In order to ensure ease of doing business, the government has taken initiatives to promote businesses by introducing new avenues of fundraising and listing securities as well as framing laws and regulations as well as bringing growth in order. is continuously striving to do. of Indian economy.
special purpose acquisition company (SPAC) is an initiative of the government that helps in raising funds through IPO (initial public offering) A route to acquire businesses. SPAC as a concept was globally well known in developed countries such as the US, UK and Canada. In a country like ours, it has gained momentum over the years.
SPAC is a type of company that has no operational business but is formed with the specific objective of achieving a target company. This concept allows a shell company to go for an IPO without any commercial activity. Units are issued to investors. Each unit usually consists of either a share or warrant or portions of the same to buy the shares at a later date.
After the IPO, the units are divided into shares and warrants, which are traded on the stock exchanges. After listing, SPAC merges or acquires one company, i.e. Target, allowing the target company to benefit from such listing without the formalities and rigors of an IPO.
Gradually, lawmakers are recognizing SPACs and creating regulations around them so that they can be implemented and put into action. The International Financial Services Center (IFSC) Listing Regulations brought a comprehensive framework for listing securities in IFSC through the SPAC for the first time.
Company Law Committee recommended SPAC
In September 2019, the Companies Law Committee also recommended placing an enabling provision under the Companies Act, 2013 to allow entrepreneurs to list a SPAC involved. India on domestic or global exchanges. Through this, domestic and international sponsors get an opportunity to acquire unlisted companies in India and abroad. SPACs can prove beneficial for Indian companies to be listed on foreign exchanges where a foreign investor is willing to invest in their known business. It helps companies with the funds needed to conduct business.
Any Indian shareholder acquiring shares through a share swap under the SPAC needs to be mindful of any round-tripping consequences if it involves fund-infusion in India through the SPAC structure. Such transactions would require prior regulatory approval, the commercial rationale behind following such a route would be duly explained and the regulator assured. While cross-border mergers are permitted under Indian corporate law, no specific policy framework exists, either under the securities law or FEMA, as compared to mergers involving listed companies. Furthermore, merging is a time-consuming process and may increase transaction closures.
A time frame of around twenty four months is required from the inception of the SPAC framework to the acquisition of the target company and completion of the merger which is a visionary objective to achieve. If the flexibility is offered to extend the time period by obtaining approvals from existing investors, it will help in achieving the desired objectives of SPAC. Further, the existing limit of Liberalized Remittance Scheme (USD 2,50,000 per financial year) may prove to be a deterrent for a resident individual who intends to make investments outside India of high transaction value.
Adoption and application of specific tax eligibility criteria in the case of SPAC
At the time of merger of the target company into SPAC, it is unclear about the terms of tax neutrality in the hands of the shareholders and the company, especially in case of outbound mergers (i.e., merger of an Indian company with a foreign company). In addition, plain-vanilla share-swap transactions, except through a tax-neutral process, are immediately taxable in the hands of shareholders. This poses serious challenges for Indian Op-Co shareholders currently pursuing SPAC, as they may be required to withdraw physical cash without liquidity from the said transaction. Hence, in order to roll over such tax/cash flow effect, these shareholders are forced to resort to other transaction-structuring avenues.
In addition, transfer of SPAC shares from non-resident to non-resident may trigger indirect transfer provisions because the value is derived from the underlying shares of an Indian company. Further, if major managerial and commercial decisions of a SPAC (notwithstanding being a foreign company) are taken in India, such foreign SPAC may be treated as an Indian company under the effective management rules in place, whereby SPAC of global income can be highlighted. Indian tax.
SPACs are a favorite of investors because it’s better to have the money to invest in the right business, as opposed to having to first identify the target and then deal with the uncertainty of fundraising. Necessary amendments and introduction of a less complex Indian tax and regulatory framework will help globalize Indian business internationally.
Ravi Mehta is the Managing Director and Head (Transaction Tax), and Amrita Bhatnagar is the Associate Director (Transaction Tax) at RBSA Advisors. The views expressed in this article are those of the authors and do not represent the stand of this publication.
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