While the concepts of Special Purpose Acquisition Company (SPAC) is certainly not new, it would be fair to say that SPACs certainly are the flavour of the season. SPACs have raised upwards of US$ 80 billion in 2020 alone, with the momentum picking up speed in first quarter of fiscal 2021 as well. In India, over the past decade or so, the technology and e-commerce boom has spawned the birth of as many as a dozen billion-dollar unicorns on the back of several rounds of funding from VCs and private equity funds. A combination of factors including uniqueness and maturity of business, exit timelines for early backers, lack of public market comparables and adequate appetite in Indian capital markets means that many Indian companies, specifically technology and e-commerce start-ups, are increasingly looking at overseas markets, including through SPACs, to raise capital for organic and inorganic growth.
The government in recognition of the market need has taken the first step on this front by amending the company law permitting Indian public companies to list abroad without them having to list on the Indian stock exchanges first. The detailed guidelines on the same are however yet to be released. The IFSCA has further issued a consultation paper on the proposed IFSCA (issuance and listing of securities) Regulations 2021, wherein the authority has proposed SPAC listings under the IFSC framework.
Pending issuance of direct listing guidelines, the story for SPACs in India is that of an alignment of capital availability from SPACs with large and unique set of target companies operating at scale in India through an indirect listing route offered structurally through the SPAC framework. Under the existing framework a foreign SPAC acquiring an Indian company is feasible only by way of an outright stock purchase or swap of shares. Outbound merger of an Indian company into a foreign SPAC is tax inefficient as there is no specific exemption for such mergers unlike inbound mergers. Further, such mergers also pose significant challenges from an operational standpoint as the Indian entity ceases to exist and the operations will have to be carried out as a branch or liaison office.
Outright purchase as well as swap of shares trigger a capital gains tax event to the shareholders except for shareholders who are non-residents and are exempted under the applicable double taxation avoidance agreement. For the Indian company, a change in shareholding on account of the swap of shares, would result in a loss of ability to carry forward and set-off the brought forward losses. Further, depending on the manner in which the de-spacing is proposed, there could be indirect transfer tax implications on the shareholders. Indirect transfer tax could also apply to founders, investors and other shareholders upon transfer of their stake in the SPAC, post listing. This would however also depend upon the ultimate stake held in the entity post listing.
Currently, shares of a company which are listed on a recognised stock exchange in India, held for more than 12 months, are treated as long term capital gains and thereby eligible for a lower tax rate of 10 per cent plus applicable surcharge and cess. Such a benefit is not available for shares listed on overseas stock exchanges.
In order to make capital raising through SPACs more attractive, the Indian government could consider providing relief by deferring the taxes upon the business combination with the SPAC, i.e., the business combination event could be treated as tax-neutral and the taxable event could be moved to the event of ultimate sale of the listed shares. In addition, protection of ability to carry forward and set-off business losses notwithstanding the change in shareholding of the Indian company by 51 per cent or more, will be extremely helpful to a lot of start-ups as most typically incur huge losses.
Independently, in the framework currently being considered by the IFSCA for permitting SPAC frameworks in India, it is important to provide for a favourable tax regime to SPACs in India. Merger of two Indian entities is currently exempt under the income tax India. Extending the tax exemption to all types of business combinations would encourage more SPACs in India.
The authors Partner and Senior Manager, Deloitte Touche Tohmatsu India LLP
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