Entrepreneurial spirit can be ceaselessly observed to find increasing acceptance in India. The nation, having emerged as the third largest ecosystem for startups across the globe1 is clearly reflective of the rising spirit for commercial conquest, inclusive of overseas expansion. One of the recent emerging structuring tools to realize the said commercial conquest is through Special Purpose Acquisition Companies ("SPACs").
SPACs are companies that are specifically created to act as instruments to raise funds for unlisted companies through an initial public offering. SPACs combine with such unlisted companies by way of mergers, thereby enabling such companies to get listed without undergoing the conventionally mandated process of listing in stock exchanges. These can be employed for domestic as well as international listing, depending on the validity of SPACs in the concerned jurisdictions.
As listing in overseas market is a giant leap in the journey of commercial expansion, Indian companies seek numerous avenues to materialize such aspiration. Given the preclusion of direct overseas listing of Indian companies in foreign stock exchanges2, SPACs are increasingly being found to be the most apt mechanism by Indian companies to manifest their intent of overseas listing.
Legal canvass concerning direct overseas listing of Indian companies
The Indian corporate law regime does not allow for direct listing of Indian entities in overseas market. In September 2018, the Securities and Exchange Board of India issued a consultation paper concerning amendments required in the Indian corporate law regime to effectuate direct foreign listing3. Consequently, section 23 of the Companies Act, 2013 was amended in 20204 to include the provision of direct listing of a class of securities of Indian companies in foreign stock exchanges. However, detailed guidelines and procedures concerning such direct listing are awaited. In the absence of a detailed procedure aimed at easing the process of foreign listing, direct overseas listing of Indian companies seems unviable.
In order to effectuate overseas listing, numerous Indian companies continue to resort to SPACs. Ocular evidences of overseas listing of Indian companies through SPACs can be found in India. The recent completion of merger of ReNew Power with RMG Acquisition Corporation II (a SPAC) and the consequent listing of ReNew in NASDAQ5 marks one of the most prominent instances of overseas listing through SPACs.
Recognizing the need for a specialized procedure to govern overseas listing through SPACs, International Financial Services Centre Authority (IFSCA) issued International Financial Services Centre's Authority (Issuance and Listing of Securities) Regulations, 2021 (IFSCA Listing Regulations 2021)6 that contain provisions to effectuate the process of foreign listing through SPACs. However, the procedure does not follow a specialized mechanism to materialize such listing and is analogous to the traditional method of raising funds through an IPO. Further, the accepted interval of completion of the process has been provided as 36 months. As one of the major intents of companies in undertaking listing through SPACs is the quest for an expeditious process of listing, the resemblance of the process governing foreign listing through SPACs with the conventional listing method in India might retrograde the upthrust for overseas listing through SPACs.
While there is no explicit bar on overseas listing of unlisted Indian companies through SPACs, the Indian landscape does not facilitate a promising ambience for such listing.
Major statutory roadblocks in the present regulatory regime concerning overseas listing through SPACs
There are numerous challenges in the Indian regulatory landscape concerning overseas listing through SPACs. An Indian target company in case of a proposed merger with a foreign-based SPAC needs to comply with the Companies Act, 2013, the Foreign Exchange Management, 1999 and other incidental regulators including the Reserve Bank of India (RBI).
Regulation 5 of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 requires compliance of Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004, and an approval of the scheme of arrangement by the National Company Law Tribunal, which is a burdensome compliance. From an individual standpoint, this regulation mandates compliance of Liberalized Remittance Scheme (LRS), which prescribes for the fair market value of shares acquired by Indian individuals in an overseas merged entity not to exceed USD 250,0007 per financial year. Given the LRS limit of USD 250,000 per financial year, the RBI approval is an inevitable compliance in cases where shareholders are Indian citizens, as fair market value of shares to be acquired by resident individuals pursuant to a cross-border merger is likely to exceed such LRS limit in SPAC transactions.
With CBDT's exemption to certain non-residents on income from investments and transactions in securities listed in stock exchanges recognized by IFSCA, Gift City8 coupled with budget 2022 providing an exemption to certain overseas investors in cases of direct investment9, the landscape of foreign investment in the limited context of IFSCA appears to be promising. However, there are major tax-related challenges associated with SPACs. In cases where the place of effective management of the resultant company is India, it is prone to be hugely taxed on its global income10. Further, there is a high probability of the transaction being identified as roundtripping, which might cause obstructions in obtaining the requisite approval from the RBI11. The cumulative effect of compliances makes the process of such merger cumbersome and unviable for large investments, thereby disincentivizing the selection of SPAC route for overseas listing.
