Foreign Investment

Overseas listing through Special Purpose Acquisition Companies (SPACs)

In India, the entrepreneurial spirit has unceasingly shown to gain popularity. The country, which has become the third-largest start-up ecosystem in the world, is unmistakably a reflection of the expanding spirit of commercial conquest, including international development. Special Purpose Acquisition Companies (“SPACs”) are a newly developing structural instrument for achieving the aforementioned commercial conquest.

SPACs are businesses that have been founded primarily to serve as tools for initial public offerings, which raise money for unlisted companies. SPACs merge with such unlisted firms, allowing them to become listed without going through the typically required procedure of listing in stock markets. Depending on the legality of SPACs in the relevant jurisdictions, these may be used for domestic and international listing.

Indian businesses look for different ways to realise this aim because listing on an international market is a significant step in the process of commercial expansion. SPACs are increasingly being discovered by Indian companies to be the most suitable method for expressing their desire for an overseas listing, given the limitations on the direct overseas listing of Indian companies in foreign stock exchanges.

SPACs stands for Special Purpose Acquisition Companies. These publicly traded companies are created to raise capital through an initial public offering (IPO) to use the funds raised to acquire or merge with an existing private company, thereby making it public without going through the traditional IPO process. SPACs have gained popularity in recent years as an alternative to traditional IPOs for companies that want to go public quickly and with less regulatory scrutiny. However, they have also faced criticism for their lack of transparency, potential conflicts of interest, and the risks associated with investing in companies without a proven track record.

Legal issues with the listing of Indian enterprises abroad

The corporate legal system in India forbids the direct listing of Indian businesses in foreign markets. The Securities and Exchange Board of India published a consultation paper in September 2018 regarding changes to Indian corporate law necessary to implement direct foreign listing. In order to provide for the direct listing of a class of securities of Indian firms in foreign stock exchanges, section 23 of the Companies Act 2013 was amended in 2020. However, detailed policies and procedures pertaining to such direct listing are still pending. Direct overseas listing of Indian companies appears to be unfeasible in the absence of a comprehensive framework designed to simplify the foreign listing process.

Numerous Indian companies continue to use SPACs to achieve an international listing. In India, there are visible signs that Indian companies are listed overseas through SPACs. One of the most notable examples of an overseas listing through a SPAC is the recent completion of ReNew Power’s merger with RMG Acquisition Corporation II (a SPAC) and the subsequent listing of ReNew in NASDAQ.

International Financial Services Centre Authority (IFSCA) released the International Financial Services Centre’s Authority (Issuance and Listing of Securities) Regulations, 2021 that contain provisions to carry out the process of foreign listing through SPACs after realising the need for a specialised procedure to regulate overseas listing through SPACs. However, the process is similar to the conventional way of collecting money through an IPO and does not adhere to a unique mechanism to materialise such a listing. The accepted time frame for finishing the process has been given as 36 months. The desire for a quick listing process is one of the main reasons businesses choose to list through SPACs; therefore, the similarity between the procedure governing foreign listing through SPACs and the traditional listing method in India may retard the growth of overseas listing through SPACs.

Even while there isn’t an explicit prohibition against unlisted Indian companies being listed overseas through SPACs, the Indian environment does not support a promising environment for such a listing.

Key Legal considerations

Direct overseas listing of Indian companies is a relatively new development, and there are various legal and regulatory considerations that companies need to be aware of when considering such a listing. Here are some of the key legal considerations: 

• Indian law and regulations: Indian companies considering a direct listing of overseas must comply with the laws and regulations of both the home and destination countries. The Companies Act, Securities and Exchange Board of India (SEBI) regulations, and the Reserve Bank of India (RBI)^[1] regulations will be relevant in India. Companies need to ensure that they comply with all applicable Indian laws and regulations related to foreign exchange control and corporate governance.
• Listing regulations of the destination country: Companies also need to comply with the listing regulations of the destination country where they plan to list. The regulations of the exchange where the shares will be listed and the local securities regulator will be relevant. Companies must ensure they meet all the eligibility criteria for listing and comply with the ongoing disclosure and reporting requirements.
• Tax implications: Direct overseas listing may have tax implications for the Indian company, its shareholders, and the destination country. Companies must carefully consider the tax implications and obtain professional tax advice to minimise the tax impact.
• Intellectual Property Rights: Companies must ensure their intellectual property rights are protected in the destination country. They need to clearly understand the local laws and regulations related to intellectual property rights and take necessary steps to protect their trademarks, patents, and copyrights.
• Compliance with International Laws: Companies must comply with all applicable laws and regulations, including anti-bribery laws, anti-money laundering laws, and economic sanctions. They need to have robust compliance programs in place to mitigate the risks of non-compliance.

Indian companies considering direct overseas listing must carefully consider the legal and regulatory implications and obtain professional advice to ensure compliance with all applicable laws and regulations.

Significant legislative barriers exist in the current legal framework regarding international listing through SPACs

The Indian regulatory environment for overseas listing through SPACs is filled with obstacles. Suppose a merger with a foreign-based SPAC is being considered. In that case, the Indian target firm must abide by the Foreign Exchange Management Act of 1999, the Companies Act of 2013, and any other incidental regulators, such as the Reserve Bank of India (RBI).

A burdensome requirement of Regulation 5 of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, in compliance with the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, and National Company Law Tribunal approval of the scheme of arrangement. This rule requires adherence to the Liberalised Remittance Scheme (LRS), which stipulates that the fair market value of shares purchased by Indian people in an overseas merged firm shall not exceed USD 250,000 every financial year. 

In cases where shareholders are Indian citizens, the RBI approval is a requirement due to the LRS limit of USD 250,000 per financial year and the likelihood that the fair market value of the shares that resident individuals will acquire as a result of a cross-border merger will exceed the LRS limit in SPAC transactions.

With Gift City and the budget 2022 providing an exemption to specific foreign investors in cases of direct investment, as well as CBDT’s exemption to certain non-residents on income from investments and transactions in securities listed on stock exchanges recognised by IFSCA, the landscape of foreign investment in the constrained context of IFSCA appears to be promising. SPACs, however, provide significant tax-related difficulties. When the ensuing company’s effective management location is in India, it will likely face significant taxation on its worldwide income. 

Furthermore, there is a good chance that the transaction will be classified as roundtripping, which could make it difficult to get the RBI’s necessary permission. The adoption of the SPAC route for an international listing is discouraged by the cumulative effect of compliances, which makes the process of such a merger complicated and unprofitable for substantial investments.

Conclusion

In conclusion, an overseas listing through SPACs can be a viable option for companies looking to go public quickly and with less regulatory scrutiny. However, companies should carefully evaluate the benefits and risks, conduct thorough due diligence, consider investor preferences, plan for ongoing compliance, and be prepared for tax implications.

Read our Article: India’s Legal and Regulatory Environment for Foreign Companies in the Indian Market