Special Purpose Acquisition Companies (SPACs) have been lifting start-ups by opening up new avenues for capital inflow but market regulators must tread carefully. It has also been in the news recently in India, in the wake of India’s biggest renewable energy company, ReNew Power, opting this route to list itself on Nasdaq. Now we will tell you the reason why SPACs are not listed in India.
1. Regulatory Framework in India
The present framework of India is not supportive of the SPACs structure as the Companies Act 2013 authorizes the Registrar of Companies to strike off the name of companies that do not commence operation within one year of incorporation. The Special Purpose Acquisition Companies (SPACs) typically take two years to identify a target and perform due diligence. The enabling provisions should be inserted in the Companies Act to make SPACs functional in India. The Securities and Exchange Board of India Act denies SPACs. To be eligible for a public listing, companies require to have net tangible assets of Rs three crore in the preceding three years, the minimum average consolidated pre-tax operating profits of Rs 15 crores during any three of the last five years and a net worth of Rs one crore in each of the last three years. The missing out of operational profits, net tangible assets led to the prevention of SPACs from making an IPO in India. In today’s time, the Indian legislature has not prescribed any comprehensive regulatory requirements for SPACs. If India considers SPACs listing in the country with flexible rules and covering aspects such as incorporation, compliance and governance shall have to be formulated.
2. Retail Investors will be at risk
As the SPAC route is opted by the start-up for obtaining faster, easier listing, on the other hand, retail investors must be cautious of the risk such listing may entail. In India, the redemption of shares of a listed company may not be permissible without specific legal provisions. Although, the shares of the SPAC shall have to be exchanged-traded along with the value of which may fall or rise substantially, exposing retail investors to risk. Therefore, regulators must frame the legal structure keeping investor interests in mind.
At present, foreign SPACs are acquiring Indian companies for offshore listing. Do Indian Tax Authorities allow foreign listed SPACs to acquire Indian start-ups without capital gains tax? The answer to this question will be that any gain derived by a person, from the transfer of capital asset (being share in Indian Company), is taxable in India. Foreign SPACs acquire the entire share capital of the target company for cash consideration or in exchange for its shares. In both cases, capital gains will ensure in the hands of the shareholders. To make SPACs functional in India, the amalgamation would be of two Indian entities: the target and the other being the Indian SPAC. Merger, under a scheme of amalgamation, as such, would be tax neutral. To avoid litigation and to accord more clarity in this regard, separate provisions under the Income Tax Act may be required. The SPAC framework might lift India’s start-ups’ sentiments by opening a new avenue for capital inflow. India’s market regulators have embraced change and inventiveness in the past, however, it must tread the road carefully after taking into account critical matters such as investor protection and revenue leakage.