Concerns under Anti-Money Laundering Law

An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001

One of the challenges which exist under the Income Tax law is that under Section 47(vi) only transfers in a scheme of amalgamation of capital assets by an amalgamating company to an amalgamated Indian company is exempted from capital gains tax. Since De-SPAC transactions have the potential to have a foreign amalgamated company, the capital gains exemption in such cases would not be available and these transactions will be treated as “transfers” and attract capital gains tax under Section 45 of the Income Tax Act, 1961.40 Similarly, Section 47(vii)(b) exempts transfers by shareholders in a scheme of amalgamation who hold shares in an amalgamating company only if the amalgamated company is an Indian company. Thus, even in such cases a shareholder will have to pay capital gains tax in a deSPAC transaction containing a foreign amalgamated company.41

Concerns under Anti-Money Laundering Law

The money laundering concerns with SPAC may often be undictated and should be considered as a major regulatory concern due to its distinct and separate functioning from other companies and the traditional IPO route. Some of the major money laundering concerns of SPACs are discussed in this part.

When any SPAC is in the process of formation and IPOs without having any typical checklist to assess the information upon the sponsors, independent due diligence mechanism, information upon the company for the merger or acquisition at the latter stage can be considered quite detrimental to the future of the SPAC. It can become the major cause of concern for a rise in money laundering activities since there is inadequate or incorrect disclosure of information and the firm is very likely to undertake any illegal or suspicious business activity. Apart from this,

40 Devarsh Shah and Dharmvir Brahmbhatt, ‘Tax Implications on SPAC: To SPAC or Not to SPAC?’ (The CBCL Blog, 08 June 2021) <https://cbcl.nliu.ac.in/taxation/tax-implications-on-spac-to-spac-or-not-tospac/> accessed 03 October 2021. 41 Devarsh Shah and Dharmvir Brahmbhatt, ‘Tax Implications on SPAC: To SPAC or Not to SPAC?’ (The CBCL Blog, 08 June 2021) <https://cbcl.nliu.ac.in/taxation/tax-implications-on-spac-to-spac-or-not-tospac/> accessed 03 October 2021.

SPACs do not have any operating business activities in the initial stage and the target company’s information is not disclosed and often unknown. This could potentially mean the confidence of the investors is upon the reputation of the sponsors, management, and executives of the SPACs. Therefore, since the target for acquisition is not identified before the IPO closing because any such identification would warrant the disclosure to the securities market regulator of the country. Therefore, SPACs have an increased risk of fraud, omissions, insider trading, non-disclosure of essential documents and fees and payment.

The Financial Industry Regulatory Authority report also elaborates several risks that are associated with SPACs such as the funds and movement of money for any SPAC related transactions should be specifically disclosed for transparent assessment of what the fees in the SPAC transactions are and the money that is being utilised for the same.42 Insider trading is also another major concern with SPAC and hence the interests of the sponsors should be specifically disclosed along with the history and assessment of the board members.43 As already mentioned there should be target acquisitions and its identification prior to the completion of the IPO procedure. Hence, usually a disclosure should be made to the securities market regulator that no specific target company for acquisition has been ascertained by the SPAC. The SPAC sponsors and executive members are to be elected in a manner that there is no conflict of interest or any existing interest or link with the target company for acquisition. Once the target company for acquisition has been identified, the financial statements of the target companies require an assessment and also an assessment has to be made if these financial statements comply with the securities law of the country in which the target company is being acquired. This includes the earnings, audited financial statements and essential documentation of the target company, Additionally, it is usually

42 Securities and Exchange Commission: Division of Corporate Finance, ‘Special Purpose Acquisition Companies’ (U.S. Securities and Exchange Commission, 22 December 2020) <https://www.sec.gov/corpfin/disclosure-special-purposeacquisition-companies> accessed 17 September 2021. 43 TenIntelligence, ‘Special Purpose Acquisition Company (SPAC) Due Diligence Considerations’ (TenIntelligence, 2021) <https://www.tenintel.com/spacs/> accessed 19 September 2021.