Panacea or downside | India Enterprise Law Journal

SPACS have generated tremendous interest in India, but are these re-emerging investment tools really a practical alternative to IPOs and a panacea for reviving capital markets? And just how tightly should they be regulated? Freny Patel reports

Flipkart, Policybazaar, Zomato, Grofers, Delhivery and Droom are just some of the unicorns in the market planning fundraising to meet their future growth projections. As most of these home-grown Indian tech startups are far from profitable, an overseas listing by way of a reverse merger with a blank cheque company should be their only option.

Enter the SPAC, or special purpose acquisition company, essentially a shell corporation created and listed on the stock exchange with the sole purpose of acquiring an unlisted company and making it public without having to go through the traditional process of an IPO.

Thousands of Indian companies vying to go public and raise funds from the capital market do not necessarily have the requisite track record, or the financials, to qualify and list on the markets, at least not in India. But what they do have is a story to tell, a story that could entice investors to pick up a stake based on their future projections.

Walmart-owned e-commerce major Flipkart is exploring a US listing via a SPAC merger, toying with an expected valuation of US$35 billion. Automobile marketplace Droom plans to list on the Nasdaq in 2022.

Online insurance platform Policybazaar proposes to list this year with a valuation upward of US$3.5 billion. Softbank-backed online grocer Grofers is reportedly in talks with Cantor Fitzgerald’s SPAC as it eyes listing in the US.

Food delivery aggregator Zomato is looking to raise ₹82.5 billion (US$1.1 billion), while new age logistics major Delhivery is vying a valuation between US$3 billion and US$4 billion through the IPO route.

There are 434 SPACs listed on US bourses with cash to the tune of almost US$139 billion, according to SPAC Research, a market intelligence provider for US-listed SPACs. As they run against the clock seeking acquisition targets, and with few feasible opportunities available in the US, many of these blank cheque companies are targeting Asia.

“India has become a veritable hunting ground for US-listed blank cheque companies,” says Akila Agrawal, partner and head of M&A at Cyril Amarchand Mangaldas (CAM) in New Delhi. India has numerous growth companies that are viable targets, she tells India Business Law Journal.

In February this year, pure-play renewable energy producer ReNew Power announced its plans to go public through a SPAC merger at an enterprise value of US$8 billion. The transaction is expected to close in the second quarter of this year, and is backed by Silicon Valley venture capitalist Chamath Palihapitiya.

The SPAC is not new to India, although previous examples have had limited success and much lower valuations. In 2015, Silver Eagle Acquisition acquired a 30% stake in Videocon d2h for about US$200 million. A year later in 2016, Yatra Online, the parent company of Yatra India, raised US$218 million and listed on the Nasdaq through a reverse-merger with Terrapin 3 Acquisition, another US-listed SPAC.

So why the sudden frenzy when SPACs – a capital-raising alternative to IPOs – have been around for decades? SPACs recently gained popularity in 2020, due to the increased volatility in the capital market with the outbreak of the pandemic. The surge was led by high net-worth investors, sitting on enormous amounts of cash, who were attracted to invest in these shell companies backed by big names that could attract other investors.

Softbank’s CEO, Masayoshi Son, hedge fund manager Bill Ackman, former economic adviser to US president Donald Trump, Gary Cohn, former Goldman Sachs banker Gerald Cardinale, and baseball executive Billy Beane are just some of the big names associated with SPACs who have raised billions from investors. SoftBank Group raised a US$280 million SPAC in March 2021, while Bill Ackman raised a US$4 billion SPAC in July 2020.

The US Securities and Exchange Commission (SEC) even had to issue a warning to investors to avoid investing in SPACs based solely on celebrities, after a surge of investments in SPACs came from the backing of celebrities including the likes of tennis player Serena Williams and rap star Jay-Z.

SPACs raised close to US$100 billion in public offerings in 2020, which is more than the combined amount raised in the decade prior, according to S&P Global.

A few Indian unicorn founders, such as Paytm and Dream11, have jumped on the bandwagon and formed an India-focused SPAC, eyeing Indian tech companies wanting to list in the US. Think Elevation Capital Growth Opportunities filed with the SEC in March to raise up to US$225 million through an IPO on the Nasdaq.

However, there are warnings of a potential bubble bursting after SPACs reached the US$100 billion milestone, says Stefanie Yuen Thio, joint managing partner at TSMP Law in Singapore. “The real fatigue is in finding good deals for these multiple SPACs to spend their money on,” she says. Deal-hungry sponsors have set their sights on Asian targets, she adds, citing the Singapore-based ride aggregator Grab Holdings’ SPAC deal, which values the unicorn at US$39.6 billion.

