Synopsis–Indian firms face hurdles akin to those faced by Indian and MNC mergers in past
Indian startups and companies that are hoping to raise billions through the Special Purpose Acquisition Company (SPAC) route are set to face taxation and round tripping hurdles akin to the problems multiple Indian and MNC mergers have faced in the recent past.
Under SPAC structures, a company is created for the sole purpose of raising capital through an initial public offer (IPO) on US capital markets.
Then the SPAC is merged with the Indian company through a merger, share swap or reverse merger. This essentially would mean that the Indian company or the startup would end up getting listed in the US.
And therein lies the problem, say industry trackers.
“There are mainly two issues with SPAC—that of a round tripping where RBI approval will be required and taxation for Indian share holders as mergers with foreign entities are not outside tax gamut,” said Uday Ved, partner at tax advisory firm KNAV.
Several Indian unicorns and companies are vying to get listed in the US, said industry trackers.
And unless these hurdles are not addressed, theyt may create an issue in the future.
“Around $88 billion have been raised just in the first three months of 2021 in the US through the SPAC route. This presents a unique opportunity available to Indian businesses to effectively attain US listing,” said Vivek Gupta, partner and head, M&A and PE Tax, KPMG India.
In all, around $120 billion have been raised in the US for SPAC, which have to be utilised within next 12-24 months.
While there is no official figure as to how much money raised in the US could be pumped in the Indian companies, insiders say at least 20 Indian companies and startups are currently negotiating with various SPACs.
Taxation is the first problem that is set to hit the existing investor in the Indian entities. There is no tax implication in case of a merger, unless both entities are Indian. Existing investors and the company could have to pay the long term or short term capital gains tax ranging between 10% and 15%.
This is mainly because Indian tax laws will not recognise the merger between SPAC and the Indian entity.
For tax purposes, it would consider this as an exit of Indian investors.
“Though it has to be seen how exactly the SPAC is structured as in some cases if foreign investors hold a substantial stake, then tax issues could still be addressed to a large extent,” said Ved.
Then there is an issue of round tripping, warn legal experts.
Every Indian company looking to raise funds through the SPAC route will have to take approvals from RBI.
The central bank would then see, on a case to case basis, if this is round tripping in any way under the Foreign Exchange Management Act (FEMA) regulations.
In May 2019, RBI had revised its FAQs on FEMA clarifying that a foreign joint venture or a wholly-owned subsidiary cannot be used by an Indian company or individual to route investments back into India.
This was further updated on September 19, 2019 to clarify that Indian companies or individuals seeking exemption from the above restriction apply to RBI to get approvals.
Many investors and promoters have also reached out to RBI and the finance ministry claiming that the regulation around round tripping is creating a spectre of harassment.
RBI will check if the merger or share swap for SPAC amounts to round tripping. The central bank would also scrutinise if there are any common investors who have invested in SPAC, and who are also present in the Indian entity. If so, this could tantamount to round tripping as per Indian regulations, warn experts.