2 SPACS and the Fault in the Indian Stars

SPACS and the Fault in the Indian Stars

By: Vanshika Sharma (Grant Thornton)

Raising money through an IPO has many benefits; however, slower execution, red-tapism and high costs, can make this process cumbersome for companies. Is there a way to raise funds and reduce the complications of IPO? Yes, the solution is SPACS (Special Purpose Acquisition Companies)

A SPAC has no commercial operation. Wait, what? If a company does not have any commercial operations, how can it ask public to invest in it? Well, a SPAC can because it is a shell corporation which is formed strictly for the purpose of acquiring or merging with existing companies. For a SPAC, the IPO is already done. It is already listed on the exchange.

The target company (the firm which it will acquire) is unknown at the time of IPO. SPACs IPO investors do not have any idea about the company in which they will be investing. SPACs have only 2 years to complete the acquisition or they have to return the funds back to the investors. Though this may sound riskier from an investor’s point of view, it reduces risk for target firms as they can go public within 3-4 months (The traditional IPO process can take 6-12 months to complete). Target companies also benefit from experienced management and enhanced market visibility as SPACs are sponsored by prominent financiers and business executives.

SPACS have witnessed a dramatic growth since the advent of the pandemic, especially in the US. (Refer to the following table by SPAC Analytics highlighting the change in total number of SPAC IPOs and Total Value of SPAC IPOs in the last 9 years in the US).

SPAC deals in India are at a nascent stage. SPACs are increasingly looking to India for acquisition targets. StoneBridge Acquisition Corp, a SPAC which is focused on acquiring Indian companies, has raised INR 1,400 crore through IPO. Renew power, Yatra Online Inc., Videocon d2h are a few Indian companies that went public on NASDAQ through SPACs.

SPAC is comparatively easy option to get listed on the stock exchange for startups as compared to the traditional IPO. India has more than 62,000+ DPIIT recognized startups as of 2021. So why aren’t they taking advantage of SPACS? Well, the fault lies in the Indian Regulation.

It is difficult to form an Indian SPAC. Why?  It takes a SPAC maximum of 2 years to identify a target and perform due-diligence; however, the Companies Act 2013 authorizes the Registrar of Companies to strike-off the name of companies that do not begin operation within one year of the firm's incorporation.  The absence of operational profits and net tangible assets further prevent SPACs from issuing an IPO in India. According to SEBI, a public listed company requires net tangible assets of at least INR 3 crore in the preceding three years, minimum average consolidated pre-tax operating profits of INR 15 crore during any three of last five years and net worth of at least INR 1 crore in each of the last three years.

Well, if SPACs cannot be formed in India, Indian companies can get listed on foreign stock exchanges like Renew Power and Yatra. So why aren’t they? Well, the problem here lies for the target company acquired by SPAC.  The target or the acquired company loses its legal identity and becomes a branch of the SPAC, which is a foreign entity. This is problem because the foreign branch is subjected to a 40% corporate tax rate as against the normal rate of 30% (or lower, depending upon the domestic company). The company then has to pay higher tax in the same region in which it was operating earlier, which makes raising money through foreign SPACs difficult for MSME and startups.

Even if some corporations can afford the 40% tax rate. The Problem then lies for SPAC Investors:  Investors in the US can redeem their shares and claim a refund of the amount they have invested until the acquisition of a target by the SPAC.  However, in India, redemption of shares of a listed company may or may not be allowed due to the absence of specific legal provisions for SPACS. Therefore, the shares of the SPAC shall then have to be exchange traded. The value of which may fall or rise substantially, exposing retail investors to risk.

Fortunately, SEBI has formed a committee of experts to examine the suitability and feasibility of introducing SPAC regulations in India. This might augment the prospects of domestic listing of start-ups in the country. India’s IPO market is sizable and mature; hence SPACs have the potential to succeed in the Indian landscape. Let us hope that the review committee takes a step in the direction of growth and prosperity of the country.

Sources: 1. https://www.thehindubusinessline.com/business-laws/regulatory-challenges-for-spacs-inindia/article34124252.ece 2. https://www.grantthornton.in/globalassets/1.-memberfirms/india/assets/pdfs/grantthornton_spac_services_india.pdf 3. https://cbcl.nliu.ac.in/taxation/tax-implications-on-spac-to-spac-or-not-to-spac/ 4. https://www.ey.com/en_in/ipo/going-the-spac-route-keyconsiderations#:~:text=From%20a%20shareholders'%20perspective%2C%20on,tax%20e xemption%20under%20the%20treaty). 5. https://www.business-standard.com/article/markets/spacs-look-to-india-for-next-wave-ofacquisition-targets-says-nomura-121030400295_1.html 6. https://economictimes.indiatimes.com/markets/ipos/fpos/india-focused-spac-raises-200million-lists-on-nasdaq/articleshow/84553468.cms?from=mdr