SPAC and Its Growing Relevance in India

5/15/23, 7:03 AM SPAC and its growing relevance in India
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SPAC and its

growing relevance
in India
https://www.ey.com/en_in/tax/economy-watch/india-economic-challenges-resurface-amidst-the-second-wave-of-covid-19 1/15
By Pranav Sayta
8 minute read 10 May 2021
The concept of Special Purpose Acquisition

Company or SPAC has become very popular in
the Indian business landscape in recent times.
We look at what constitutes SPAC and what
businesses should know.
A SPAC is formed to complete a merger, acquisition or

similar combination with one or more businesses, that is identified after
raising money from public investors by way of an IPO and listing,
typically on a US stock exchange.
Money is raised with an objective to identify attractive private companies

(with high growth potential) which can be acquired and taken public. A
SPAC is required to complete the business combination with one or more
private businesses within the time specified in its charter documents
(usually within 18 – 24 months).
SPACs are typically floated by experienced management teams with well-

established track records who understand the industry or the relevant
market segment. The founders of a SPAC are known as its sponsors.
Sponsors become the public face of a SPAC, as investors essentially
entrust funds to their professional judgement/expertise.
A typical SPAC’s lifecycle
The sponsors/management team of a SPAC register the SPAC shares

with the Securities and Exchange Commission (SEC) and undertakes
a pre-IPO roadshow (presentations to potential investors) and raises
capital in a SPAC IPO in exchange for the issuance of SPAC shares
that are listed on a stock exchange, commonly at US$10 per share.
The money raised by the SPAC in the IPO is held in a trust until the
business combination is completed.
Once a target is identified, the SPAC acquires the target (for

example, via a consolidation/merger) in a transaction commonly
referred as the “de-SPAC” transaction. Where additional funds are
required at this stage (for acquisition of target), SPACs could explore
raising requisite funds from PIPE investors (refer question 9 below).
After a successful de-SPAC, the target company becomes a subsidiary
of the SPAC or a new holding company whose shares are listed on
the stock exchange.
If a SPAC is unable to complete a de-SPAC transaction within the

prescribed period, the investors' money raised in the initial SPAC
IPO is returned to investors and the SPAC dissolves.
Jurisdictions of SPACs incorporation
The jurisdiction in which a SPAC aims to be listed is a factor in

deciding the jurisdiction in which the SPAC is incorporated. US-
listed SPACs could be incorporated in the US or other jurisdictions,
as US laws permit companies incorporated outside the US (for
instance, Cayman Islands) to be listed on US stock exchanges.
Benefits to the parties involved
Benefit to the sponsor for floating a SPAC
Sponsors generally purchase equity in the SPAC at more favorable

terms than investors in the IPO. After the de-SPAC transaction, the
sponsor generally holds about 20% stake in the post-IPO SPAC,
which would have been obtained for a relatively nominal
consideration. This holding would eventually be converted into
respective stake in the target’s business. This becomes the sponsors’
primary motivation in finding an attractive target with immense
potential value.
Benefit to a target and its shareholders / promoters from a SPAC

deal
One of the key advantages to a target company is the reduction in

time and effort to go public and the associated costs. Regular IPO
underwriter fees usually correspond to 7% of the total IPO proceeds.
In the case of a SPAC deal, these costs are generally lower, relative to
the size of the de-SPAC transaction.
More importantly, SPACs may help companies go public without

being subject to complexities of the market, such as multiple investor
negotiations, underwriter negotiations, valuation uncertainty and
overwhelming documentations and filings. SPAC structures are also
a compelling opportunity for companies to access a wide pool of
investors through the expertise of seasoned professionals, in the

form of sponsors (also refer question 17 below).
How EY can help
IPO readiness assessment

A successful initial public offering (IPO) involves
intensive planning and effort, both before and after th…
Read more
IPO destination services
When it comes to an initial public offering (IPO), the

question of ‘where’ can be as important as ‘when.’ We…
Read more
For promoters/shareholders, the potential of unlocking value for the

company on a securities market and thereby receiving multiplied
returns on exit could be a driving factor.
What is a PIPE investment and how do PIPE investors benefit from a