Regulatory wall

The SPAC offers many opportunities for Indian tech companies to list overseas because there is no dearth of capital. But the problem lies in the regulatory framework. A framework is required that appreciates the need to design a capital market product that understands why investors should buy future growth stories of tech startups, that focuses more on their R&D than their current cash flows, or rather cash crunch, as covid-19 has crippled the Indian economy.

Currently, Indian regulations do not permit the listing of SPACs. Under the Companies Act 2018, an enterprise needs to have a specific business objective. The acquisition of a business is not considered a business objective under Indian law, and regulations do not permit the listing of shell companies. This is not surprising, as shell companies have been used for tax avoidance and money laundering. Insulating the rupee from global currency fluctuations also explains why India does not allow the listing of shell companies.

India is not alone, because just a handful of countries allow SPAC listings. The majority of SPACs are listed in the US, although countries like Canada, Italy and South Korea do allow SPAC listings on their local exchanges.

The challenge for India is the implementation of the de-SPAC transaction, which essentially is the reverse merger of the target company with the SPAC.

A traditional de-SPAC transaction involves the merger of the SPAC and the target entity. This combination becomes the operating entity, which requires the execution of an outbound merger in compliance with the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, and section 234 of the Companies Act, 2013, which requires approval of the sanctioned scheme of merger by the National Company Law Tribunal.

“From the Indian exchange control perspective, execution of a de-SPAC transaction is easier if a majority of the shareholders of the Indian target reside overseas,” says CAM’s Agrawal, otherwise regulatory approvals will be required.

Bhakta Patnaik, a Mumbai-based partner and head of the capital markets practice at Trilegal, says: “US SPACs are looking at Indian companies with overseas parents or international shareholding. There are about 20 to 30 such companies, and these are attractive targets because there is no need to seek approval from any regulator, such as the Reserve Bank of India or the National Company Law Tribunal.”


Cross-border mergers are not necessarily a challenge, but they can be time-consuming, and would hinder the de-SPAC process, says Patnaik. SPACs have a fixed timeframe of 18 to 24 months to find a target. While they would prefer to complete the acquisition process in five to six months, this may not be possible due to the regulatory process, and getting necessary approvals where there is no offshore holding structure, he says. This explains why most SPACs are evaluating Indian targets with offshore holding companies in place.

“The most popular transaction structure is where the Indian target becomes a subsidiary of the SPAC entity, after the de-SPAC transaction,” says Agrawal. A de-SPAC transaction from an Indian perspective is essentially an M&A transaction, and all regulatory approvals that are necessary for an M&A transaction will apply.

That said, Indian companies are getting better valuations for a de-SPAC, as opposed to a traditional IPO in India, depending on the sector, says Agrawal.

Tax is the biggest driver for the success of a de-SPAC transaction. Indian tax laws are the biggest challenge, and transactions have to be structured accordingly. Some companies had initially been advised to consider SPACs, but their inability to get around taxation issues forced them to look at an IPO.

A legal expert advises: “Get your advisers on board early and simultaneously across jurisdictions, because there could be conflicting laws or tax-related issues,” one legal expert advises. There are many moving pieces given that a SPAC is a combination of fundraising and M&A activity, and these transactions are usually cross-border in nature, dealing with two to three jurisdictions, or even more.

There are a lot of vested interests, says S Sivanesan, a senior partner at Dentons Rodyk & Davidson in Singapore. SPAC sponsors generally have a two-year clock running against them, and target companies want to access SPACs to be listed and have access to funds, he explains. “In this covid era, a SPAC is a very viable option, even if the target company has to give up a larger shareholding post-combination,” he says. “At least it can survive, raise funds and be listed at the same time.”


US tightens scrutiny

Amid the growing concerns, the SPAC bubble will burst, and the SEC is issuing public warnings and closely scrutinising deal filings as it tries to rein in deals. Meanwhile, many SPACs being wildly overvalued brings about a fear that some of the targets are trying to evade regulatory scrutiny.

The SEC’s corporate finance unit acting director, John Coates, warns of “some significant and yet undiscovered issues” prevailing with SPACs. In a tweet, he said: “The rapid increase in the volume of SPACs represents a significant change, and we are taking a hard look at the disclosures and other structural issues surrounding SPACs.”

Gerold Niggemann, a New York-based partner at Hughes Hubbard & Reed, says the SEC is considering tightening rules, and has requested information from banks. Concerns have been raised regarding the disclosure rules applicable to de-SPACing mergers.

