When SPACs knock | Journal of Indian Enterprise Law

Ashok Lalwani and Mark Bell examine the opportunities and risks associated with Indian companies embarking on the SPAC path

W.ith the accelerated rise of Special Purpose Acquisition Companies (SPACs) in the USA and Europe in 2020 and 2021, business combinations with SPACs, so-called de-SPAC transactions, have quickly become a popular alternative to a traditional IPO for private companies, to go public.

Ashok Lalwani
Head, International Capital Markets AP and Global India Practice
Baker McKenzie in Singapore
Tel: + 65 6434 2684
Email: [email protected]

While Indian regulations prohibit SPACs from listing on a domestic stock exchange, the International Financial Services Centers Authority, the regulator of Gujarat International Finance Tec-City, published a consultation paper on a SPAC regulatory framework in March 2021 that could pave the way for future listings .

An Indian company can currently list domestically and then access US markets through the issuance of American depository receipts. In March 2020, the Indian government announced that it would allow Indian companies to list directly on several foreign exchanges, including the US, although the final framework for doing so has not yet been finalized. Once this route becomes available, Indian companies will have a choice between listing directly on the stock exchange or through a SPAC.

India’s de-SPAC challenges

India has a large number of startups and “unicorns” that could offer a rich market for SPAC acquisitions. Attractive valuations by Indian companies and an oversupply of SPAC vehicles could create the conditions for a wave of De-SPACs. However, caution should be exercised as a De-SPAC in which an Indian company is involved will have to deal with complex tax and regulatory challenges.

An outbound merger would require compliance with the Companies Act and a number of merger rules, and likely require the approval of the Reserve Bank of India (RBI) and the National Company Law Tribunal. In relation to the fair market value of offshore stocks to be acquired by Indian shareholders, Indian exchange control regulations would also need to be considered.

An alternative route to a business combination can be a share swap between the acquiring SPAC and the shareholders of the Indian target company. This could be a chargeable event so careful planning of the ownership structure would be required to minimize the impact.

One option for an Indian company is to spin off and set up a foreign holding company. By choosing a jurisdiction that allows cross-border mergers, it is possible to structure the transaction in such a way that de-SPAC is facilitated.

Mark Bell, Lead Knowledge Lawyer, Capital Markets, Baker McKenzie, SingaporeMark Bell
Lead knowledge
Lawyer, capital market law
Baker McKenzie in Singapore
Tel: +65 6434 2778
Email: [email protected]

Critical considerations

As the number of SPACs increases, so will the number of de-SPACs, but such transactions are not without risks. Ideally, the strategic interests between the SPAC and the target company should coincide. The closer the alignment, the more likely it is that the acquisition will make sense for SPAC shareholders (thereby reducing the risk of redemption in SPAC) and for the wider investing community.

With de-SPAC transactions, the market risk of the IPO pricing has shifted to two key points in the process:

(1) the marketing of so-called PIPE financings (Private Investment in Public Equity), often before announcement; and

(2) the right of redemption that the original investors in the SPAC have. In both cases, the target company and the SPAC still have to present the attractiveness and price attractiveness of the target company to the market.

A critical aspect of a de-SPAC transaction is that the target company becomes a stock corporation after the transaction is complete and is subject to all reporting and disclosure obligations of a stock corporation.

A “back door” listing by a SPAC does not reduce the amount of work required to prepare the target for life as a publicly traded company, and therefore both the SPAC and the target board must be certain that the target company is prepared for these new ones Obligations.

Increasing control

The increase in de-SPAC transactions, particularly in the US, has resulted in increased regulatory scrutiny of these transactions, making them a primary target for shareholder disputes. Because many de-SPAC target companies tend to be less mature and have little or no earnings records, their share prices tend to be relatively volatile after going public.

In the US, many target companies originally marketed themselves during de-SPAC on forecasts that in some cases will turn out to be overly optimistic. Such volatility inevitably leads to lawsuits from shareholder plaintiffs who claim that there was misstatement or omission in the company’s investor communications during or after the de-SPAC was marketed.

SPACs offer an interesting and attractive option. Indian companies should keep in mind that structuring the de-SPAC transaction can pose legal and regulatory obstacles and that life as a publicly traded company, much like a regular IPO, requires careful planning and resource allocation.

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