SPACs: A Backdoor Lifeline for Indian M&A

In the year 2020, the US saw a huge surge in Special Purpose Acquisition Company (SPAC) activities amounting to $83 billion raised from 247 SPACs, which is 50% of the capital that all the initial public offerings (IPOs) raised in the year. This was followed by a record-breaking 189 SPAC IPOs being announced in just the first quarter of 2021. The spike in this activity during the pandemic has already started a lot of inquiry by Indian companies with consultants for potential SPAC transactions. With the announcement of ReNew Power’s merger with a US listed SPAC followed by Flipkart and now Zomato and Grofers, India is viewed as a ripe country for potential targets.

SPACs, also popularly known as ‘blank cheque companies’, are formed for the sole purpose of raising capital through an Initial Public Offering (IPO) and sometimes through private funding to acquire a future target company. These are best suited for start-ups, where through reverse merger with these publicly listed shell companies, the start-ups get listed. The funds raised by the SPACs shall be utilized to acquire the target within 12-24 months or else it should be dissolved, and the funds returned to the investors.

There are two ways in which this acquisition can take place: (i) through a reverse merger, also known as a De-SPAC transaction, where the existing shareholders of the company receive shares of the SPAC; and (ii) through a swap of shares, where the existing shareholders of the company are issued shares of the SPAC.

Now, the Indian corporate regulatory framework does not make it easy on the start-ups to get listed and raise public funding and therefore, it will soon become a trend for Indian companies to merge with SPACs abroad.

Regulations limiting establishment of SPACs in India:

  1. Companies Act, 2013: The most basic regulation around which all companies are formed and function. Since the demonetization of Indian currency in the year 2016, the government has grown suspicious of the activities of shell companies. Since these companies do not have any other purpose apart from acquiring a target, it is almost impossible to define their objective under the object clause. However, what makes it even more difficult is the power vested with the Registrar of Companies, under Section 248 of the Companies Act, 2013, to strike off the name of a Company that fails to enter a business within 1 year of incorporation, and it takes a minimum of 18-24 months for an SPAC to identify and acquire a target company.
  2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009: These Regulations set out the basic requirements for an IPO. It requires the issuer company to have:
    1. The total tangible assets of company for the previous 3 years shall be atleast INR 3 Crore for each year;
    2. Atleast INR 15 Crore of consolidated pre-tax operating profile for 3 years of the past 5 years; and
    3. The net value shall amount to INR 1 Crore in the last 3 years.

Apart from these regulations, the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 need to be complied with when an outbound merger takes place. Pursuant to the outbound merger, the existing shareholders of the target company receive shares of the resultant entity, which will be a foreign company, as a consideration for the merger. This outbound merger is deemed to have received approval from the Reserve bank of India (RBI) after complying with all the conditions necessary under the Merger Regulations, which include the requirement of fair market value (FMV) of securities of the resultant entity that shall be within limits prescribed by the Liberalized Remittance Scheme (LRS), i.e. USD 250,000 per financial year. However, with the limit being exceeded in almost each De-SPAC transaction, it becomes difficult to assume that RBI will give a green flag to such outbound mergers given that their only business object is to acquire another company by raising capital.

From the taxation perspective, the swap of shares that happens between the SPAC and the existing shareholders of the Indian target, provides indirect liquidity to the shareholders of the company. However, before the shareholders of the company can cash in, such transactions become taxable under the Indian taxation regime. This adds an extra burden for the shareholders of the operating company since the taxation regime in India does not provide any interim tax relief in the instance involving a swap of shares with a foreign SPAC.

Why is US the most approached country for setting up a shell company?

In the US, unlike India, rules are designed in such a manner that SPACs can float in the market without incubating fear in the investors and shareholders regarding their shareholding and tax liability. Rule 419 of the Securities Act, 1933 requires that the net offering proceeds and all securities to be issued and sold shall be promptly deposited into a trust account, called the “Deposited Funds” and “Deposited Securities,” respectively which is governed by an agreement. “Under Rule 419, these Funds and Securities will be released by the Trustee to the investors and Company, only after the Company meets the following 3 conditions:

(i) First, the Company must execute an agreement for an acquisition(s) valued at at least 80% of the offering amount (which acquisition may be consummated using the proceeds from the offering, loans or equity);

(ii) second, the Company must successfully complete a reconfirmation offering which is reconfirmed by sufficient investors so that the remaining funds are adequate to allow the acquisition to be consummated; and

(iii) third, the acquisition(s) meeting the above criteria must be consummated.” (Source)

After the completion of the above procedure, companies are still not considered as a blank cheque company, unless they issue a penny stock. However, if a company has atleast $5 million of net tangible assets for less than three years, it is excluded from this provision of issuing a penny stock. This makes it easier for SPACs to function as a normal company and not as an acquisition vehicle. In addition to this, the NASDAQ in January 2018, proposed that SPACs should maintain net tangible assets of $5 million to remain listed on the stock exchange. These relaxations allow SPACs to stay afloat without having to worry about any restrictions from the regulatory perspective.

The most recent De-SPAC talked about in the market about is Zomato, that hasn’t reported any profits for the past 5 years and it set to get listed on the stock exchange. In wake of the upcoming wave of De-SPAC transactions that are already under the veil of consideration by firms, certain regulatory changes relaxing the burden on Indian companies to thrive as SPACs in the Indian market would be welcome. Not just limited to the regulatory changes in the Companies Act, SEBI, FEMA but also relaxing taxation regime for shareholders in an outbound merger would give companies, especially the thriving market of start-ups, in India an opportunity to establish a good source of funding within India. The clouds that hover over the concept of shell companies under the Companies Act need to be cleared for them to establish a business in India within the ambit of the services they are incorporated to provide.


Richa Seth

Richa is an Associate Solution Advisor at Deloitte. She is an avid reader and has interest in writing about contemporary legal issues.

One response to “SPACs: A Backdoor Lifeline for Indian M&A”

  1. […] it is clear that these SPAC entities need to be brought under the purview of the CCI and relevant Mergers & Acquisitions […]


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