SPAC deal?
PIPE stands for private investment in public equity. It involves

issuing shares of a public company in a private arrangement with a
select investor / group of investors. In the context of SPACs, a SPAC
could seek PIPE investment if it needs to raise additional capital for
the acquisition of a target company. By way of market convention,
PIPE investments happen only after a target is identified (generally,
PIPE investment coincides with the proposed business combination
of target). Accordingly, PIPE investments usually happen at
valuations that take into consideration the combined value of the
SPAC and target’s business.
Recent Trends
Number of SPACs
According to sources, in the recent past (since 2015) there have been
over 700 SPAC IPOs. In 2020 alone, close to 250 SPAC IPOs were
executed. The trend only seems to be expanding, as over 300 SPAC
IPOs were seen in the first three months of 2021 (as against less than
20 SPAC IPOs in the first three months of 2020).
As noted in the charts above, SPACs have raised a record US$83

billion in 2020 (which is approximately two times the total monies
raised in the last five years) and an additional US$95 billion has
been raised in just the first three months of 2021 (as compared to
just over US$ 5 billion in the first three months of 2020).
Why are SPACs in vogue now?
SPACs have been around in the US for around 20 years but have
recently been growing in popularity due to a variety of reasons,
including credibility of sponsors, growth potential of target
businesses, time and process involved in traditional IPOs,
availability of dry powder in the post COVID-19 times.
Also, given the fact that substantial funds have been raised by SPACs
in the recent past and a significant portion of these funds remain to
be deployed in targets across the globe (with higher focus on
emerging markets), one could expect to see many SPAC transactions
being consummated in the near-term.
India in the SPAC race
While SPAC deals in India are still at a nascent stage, the number of
SPAC related conversations in the Indian transactions space is
swiftly growing. However, certain Indian tax and regulatory
considerations need to be suitably addressed / structured
appropriately before implementing SPAC structures in India.
Are any Indian regulatory approvals required for an India based

SPAC structure?
As per the existing Indian exchange control regime, regulatory

approvals may be required at critical junctures (at the time of SPAC
investment as well as de-SPACing) and these approvals would
depend on merits of each case and close scrutiny by the regulators.
However, regulatory approvals may sometimes not be required,
depending on the mode/amount of investment (subject to
satisfaction of prescribed conditions) and the structures proposed to
be adopted.
Can Indian resident individuals invest in a SPAC?
Yes, Indian resident individuals can invest in an overseas SPAC.

However, such investment would have to be within prescribed
annual limits (currently, US$250k). Another aspect to note would be
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that as per current regimes, most de-SPACing alternatives may

create taxable events for Indian shareholders, with such continuing
shareholders having to pay taxes even without having monetized
their investments. Further, depending on the mechanism adopted
for de-SPACing, Indian investors may have to seek regulatory
approvals at this stage as well.
What are the tax implications for Indian investors on future sale of
the SPAC shares/resultant company’s shares? How is this different
from domestic Indian IPO?
Tax implications in the hands of investors on future sale of SPAC

shares/resultant company’s shares shall depend on various factors
such as residential status of the investor and the nature / type of

investor involved (i.e., company or individual, etc.).
We have provided below the high-level implications in the hands of

resident individual investors:
Does India have a SPAC regime too?
While India currently does not have a specified SPAC regime in

place, the International Financial Services Centres Authority
(IFSCA), being the regulatory authority for development and
regulation of financial products, financial services and financial
institutions in the Gujarat International Finance Tec-City (GIFT
City), has recently released a consultation paper where (among other
proposed measures) IFSCA is exploring to facilitate listing of SPACs
in the GIFT City.
The proposed scheme defines critical parameters such as offer size to

public, compulsory sponsor holding, minimum application size,
minimum subscription of the offer size, etc.
Other areas
Key advantages of going public via a SPACs as compared to a

traditional IPO route?
The SPAC route offers certain advantages over a traditional listing

process, such as speed and certainty, through a faster timeline to go
public. SPAC acquisitions are conducted on predetermined prices,
which are less vulnerable to the risk of volatility in the public
markets, unlike traditional IPO processes, where companies’
securities are valued through market-based price discovery
approaches, which can be affected by market conditions. Further,
SPAC structures are more suitable for emerging technology
businesses / non-traditional businesses, whose potential value might
not be fully apparent to public investors.
Further, unlike traditional IPOs, where higher focus lies on historical

performance / track record of the company, the SPAC route offers
targets the ability to market the company’s future projections to
public / PIPE investors, which is particularly relevant for start-ups /
high-growth companies, especially in a post-COVID world where
current performance may not reflect the company’s potential value.
Key advantages of a traditional IPO route over SPACs
A traditional IPO may sometimes be a better option for a company,

