Ashok Lalwani and Mark Bell explore the opportunities and risks associated with Indian companies taking the SPAC route
With the accelerated rise of special purpose acquisition companies (SPACs) in the US and Europe in 2020 and 2021, business combinations with SPACs, known as de-SPAC transactions, have quickly become a popular alternative to a traditional IPO for private companies to go public.
While SPACs are not permitted to list on a domestic exchange under Indian regulations, in March 2021, the International Financial Services Centres Authority, the regulator for the Gujarat International Finance Tec-City, released a consultation paper on a SPAC regulation framework, which may pave the way for future listings.
An Indian company can currently list domestically and then access US markets through the issue of American depository receipts. In March 2020, the Indian government indicated that it would allow the direct listing of Indian companies on several overseas exchanges, including in the US, although the final framework to allow this is not yet finalised. Once this route becomes available, Indian companies will have a choice between listing shares directly, or via a SPAC.
India’s de-SPAC challenges
India has a large number of startups and “unicorns” that could provide a rich market for SPAC acquisitions. Attractive valuations of Indian companies and a surfeit of SPAC vehicles could provide the conditions to trigger a wave of de-SPACs. However, there is a need for caution, as a de-SPAC involving an Indian entity involves navigating complex tax and regulatory challenges.
An outbound merger would require compliance with the Companies Act and a number of merger regulation conditions, and likely involve obtaining approval from the Reserve Bank of India (RBI) and the National Company Law Tribunal. There would also be Indian exchange control regulations to consider in relation to the fair market value of any offshore shares to be acquired by Indian shareholders.
An alternative route to a business combination may be a share swap between the acquiring SPAC and the Indian target’s shareholders. This could be a taxable event, so careful planning of the shareholding structure would be required in order to minimise the impact.
One option open to an Indian company is to externalise and establish a foreign holding company. By choosing a jurisdiction that allows cross-border mergers, it is possible to structure the transaction to facilitate a de-SPAC.
As the number of SPACs grows, the number of de-SPACs will also rise, however such transactions are not without risks. Ideally, the strategic interests between the SPAC and the target company should align. The closer the alignment, the more likely it is that the acquisition will make sense to the SPAC shareholders (thereby reducing the risk of redemptions in the SPAC) and to the wider investment community.
In de-SPAC transactions, the market risk of pricing the IPO has shifted to two crucial points in the process:
(1) the marketing of so-called PIPE (private investment in public equity) financing, often prior to announcement; and
(2) the redemption right that the SPAC’s original investors hold. In both cases, the target company and the SPAC still have to make the case to the market that the target company is attractive and also priced attractively.
A critical consideration for a de-SPAC transaction is that once the transaction is consummated, the target company becomes a public company and is subject to all of the reporting and disclosure obligations of a public company.
A “back door” listing through a SPAC does not reduce the amount of work needed to prepare the target for life as a listed company, and so both the SPAC and the target board will need to be sure that the target company will be prepared for these new obligations.
The increase in de-SPAC transactions, particularly in the US, has led to enhanced regulatory scrutiny over these transactions, and made them a prime target for shareholder litigation. As many de-SPAC target companies tend to be less mature, and have little or no track record on earnings, their share prices tend to be relatively volatile once public.
In the US, many target companies originally marketed themselves during the de-SPAC on forward projections, which in some cases will turn out to be overly optimistic. Such volatility inevitably attracts shareholder plaintiffs’ suits alleging that there were misstatements or omissions during the marketing of the de-SPAC or afterwards in the company’s investor communications.
SPACs present an interesting and attractive opportunity. Indian companies should keep in mind that structuring the de-SPAC transaction can present legal and regulatory obstacles and that, similar to a regular IPO, life as a public company will require careful planning and resourcing.
Ashok Lalwani is head of the International Capital Markets (Asia Pacific) and Global India Practice, and Mark Bell is the lead knowledge lawyer, Capital Markets at Baker McKenzie in Singapore
Baker McKenzie is an international firm with 76 offices across 46 countries