SPAC and its growing relevance in India

The sponsors/management team of a SPAC register the SPAC shares with the Securities and Exchange Commission (SEC) and undertakes a pre-IPO roadshow (presentations to potential investors) and raises capital in a SPAC IPO in exchange for the issuance of SPAC shares that are listed on a stock exchange, commonly at US$10 per share. The money raised by the SPAC in the IPO is held in a trust until the business combination is completed.

Once a target is identified, the SPAC acquires the target (for example, via a consolidation/merger) in a transaction commonly referred as the “de-SPAC” transaction. Where additional funds are required at this stage (for acquisition of target), SPACs could explore raising requisite funds from PIPE investors (refer question 9 below). After a successful de-SPAC, the target company becomes a subsidiary of the SPAC or a new holding company whose shares are listed on the stock exchange.

If a SPAC is unable to complete a de-SPAC transaction within the prescribed period, the investors' money raised in the initial SPAC IPO is returned to investors and the SPAC dissolves.

Jurisdictions of SPACs incorporation

The jurisdiction in which a SPAC aims to be listed is a factor in deciding the jurisdiction in which the SPAC is incorporated. US-listed SPACs could be incorporated in the US or other jurisdictions, as US laws permit companies incorporated outside the US (for instance, Cayman Islands) to be listed on US stock exchanges.

Benefits to the parties involved

Benefit to the sponsor for floating a SPAC

Sponsors generally purchase equity in the SPAC at more favorable terms than investors in the IPO. After the de-SPAC transaction, the sponsor generally holds about 20% stake in the post-IPO SPAC, which would have been obtained for a relatively nominal consideration. This holding would eventually be converted into respective stake in the target’s business. This becomes the sponsors’ primary motivation in finding an attractive target with immense potential value.

Benefit to a target and its shareholders / promoters from a SPAC deal

One of the key advantages to a target company is the reduction in time and effort to go public and the associated costs. Regular IPO underwriter fees usually correspond to 7% of the total IPO proceeds. In the case of a SPAC deal, these costs are generally lower, relative to the size of the de-SPAC transaction. 

More importantly, SPACs may help companies go public without being subject to complexities of the market, such as multiple investor negotiations, underwriter negotiations, valuation uncertainty and overwhelming documentations and filings. SPAC structures are also a compelling opportunity for companies to access a wide pool of investors through the expertise of seasoned professionals, in the form of sponsors (also refer question 17 below).

For promoters/shareholders, the potential of unlocking value for the company on a securities market and thereby receiving multiplied returns on exit could be a driving factor.

What is a PIPE investment and how do PIPE investors benefit from a SPAC deal?

PIPE stands for private investment in public equity. It involves issuing shares of a public company in a private arrangement with a select investor / group of investors. In the context of SPACs, a SPAC could seek PIPE investment if it needs to raise additional capital for the acquisition of a target company. By way of market convention, PIPE investments happen only after a target is identified (generally, PIPE investment coincides with the proposed business combination of target). Accordingly, PIPE investments usually happen at valuations that take into consideration the combined value of the SPAC and target’s business. 

Recent Trends

Number of SPACs

According to sources, in the recent past (since 2015) there have been over 700 SPAC IPOs. In 2020 alone, close to 250 SPAC IPOs were executed. The trend only seems to be expanding, as over 300 SPAC IPOs were seen in the first three months of 2021 (as against less than 20 SPAC IPOs in the first three months of 2020).

As noted in the charts above, SPACs have raised a record US$83 billion in 2020 (which is approximately two times the total monies raised in the last five years) and an additional US$95 billion has been raised in just the first three months of 2021 (as compared to just over US$ 5 billion in the first three months of 2020).

Why are SPACs in vogue now?

SPACs have been around in the US for around 20 years but have recently been growing in popularity due to a variety of reasons, including credibility of sponsors, growth potential of target businesses, time and process involved in traditional IPOs, availability of dry powder in the post COVID-19 times.

