SPAC structures are not new to Wall Street and have been around for decades. However, it has lately become a rage in the US with nearly 250 SPACs going public in 2020 and 67 SPACs hitting the market in January 2021.
- By Harsh Bhuta
For most startups, the end game is eventually taking the company public. The challenge is listing non-profitable or barely profitable technology start-ups in India. Venture capital firms and financial investors, therefore, are forced to look for viable exit options through overseas IPO.
Difficulty in meeting listing criteria of NSE and BSE
Several conditions for listing on Indian stock exchanges, particularly relating to positive net worth and profits, are unfeasible for many start-ups. Most of these firms may have large cash burns and considerable losses, but they may have incredible growth potential. Further, SME platforms and the technology start-up-focused platforms such as the Innovators Growth Platform on BSE have not gained momentum. With limited options available in India, overseas funding via an IPO has emerged as an attractive alternative.
Overseas listing allows Indian start-ups to access larger and more diversified pools of capital and raise funds at lower costs, reducing their cost of capital and making them more competitive. Overseas markets may help start-ups attain more lucrative valuations as these markets have a deeper investor ecosystem that understands the risks involved in a start-up.
How do companies list overseas
Historically, many Indian corporates listed their securities abroad through American Depository Receipt (ADRs) or Global Depository Receipt (GDRs). One may recall the famous ADRs issuance by Infosys in NASDAQ and VSNL in the New York Stock Exchange (NYSE) in 1999 / 2000. Though of late, the Indian corporate appetite for ADRs/GDRs has mostly ebbed.
Thankfully, the Indian government has, in recent months made it easier to list abroad with the Companies (Second Amendment) Bill, 2019 passed on 04 March 2020, which allows Indian companies to directly list on certain foreign stock exchanges. A 2018 SEBI committee suggested 10 permissible foreign jurisdictions for Indian companies to list overseas, including the US, the UK, HK, China, and Japan.
Special Purpose Acquisition Company: Newest kid on the block
SPACs are ‘blank check companies’ that raise money by going public with the promise that they will use the money to acquire a high-growth company. “It’s a back door to going public and avoiding scrutiny,” writes Kathleen Smith, Principal at Renaissance Capital in Marketwatch. Also, SPACs are a great option for start-ups as direct IPOs on foreign stock exchanges are realistically accessible only to large Indian corporates or the largest startups given the requirement of a large IPO size and high fee structure of global investment banks.
A SPAC is formed by a sponsor who contributes the capital and undertakes an IPO of what is essentially a shell company. The proceeds of the IPO are held in a trust account until it can be used for a potential acquisition, typically in 18-24 months. The proposed transaction is required to be approved by the SPAC shareholders. Upon receipt of such approval, the SPAC and the target combine into a publicly-traded operating company (“De-SPAC transaction”). The SPAC sponsors are paid through shares in the merged listed company that are typically locked up for about 12 months and/or contingent upon certain milestones. This incentive structure makes the sponsors long term partners post listing. The company can benefit from its capital market expertise and investor networks.
SPAC structures are not new to Wall Street and have been around for decades. However, it has lately become a rage in the US with nearly 250 SPACs going public in 2020 and 67 SPACs hitting the market in January 2021. Investors are looking for lucrative deals whereas companies are looking to get an easier road to funding. SPACs are also not completely new to India as in 2015, Silver Eagle Acquisition, a SPAC acquired a 30 per cent stake in Videocon d2h for approximately USD 200 Mn. In 2016, Yatra Online Inc, the parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with US-based SPAC, Terrapin 3 Acquisition. According to Bloomberg, the Indian online delivery platform, Grofers, and India’s top solar energy producer, ReNew Power, are reportedly considering the US market and the SPAC route to go public.
Regulatory Risks to be kept in mind while listing abroad via SPAC
For Indian start-ups, SPACs are a fantastic way to go public in a shorter time and tap into a whole new ecosystem of capital. SPACs have lower market and execution risks as they offer relative certainty of valuation. Although, from an Indian target’s perspective and that of its shareholders, it may prove to be a challenge to implement a typical De-SPAC transaction, given the Indian regulatory regime and its necessary approvals. A De-SPAC transaction involves a merger of the SPAC and the target, where the combined entity is the SPAC, which becomes an operating entity. In India, this is an outbound merger that must comply with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulations), and Section 234 of the Companies Act, 2013, according to an NCLT sanctioned scheme of merger and subject to conditions.
The process of executing a court-sanctioned merger, obtaining approvals, providing disclosures to fulfill obligations towards Indian shareholders, and dealing with cross-border taxation issues are just some of the significant challenges facing start-ups using the SPAC route to go public. Thus, indirectly listing overseas through SPAC comes with its challenges and any transaction structure needs to be customized and analyzed in detail. Reacting to the recent wave for SPACs, interestingly the International Financial Services Centers Authority has recently issued a consultation paper contemplating SPAC structures in International Financial Services Centres (IFSC) in India, namely, Gujarat. It would be interesting to see the reaction of the global investing community to this development.
Harsh Bhuta is the Partner of Bhuta Shah & Co LLP. Views expressed are the author’s own.