Before a SPAC is fully functional, one must consider aspects such as tax implications for shareholders and foreign exchange and other regulatory implications. Image: Reuters
By Nitesh Mehta and Arjun Goradia
A phenomenon that has undoubtedly picked up steam and broken all sorts of records in the last two years and more so in the previous four months is Special Purpose Acquisition Companies (SPACs) – investment vehicles that can be used to approach public markets. Simply put, these vehicles raise capital, get listed, and then look to acquire an existing unlisted target company across sectors/geographies. Doing so helps unlock value for SPACs investors, and the target companies also get to go public in a compressed timeframe.
The US market has experienced a spike in SPAC activity. In 2020 the number of SPACs was almost five times that of 2019, and in 2021, SPAC activity already crossed the 2020 numbers within four months. The broad reason why several SPACs have been surging is mainly due to the ease of listing through a SPAC route as against listing through a traditional IPO route for factors such as more than 400 SPACs are seeking acquisition and an estimated USD 140 billion dry powder is available. The recent activities of SPAC listings in the US are also expected to quickly attract the Indian markets, which have interesting private companies ready to go public in terms of scale and size of the business.
- An IPO process is generally rigorous, entails extensive preparation (including roadshows for promotion), and typically takes 12-18 months to list overseas, whereas an overseas listing through the SPAC route can generally be consummated in 6-8 months.
- The regulations in India currently do not permit a direct overseas listing for Indian companies. In contrast, Indian companies looking to go public can consider raising funds through the SPAC route.
The spike in the number of SPACs and colossal liquidity available to be deployed demonstrates that SPACs are here to stay, and the opportunity is for real. However, the success of SPACs would not only depend on the identification and acquisition of the correct targets but also to what extent the value appreciation on investment for SPAC investors takes place post-acquisition, especially considering that the shares prices of some of the SPACs that have gone public have hovered around their initial offering price post target acquisition. Accordingly, factors such as the credibility of the SPAC Founders and the choice of target for SPACs would be the critical determinants of a promising future for SPACs.
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SPACs, from various countries worldwide (especially the US) have been approaching multiple businesses in India, especially those in the technology, healthcare, and entertainment spaces, to invest in them and unlock their value globally. However, founders also need to understand whether they are SPAC-ready in their current business planning, governance, legal processes, reporting requirements, and cost for compliance as post-acquisition by a SPAC. US regulators would govern the target company.
Additionally, from an Indian perspective, before a SPAC is fully functional, one must consider aspects such as tax implications for shareholders and foreign exchange and other regulatory substances, especially for Indian founders and shareholders. While the regulations to accommodate offshore SPAC transactions from an Indian perspective are still awaited, as an endeavor to attract global capital for boosting India’s economic growth and development and to replicate innovative international methods for raising money such as SPACs, the Government of India, through its regulatory authority, IFSCA has also recently proposed a draft framework for listing of SPACs on the recognized stock exchanges in the IFSC, in India. Considering the measures taken by the Indian government to promote businesses in India, the Indian markets are likely to see increased traction and could be the next bet for SPACs.
Nitesh Mehta is Partner, and Arjun Goradia is Manager – M&A Tax and Regulatory Services at BDO India. Views expressed are the author’s own. Get live Stock Prices from the BSE, NSE, and US Market, and the latest NAV and portfolio of Mutual Funds; check out the newest IPO News, Best Performing IPOs, calculate your tax by using an Income Tax Calculator, know the market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter. Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news.