Also, given the fact that substantial funds have been raised by SPACs in the recent past and a significant portion of these funds remain to be deployed in targets across the globe (with higher focus on emerging markets), one could expect to see many SPAC transactions being consummated in the near-term.

India in the SPAC race

While SPAC deals in India are still at a nascent stage, the number of SPAC related conversations in the Indian transactions space is swiftly growing. However, certain Indian tax and regulatory considerations need to be suitably addressed / structured appropriately before implementing SPAC structures in India.

Are any Indian regulatory approvals required for an India based SPAC structure?

As per the existing Indian exchange control regime, regulatory approvals may be required at critical junctures (at the time of SPAC investment as well as de-SPACing) and these approvals would depend on merits of each case and close scrutiny by the regulators. However, regulatory approvals may sometimes not be required, depending on the mode/amount of investment (subject to satisfaction of prescribed conditions) and the structures proposed to be adopted.

Can Indian resident individuals invest in a SPAC?

Yes, Indian resident individuals can invest in an overseas SPAC. However, such investment would have to be within prescribed annual limits (currently, US$250k). Another aspect to note would be that as per current regimes, most de-SPACing alternatives may create taxable events for Indian shareholders, with such continuing shareholders having to pay taxes even without having monetized their investments. Further, depending on the mechanism adopted for de-SPACing, Indian investors may have to seek regulatory approvals at this stage as well.

What are the tax implications for Indian investors on future sale of the SPAC shares/resultant company’s shares? How is this different from domestic Indian IPO?

Tax implications in the hands of investors on future sale of SPAC shares/resultant company’s shares shall depend on various factors such as residential status of the investor and the nature / type of investor involved (i.e., company or individual, etc.).

We have provided below the high-level implications in the hands of resident individual investors:

Does India have a SPAC regime too?

While India currently does not have a specified SPAC regime in place, the International Financial Services Centres Authority (IFSCA), being the regulatory authority for development and regulation of financial products, financial services and financial institutions in the Gujarat International Finance Tec-City (GIFT City), has recently released a consultation paper where (among other proposed measures) IFSCA is exploring to facilitate listing of SPACs in the GIFT City.

The proposed scheme defines critical parameters such as offer size to public, compulsory sponsor holding, minimum application size, minimum subscription of the offer size, etc.

Other areas

Key advantages of going public via a SPACs as compared to a traditional IPO route?

The SPAC route offers certain advantages over a traditional listing process, such as speed and certainty, through a faster timeline to go public. SPAC acquisitions are conducted on predetermined prices, which are less vulnerable to the risk of volatility in the public markets, unlike traditional IPO processes, where companies’ securities are valued through market-based price discovery approaches, which can be affected by market conditions. Further, SPAC structures are more suitable for emerging technology businesses / non-traditional businesses, whose potential value might not be fully apparent to public investors.

Further, unlike traditional IPOs, where higher focus lies on historical performance / track record of the company, the SPAC route offers targets the ability to market the company’s future projections to public / PIPE investors, which is particularly relevant for start-ups / high-growth companies, especially in a post-COVID world where current performance may not reflect the company’s potential value.

Key advantages of a traditional IPO route over SPACs

A traditional IPO may sometimes be a better option for a company, depending on various factors like stability of capital markets, traditional business models, etc. In case of fairly developed companies with simple business models, values of such companies are duly appreciated by public investors in a traditional IPO and hence such companies may not need a SPAC structure in place, wherein substantial dilution takes place in favor of SPAC sponsors.

From a public investor’s perspective, traditional IPOs present a fairly simple equation, and investors have complete discretion regarding the company they invest in. As against this, in case of a SPAC investment, there exists a high degree of uncertainty regarding which business would eventually be acquired by the SPAC.

Key disadvantages for a SPAC structure in Indian context

As discussed earlier (refer questions 13, 14 and 15 above), the current Indian regulatory framework and tax regimes make the SPAC route less preferred (compared to a traditional India IPO), from an Indian resident investor perspective. Given this, the target companies would need to undertake SPAC readiness assessment, to identify and suitable address the inefficiencies (if any), especially from an investor and de-SPAC transaction structure perspective.