Capital markets: The IPO of the future

March 6, 2021 5:15 AM

A ‘cookie-cutter’ approach cannot be followed while undertaking SPAC transactions involving Indian companies

IPOIn a traditional IPO, the target company is subjected to a time-consuming process involving roadshows, pitch meetings, and intense scrutiny of the company’s financial statements and other regulatory mandatory disclosures. This process is simplified in a SPAC where the funds are first deposited in the kitty, without even identifying the target.

Sidharrth Shankar & Madhurima Mukherjee

The year 2020 saw stellar performances by capital markets across the world. One of the most interesting stories in the financial market was the resurrection of the ‘Special Purpose Acquisition Vehicles (SPACs)’. In the mercurial world of equity capital markets, nothing is more captivating than the thought of a quick and (relatively painless) fund-raising. Yet, IPOs remain the predominant method of fund-raising from the public.

Like all Wall Street idioms, SPAC, too, is complex-sounding jargon, meaning simply a ‘blind pool of cash’. In fact, SPACs are often colloquially referred to as ‘blank-check companies’. A SPAC is a special purpose acquisition company, which is formed for the purpose of raising capital through an IPO to use the funds so raised to acquire an operating business.

In a traditional IPO, the target company is subjected to a time-consuming process involving roadshows, pitch meetings, and intense scrutiny of the company’s financial statements and other regulatory mandatory disclosures. This process is simplified in a SPAC where the funds are first deposited in the kitty, without even identifying the target. This makes SPACs a particularly attractive option for start-ups and technology companies, which prefer a privately negotiated deal over price-discovery in a traditional IPO process.

Typically, a SPAC transaction has two parts. First, a management team sets up a SPAC by identifying a particular sector and formulating a business plan. The SPAC then goes through the typical US.IPO process with the US Securities and Exchange Commission, and undertaking a roadshow followed by an underwriting. The IPO proceeds are held in a trust account until released to fund the business combination or used to redeem shares of the SPAC.

The second part of the process, commonly called a ‘De-SPAC transaction’, typically involves the identification of a potential acquisition target. The SPAC then pursues the acquisition and negotiates a merger or purchase agreement. Following the announcement of signing, the SPAC undertakes a mandatory shareholders’ vote. If a SPAC shareholder does not approve the transaction, the shares and warrants held by such shareholder can be redeemed for cash. If the acquisition is approved by the shareholders, and the other conditions in the acquisition agreement are satisfied, the SPAC and the target combine into a publicly-traded operating company.

India has caught the global frenzy of SPACs in 2020, with ReNew Power’s agreement to merge with a SPAC, resulting in a publicly-listed company on the NASDAQ. However, the concept is not new. Early examples are the SPAC of Trans-India Acquisition Corp, which acquired Solar Semiconductor in 2008. Another example is Phoenix India Acquisition Corp, which acquired Citius Power in 2008. In 2016, Yatra Online Inc, the parent company of Yatra India, was listed on NASDAQ by way of a reverse-merger with US-based Terrapin 3 Acquisition.
While SPACs may have the potential to become the definite exit strategy for Indian tech-unicorns, the myriad of Indian laws offers several points of consideration. For instance, De-SPAC transactions structured as ‘outbound mergers’ require compliance with the Companies Act, 2013 and the foreign exchange laws. Under the foreign exchange regulations, an ‘outbound merger’ means a transaction where the resultant company is a foreign company. In a typical De-SPAC transaction, the shareholders of the Indian company receive shares of the combined entity as merger consideration. Resident individual shareholders must comply with the limits specified under the Liberalized Remittance Scheme (LRS) framed by the Reserve Bank of India (RBI) while participating in such transactions (set at USD 250,000 per financial year currently). Hence, RBI approval would be required if the target has Indian resident shareholders, as shares to be acquired by resident individuals pursuant to a De-SPAC merger are likely to be over the LRS limit.

Alternatively, the ‘De-SPAC transaction’ could also be structured as a share swap between SPAC and the shareholders of the Indian company. A merger with an overseas holding company would be the easiest and most time-efficient option. However, to consider such an option, the Indian target company must, first, have an overseas holding company, which is not common. Such structures may also necessitate approval from the RBI and the NCLT.

To sum up, a ‘cookie-cutter’ approach cannot be followed while undertaking SPAC transactions involving Indian companies. The transaction depends on the facts and circumstances of the deal. As with all capital market transactions, structures and methodologies will evolve and be fine-tuned. But, for now, Indian firms reaching out to global investors through De-SPAC may be here to stay.

Authors are with J Sagar Associates
Views are personal

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