depending on various factors like stability of capital markets,
traditional business models, etc. In case of fairly developed
companies with simple business models, values of such companies
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India
are duly appreciated by public investors in a traditional IPO and

hence such companies may not need a SPAC structure in place,
wherein substantial dilution takes place in favor of SPAC sponsors.
From a public investor’s perspective, traditional IPOs present a fairly

simple equation, and investors have complete discretion regarding
the company they invest in. As against this, in case of a SPAC
investment, there exists a high degree of uncertainty regarding which
business would eventually be acquired by the SPAC.
Key disadvantages for a SPAC structure in Indian context
As discussed earlier (refer questions 13, 14 and 15 above), the current

Indian regulatory framework and tax regimes make the SPAC route
less preferred (compared to a traditional India IPO), from an Indian

resident investor perspective. Given this, the target companies would
need to undertake SPAC readiness assessment, to identify and
suitable address the inefficiencies (if any), especially from an
investor and de-SPAC transaction structure perspective.
Summary
The unprecedented rise of the SPAC market is transforming and reshaping
our capital markets. Regardless of market conditions, success is dependent
on understanding all the risks and rewards involved in a SPAC merger.
About this article
Pranav Related topics
Sayta Tax
EY India
Private equity
international Tax
and Transaction
Services Leader
Pranav specializes
in direct tax and
also advices on
various
international tax Upvote 27
matters, inbound
and outbound
transactions,
acquisitions, joint
ventures and
corporate
restructuring.
EY | Assurance | Consulting | Strategy and Transactions | Tax
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5/15/23, 7:03 AM SPAC and its growing relevance in India

InsightsServicesIndustrie CareersAbout usContact u

SPAC and its

8 minute read 10 May 2021

The concept of Special Purpose Acquisition

A SPAC is formed to complete a merger, acquisition or

Money is raised with an objective to identify attractive private companies

SPACs are typically floated by experienced management teams with well-

A typical SPAC’s lifecycle

The sponsors/management team of a SPAC register the SPAC shares

Once a target is identified, the SPAC acquires the target (for

If a SPAC is unable to complete a de-SPAC transaction within the

Jurisdictions of SPACs incorporation

The jurisdiction in which a SPAC aims to be listed is a factor in

Benefits to the parties involved

Benefit to the sponsor for floating a SPAC

Sponsors generally purchase equity in the SPAC at more favorable

Benefit to a target and its shareholders / promoters from a SPAC

One of the key advantages to a target company is the reduction in

More importantly, SPACs may help companies go public without

investors through the expertise of seasoned professionals, in the

How EY can help

IPO readiness assessment

IPO destination services

When it comes to an initial public offering (IPO), the

For promoters/shareholders, the potential of unlocking value for the

returns on exit could be a driving factor.

What is a PIPE investment and how do PIPE investors benefit from a

PIPE stands for private investment in public equity. It involves

As noted in the charts above, SPACs have raised a record US$83

Why are SPACs in vogue now?

India in the SPAC race

Are any Indian regulatory approvals required for an India based

As per the existing Indian exchange control regime, regulatory

Can Indian resident individuals invest in a SPAC?

Yes, Indian resident individuals can invest in an overseas SPAC.

that as per current regimes, most de-SPACing alternatives may

Tax implications in the hands of investors on future sale of SPAC

such as residential status of the investor and the nature / type of

We have provided below the high-level implications in the hands of

Does India have a SPAC regime too?

While India currently does not have a specified SPAC regime in

The proposed scheme defines critical parameters such as offer size to

Key advantages of going public via a SPACs as compared to a

The SPAC route offers certain advantages over a traditional listing

Further, unlike traditional IPOs, where higher focus lies on historical

Key advantages of a traditional IPO route over SPACs

A traditional IPO may sometimes be a better option for a company,

are duly appreciated by public investors in a traditional IPO and

From a public investor’s perspective, traditional IPOs present a fairly

Key disadvantages for a SPAC structure in Indian context

As discussed earlier (refer questions 13, 14 and 15 above), the current

less preferred (compared to a traditional India IPO), from an Indian

About this article

Pranav Related topics

EY | Assurance | Consulting | Strategy and Transactions | Tax

EY is a global leader in assurance, consulting, strategy and transactions,

our stakeholders. In so doing, we play a critical role in building a better

© 2020 EYGM Limited. All Rights Reserved.