listing in terms of timelines. It is expected that documentation and compliance burden will be less onerous when compared to typical IPO listed companies.

Amendments to bring SPAC closer to reality

To complement the SEBI framework, necessary amendments to allied laws in India would be required to bring the SPAC vision closer to reality. Amendments to corporate law to treat SPAC as a separate entity, permit a non-operational company to exist without any business until the acquisition of a target, easy exit for the company in case of unsuccessful SPAC and simplification of merger process with accelerated timelines, would be essential for bringing operational precision to SPACs.

In order to make capital raising through SPACs more attractive, the Indian government could consider providing relief by treating the business combination event with SPACs as tax neutral and shifting the taxable event to the event of ultimate sale of the listed shares. In addition, protection of ability to carry forward and set-off of business losses for Indian companies notwithstanding the change in shareholding of the Indian company by 51% or more, will be extremely helpful to a lot of start-ups as most of them would have incurred huge losses.

SPACs are undoubtedly proving to be the most efficient alternate route for listing globally. Many countries have recognised the significance and are coming up with guidelines for extending SPAC listing eligibility to domestic companies. However, the success of SPACs in any country would lie in the efficient administration and flexibility of implementation of SPAC. It would be worthwhile to wait and watch the unfolding of the SEBI SPAC framework in India.

(The author is a Partner with Deloitte Haskins and Sells. Views expressed are personal.)