Our latest publication provides an overview how SPAC works and also explains why SPACs are the new IPO. It also talks about how they are different from traditional listing, key regulatory challenges for SPACs in India, SPAC accounting and SEC reporting for SPAC companies, and taxation considerations for companies undertaking such transactions. It also covers aspects of SPAC Vs IPO in the US and global markets during the last couple of years, and funds raised through the SPAC route by US companies.
US listing considerations for SPAC
SPACs have become very popular in the US and currently exceed traditional IPOs in numbers and dollars raised. The reasons include greater acceptance among private companies that are usually SPAC targets and increasing interest from financial sponsors and management teams with experience in private equity.
In the US, a typical life cycle of a SPAC comprises approximately eight months of IPO journey. A SPAC would normally take 18-24 months to identify and complete an initial merger with a target company based on the timeline included in the governing documents of the SPAC. However, timeline for an initial merger can be extended based on governing instruments subject to shareholders’ approval, subject to a maximum period of three years as per the US regulation from the date of IPO.
Indian Tax and regulatory considerations for SPAC
Considerations on migration into a SPAC
An Indian company could transition into a SPAC through any of these typical options:
- Share-swap: under which the shareholders of the Indian target receives shares of the SPAC in exchange of their shares transferred in the Indian target, and the SPAC ultimately holds shares of the Indian Target;
- Outbound merger: whereby the Indian target merges with the SPAC, with the SPAC being the surviving entity undertaking the business of the Indian Target directly in India, and the shareholders of the Indian target would be issued shares of the SPAC;
- Inbound merger: in this case, the SPAC merges with the Indian target, with the target being the surviving entity, and the shares of the Indian Target are issued to shareholders of the SPAC.
Ongoing considerations for a SPAC
An Indian company migrating to an overseas SPAC (either in lieu of share swap or outbound merger discussed above) would also have to bear in mind the following considerations, from a future tax and regulatory perspective:
- Where key management and commercial decisions are taken in India, the place of effective management (“POEM”) of the SPAC may be regarded to be in India and the SPAC could be subject to Indian taxes on its global income. This aspect would have to be borne in mind and suitably addressed.
- Where the Indian target remains a subsidiary of the SPAC (i.e., in case of a share-swap), repatriation of profits from the Indian target to shareholders of the SPAC may have tax implications in India, and this would need to be carefully evaluated.
- From a shareholders’ perspective, on the basis that the overseas SPAC may be deriving value from Indian target/ operations, sale of SPAC shares in future should be taxable in India (subject to ‘5% small shareholder exemption[1] or any beneficial tax exemption under the treaty).