The SEC’s most noteworthy definitive action relates to the accounting treatment of the warrants that are typically issued to IPO investors when the SPAC first raises funds, says Niggemann. This decision affects the balance sheet of companies that went public through a SPAC.

It will be interesting to see how the market reacts, he says, because, “in the case of a tech startup, for many investors the balance sheet may not be the most important factor in making their investment decisions”.

Lin Xiaoxi, a partner at Linklaters in Hong Kong, hopes that US laws will not change in a way that completely prevents SPAC structures, adding that the benefits offered by a SPAC structure can be preserved with proper regulation.

Can SPACs find a home in India?

The fear of local players moving to the US is pushing authorities to actively review whether blank cheque companies can be listed in the country. The domestic capital market watchdog and its counterpart for Gujarat’s GIFT City, the International Financial Services Centres Authority (IFSCA), are reviewing plans to launch SPACs in India.

Speed and price certainty are the key advantages of listing companies through the SPAC, and launching Indian SPACs would open up new listing options for home-grown, high-growth companies looking to quickly access public markets, says Monika Srivastava, a partner at Khaitan & Co in New Delhi.

The listing of SPACs would facilitate the government’s efforts to encourage startups to list in India, instead of eyeing overseas listings, more so in light of recent frenzied SPAC activity, says Srivastava. “It could help find more takers for the Indian startup platforms, which, despite the recent easing of norms, has seen few listings,” she says, adding that a lot would depend on how the regulatory framework shapes up.

Leading Mumbai-based securities lawyer Somasekhar Sundaresan says the direct listing of Indian companies abroad “has been a very sensitive subject from a regulatory perspective”, conjuring images of losing out on quality trading opportunities in India. With foreign portfolio investment being allowed and participatory notes still in play, Sundaresan says the system will do its best to compete with the foreign markets, rather than let Indian companies go abroad to list.

While this concern will eventually take centre stage in the Indian regulatory context, he shares Srivastava’s scepticism as to what degree Indian regulators would embrace a SPAC listing.

India has rigorous provisions on the eligibility criteria when it comes to the listing of securities, with detailed requirements of promoter contribution, lock-in of shares issued, end-use declarations, and discussion of future plans to name a few.

Enabling SPACs to raise funds from the market would require “near-total flexibility on these facets,” says Sundaresan. “If a SPAC is to be allowed in India, there would have to be a marked departure from the current and historical thinking on how we regulate IPOs,” he says.

Given the challenge for the Securities & Exchange Board of India to enable SPACs, as this would mean a marked departure from the current framework of primary market regulation, Sundaresan believes that SPAC listings would be relatively easier in the GIFT framework. The latter is like “a special zone, where such flexibility can be socially and politically justified”, he says.

A domestically listed SPAC would come with a lot of strings attached, he adds. This could be an opportunity to allow the listing of a company on the back of institutional investment, without any retail participation, given the higher level of risk that comes with a reduced level of regulation.

Patnaik, who heads the capital market practice at Trilegal, agrees, saying that the SEBI would initially want to restrict investment in SPACs, allowing only financial institutions to participate. “This could impact the sustainability of the IPO market when there are only around 30 to 40 financial institutions in the country,” he cautions.

Srivastava says some of the biggest hurdles in a de-SPAC transaction with an overseas-listed SPAC are the restrictions imposed under the overseas direct investment framework, which severely limit the ability of Indian founders and other resident shareholders to transition to an offshore listed entity.

Although a domestic-listed SPAC would help solve some of the issues from an exchange control perspective, investments from land-bordering countries of India may remain a question mark, says Srivastava. Without a legal framework to review, it’s hard to say how much of the taxation issues could be addressed, she adds. Nevertheless, “some tax exemptions or incentives could go a long way in making the route attractive”.

Sundaresan thinks otherwise, saying that tax and exchange control issues would be no different from any listing in India, because a large part of the IPO market is internationally sold.

Direct listing of Indian companies overseas, as envisaged by the Ministry of Corporate Affairs, is likely to emerge as a contender to listing via foreign SPACs, says Srivastava. Recent amendments to the Companies Act have paved the way for overseas listings, subject to notification of enabling regulations, she adds.

India is not the only jurisdiction in Asia looking to list SPACs. Neighbouring countries like Singapore and Hong Kong, in particular, are reviewing the necessary framework to list SPACs in their domestic markets.

Srivastava favours this development, saying it will offer Indian companies more choices in terms of jurisdictions, as opposed to strictly listing in the US. For many Indian-originated startups, Singapore has been a favoured jurisdiction, she says. “The ability to achieve listing via a SPAC in Singapore could potentially involve synergies with the existing business model,” she says, for instance by setting up global operations through Singapore.


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