The way forward
The regulatory governance concerning overseas listing through SPACs in India needs to be reconsidered, particularly with reference to tax implications and LRS to ensure minimum compliances and restrictions in outbound mergers. The threshold of investment for individuals mentioned in LRS needs to be enhanced beyond the meagre threshold of USD 2,50,000. Further, amendments in the overall tax regime congruent to IFSCA are essential to provide fillip to Indian companies for overseas listing.
While the IFSC Listing Regulations 2021 reflect a detailed procedure to effectuate overseas listing through SPACs, the inordinate interval of consummation of initial business and the apparent similarity of the same with the conventional IPO process should be reconsidered. A specialized (and at the same time, tailor made) procedure, analogous to the one followed in United States12 (the pioneer of SPACs), with least possible compliances should be adopted in India to manifest the intent of commercial expansion of Indian companies through overseas listing. Such amendments are crucial to streamline and speed up overseas listing through SPACs, thereby facilitating the global expansion of Indian companies.
Footnotes
1. Samidha Jain, Rucha Sharma, 'Meet all the 42 unicorns born in 2021, the highest ever for any year' (Forbes India, 31 December 2021) (https://www.forbesindia.com/article/startups/meet-all-the-42-unicorns-born-in-2021-the-highest-ever-for-any-year/72637/1) accessed 20 April 2022.
2. Securities and Exchange Board of India, 'Report of the Expert Committee for listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchange'(4 December 2018) para 1.1 (https://www.sebi.gov.in/reports/reports/dec-2018/report-of-the-expert-committee-for-listing-of-equity-shares-of-companies-incorporated-in-india-on-foreign-stock-exchanges-and-of-companies-incorporated-outside-india-on-indian-stock-exchange_41219.html) accessed 20 April 2022.
3. Ibid. Chapter 2.
4. The Companies (Amendment) Act, 2020 (https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf) accessed 20 April 2022.
5. Rachita Prasad, 'ReNew lists on Nasdaq at $4.5 billion valuation' (Economic Times, August 26, 2021) (https://economictimes.indiatimes.com/markets/stocks/news/renew-lists-on-nasdaq-at-4-5-b-valuation/articleshow/85636866.cms) accessed 20 April 2022.
6. International Financial Services Centre's Authority (Issuance and Listing of Securities) Regulations, 2021 (https://ifsca.gov.in/Viewer/Index/202) accessed 20 April 2022.
7. Master Circular on Miscellaneous Remittances from India - Facilities for Residents (https://m.rbi.org.in/scripts/FAQView.aspx?Id=115#F) accessed 20 April 2022.
8. 'CBDT exempts certain non-residents, foreign investors from filing ITR FY21 onwards' (Economic Times, October 12, 2021) (https://economictimes.indiatimes.com/news/economy/policy/cbdt-exempts-certain-non-residents-foreign-investors-from-filing-itr-fy21-onwards/articleshow/86969102.cms?from=mdr) accessed 20 April 2022.
9. 'Tax sops to boost P-notes popularity, attract foreign funds to Gift City' (Economic Times, February 2, 2022) (https://economictimes.indiatimes.com/markets/bonds/tax-sops-to-boost-p-note-popularity-attract-foreign-funds-to-gift-city/articleshow/89287022.cms?from=mdr) accessed 20 April, 2022.
10. Sandip Khetan, Pawan Sisodia 'Going the SPAC route: key considerations' (EY India, 29 November 2021) (https://www.ey.com/en_in/ipo/going-the-spac-route-key-considerations) accessed 20 April, 2022.
11. Pranav Sayta, Pavan Sisodia 'Special purpose acquisition company (SPAC) likely to boost inflow of foreign investment in India' (EY India, 10 May 2021) (https://www.ey.com/en_in/tax/india-tax-insights/special-purpose-acquisition-company-likely-to-boost-inflow-of-foreign-investment-in-india) accessed 20 April, 2022.
12. U.S. Securities and Exchange Commission (https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin) accessed 20 April 2022.
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