Will More Indian Companies Join The SPAC Party?
An initial public offering (IPO) sign stands on display near a digital screen hanging inside the Euronext NV Paris stock exchange in the La Defense business district of Paris, France. (Photographer: Cyril Marcilhacy/Bloomberg)

Will More Indian Companies Join The SPAC Party?

An innovative legal structure has caused a frenzy in the U.S. capital markets, resulting in new billionaires and companies going public indirectly without taking the traditional IPO route.

SPACs or special purpose acquisition companies have seen a rising investor interest — for instance, in 2020, $84.7 billion was raised in the U.S. from more than 200 SPACs, according to Bloomberg data.

SPACs are entities which are incorporated and listed with the sole intent of raising capital without any prior business plan or commercial purpose. They are formed by expert investors or venture capitalists, who seek to use the IPO proceeds or the cash pool to buy a private company and quickly take it public.

More than 90 SPACs started trading in January this year with a record sale of shares worth $26 billion in the U.S. equity markets. An Indian company will soon debut via this route as well.

ReNew Power, the country’s biggest renewable power producer, recently entered into a business agreement with RMG Acquisition Corp. II., a Nasdaq listed blank-check company.

ReNew Power’s filings with the Securities and Exchange Commission.
Proposed structure of ReNew Power after the SPAC transaction.

Indian e-commerce operator Flipkart is not far behind. It is exploring a merger with a blank-check company and has approached several SPACs in the US seeking a valuation of upto $ 35 billion, as per a Bloomberg report citing people familiar with the matter.

Experts expect more action in this space, but also pointed to factors that could spoil the SPAC party for Indian companies.

“We are seeing a lot of inquiries and discussions regarding potential SPAC transactions with Indian companies,” Prashant Gupta, head-capital markets at law firm Shardul Amarchand Mangaldas & Co., said. “Given the extraordinary amount of capital available with SPACs, we expect that there will be far more traction in the upcoming time.”

But SPACs may remain unpopular with a large number of companies due to unfriendly cross-border merger rules and exchange control regulations, experts told BloombergQuint.

Sectors Ripe For SPACs

Startups intending to go public may take the SPAC route as the U.S. markets offer them access to a wider global investor base, higher valuations and more liquidity. The SPAC structure will particularly suit startups with a holding company abroad or those which are in the advanced phase of business growth.

A number of companies in the tech or tech-based sectors will likely consider going public via SPAC route, Bharat Anand, partner at law firm Khaitan & Co., said.

With ReNew Power having announced its de-SPAC transaction and Grofers SPAC merger in the works in the span of a few months, a lot of activity has already taken place. SPACs with undeployed capital and themes focussed around India or tech will drive this momentum forward in the coming year.
Bharat Anand, Partner, Khaitan & Co

Indian startups that already have holding companies abroad in more favorable jurisdictions are more likely to use the SPAC route for listing, Yogesh Singh, partner and co-head for corporate practice at law firm Trilegal, explained. The viability and attractiveness of SPAC acquisitions can vary greatly from sector to sector for startups incorporated in India, he said.

Sectors without significant restrictions on foreign investment are likely to find SPAC acquisitions comparatively favourable. While this route has typically made sense for startups with middling valuations, the latest changes proposed to the innovators growth platform will likely become a compelling alternative to SPAC-based listings.
Yogesh Singh, Partner and Co-Head Corporate Practice, Trilegal

SEBI’s Innovators Growth Platform provides a listing regime for companies engaged in the intensive use of information technology, intellectual property, biotech or nanotechnology in their business. In December last year, the regulator proposed to ease rules relating to holding period for pre-issue capital, provide special rights for institutional shareholders above 10%, etc.

What Factors Can Dampen The SPAC Spirit?

Limitations relating to company law and exchange control could be an impediment to more Indian companies taking the SPAC route.

Company Law Challenges

The government has already signaled its willingness to allow Indian companies to directly list abroad through an overseas listing framework. And so, companies may end up choosing this over the SPAC route which will either entail incorporating an offshore entity or a cross-border merger, Gupta said.

The process of merger with an overseas entity can be very time consuming. The other option is companies could look at restructuring themselves with an overseas holding company. But this option can cause issues for those with large Indian founder shareholding and may also involve other tax considerations.
Prashant Gupta, Partner, Shardul Amarchand Mangaldas & Co

The cross-border merger regulations also require an approval of the National Company Law Tribunal. This process will involve review of the merger by all applicable Indian regulators, Tanya Aggarwal, partner at law firm S&R Associates, said.

Given the novelty of, and lack of jurisprudence around, cross-border mergers, there can be no assurance that the NCLT approval for a merger of an operating company with an offshore shell firm will be received in a timely manner or at all.
Tanya Aggarwal, partner, S&R Associates

Also, Indian offices of the domestic merging company must function as branch offices of the foreign company, which, given the limited scope of permitted activities for branch offices, is likely to hinder Indian operations, Aggarwal said.

Exchange Control Regulations

The Reserve Bank of India places restrictions on direct and indirect outbound investments by individuals. At present, the liberalised remittance scheme allows an individual resident to remit an amount up to $250,000 for education, investment in foreign stocks or assets, etc.

A de-spac transaction happens when a listed SPAC acquires or combines with an operating target company. If an Indian entity is involved, such transaction will be considered an outbound merger for the purpose of Foreign Exchange Management Act. As existing shareholders of the Indian company will obtain shares in the new entity, their fair market value may exceed $ 250,000 - the maximum permissible amount of remittance under the LRS scheme.

Any SPAC acquisition needs to be in compliance with relevant exchange control regulations, including sectoral caps on foreign investment, applicable ODI regulations and in case of individual shareholders, ensuring that the fair market value of their holdings are within the prescribed LRS limit, Singh explained.

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