Special Purpose Acquisition Companies (“SPACs”) have made a comeback on the Wall Street. SPACs are essentially investment companies backed by sponsors to raise capital from the public in an initial public offering (“IPO”) in the USA for the sole purpose of using the proceeds to acquire targets that are to be identified after the IPO. The eventual objective is to list the target. As of July 31, 2020, SPACs have raised close to USD 24 billion globally this year. The buzz around SPACs with available funding has reached Indian shores on the possibility of Indian companies being potential SPAC targets or Indian companies teaming up with SPACs to potentially list themselves in overseas markets.
The SPAC is formed by a sponsor who contributes the capital and undertakes an IPO of what is a shell company (investors typically get a share and a warrant). The proceeds of the IPO are held in a trust account until it can be used for a potential acquisition transaction, usually in a span of two years. Once the target is identified, the proposed transaction is required to be approved by the SPAC shareholders. Those who do not approve may redeem their shares, thereby necessitating the need for alternative source of funds that need to be arranged by the sponsor. Upon receipt of the requisite approval, the SPAC and the target business combine into a publicly traded operating company (“De-SPAC transaction”). SPACs therefore provide investors an entry ticket to a future deal or an option to walk away if they do not approve such future deal. From the potential target’s perspective, SPACs offer a simplified process and a viable alternative path to private companies for making their shares available to public investors.
The Potential Indian Angle
SPAC structures are not new to India and, in the past, there have been several examples of India focussed SPAC entities such as Trans-India Acquisition, Constellation Alpha Capital, Phoenix India Acquisition, etc. Their success however has been limited. In 2015, Silver Eagle Acquisition, a SPAC acquired 30% stake in Videocon d2h for approximately USD 200 million. The transaction also involved listing Videocon d2h’s American Depository Receipts on the NASDAQ and distributing them to Silver Eagle’s shareholders and warrant holders who approved of the transaction – which was possible under the then existing regulations. Silver Eagle was subsequently dissolved. In 2016, Yatra Online Inc, parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition.
With revival of opportunities at attractive prices in emerging economies, it appears that India focused investment opportunities by SPACs are now resurfacing. In this blog, we seek to examine key regulatory constraints around undertaking a traditional De-SPAC transaction involving an Indian target, as well as potential alternatives.
A traditional De-SPAC transaction involves merger of the SPAC and the target entity, where the combined entity is the SPAC, which becomes an operating entity. This requires execution of an outbound merger in compliance with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Merger Regulations”), and Section 234 of the Companies Act, 2013, pursuant to an NCLT sanctioned scheme of merger. Pursuant to the De-SPAC transaction, the shareholders of the Indian target will receive shares of the combined entity as merger consideration and the Indian office of the Indian target will be treated as a foreign company/ branch office of the combined entity. Such outbound merger is deemed to have received prior RBI approval if the transaction is undertaken in compliance with the conditions prescribed under the Merger Regulations, which, inter alia, include compliance with the FEMA ODI regulations; requirement that the fair market value (“FMV”) of securities of the combined entity held by the resident individual(s) should be within the limits prescribed under the Liberalized Remittance Scheme (“LRS”); repayment of the guarantees/ outstanding borrowings of the Indian target (which become liabilities of the combined entity) as per the NCLT sanctioned scheme, etc. While most of these conditions may be fulfilled, given the current LRS limit of USD 250,000 per financial year, RBI approval will be required in cases where Indian shareholders are individuals, as FMV of shares to be acquired by resident individuals pursuant to a cross-border merger is likely to be over such LRS limit. Apart from RBI approval, a key consideration in this case will be obtaining NCLT approval, given that the SPAC entity is a shell and the primary objective of the merger is overseas listing and access to funds. It is also to be examined if there are any public policy issues relating to listing of an Indian entity, given that MCA and SEBI are proposing to regulate/ facilitate listing of certain classes of public companies in permissible overseas bourses.
An alternative, subject to taxation related considerations, could be a share swap between SPAC and the shareholders of the Indian target, such that the Indian target becomes a wholly-owned subsidiary of the SPAC and the Indian target shareholders hold majority units in the SPAC. This indirectly provides liquidity to Indian shareholders, without directly listing the Indian target. The transaction will have to be primarily carried out in compliance with the FEMA rules and regulations governing FDI (including sectoral caps, pricing guidelines and other conditions prescribed therein) as well as ODI, given the inbound as well as outbound leg of such transaction. The residential status of the Indian shareholders is relevant and RBI approvals will be necessary in case they are residents. Additionally, the US law aspects relating to such transaction structure, including survival of the SPAC as an investment holding company, need to be examined.
From an Indian target’s perspective and that of their shareholders, whilst it may prove to be a challenge to implement a typical De-SPAC transaction, it is possible to tailor make one suitable to be undertaken in compliance with the Indian regulatory regime, with necessary approvals. Needless to mention, any transaction structure not only requires detailed analysis from the perspective of Indian laws (including taxation aspects), but also the laws in the country of registration and listing of the SPAC, for instance, process for enforcement of court sanctioned merger, approvals and disclosures required for consummation of the De-SPAC transaction, issues surrounding survival of the SPAC entity as a holding investment company, continued obligations of the Indian shareholders and cross-border tax considerations.