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Indian companies are listing abroad using a new avenue called Special Purpose Acquisition Company or SPAC. This is also known as a ‘blank cheque company’. Recently, Renew Power took the SPAC route to list on NASDAQ and reports suggest even tech startups like Flipkart may be eying that route.

What is this SPAC route? What are these ‘blank cheque companies’? What do they do for Indian startups looking at raising capital and for retail investors in India wanting to cash in on the IPO investment opportunity?

Hemal Uchat, Partner Deal Tax at PwC India, weighs in an interview with Money9’s Kartik Malhotra.

Edited excerpts:

Q: How does SPAC work?

Uchat: There are investors flocking towards SPACs and there are companies who want to go for global listing. Briefly when we could talk about SPAC, it is blank check company. It means literally that the companies have cash, they have raised capital, but they do not have operations. They do not have visibility of where they’re going to invest. So SPACs, as such, are vehicles with a pool of capital. They are ready to want to make investments in an operating company.

Q: Is this pool of capital already available with the shell company or with this SPAC ready to be deployed into any target company that wants to list or raise capital?

Uchat: Yes. Briefly the way the procedure is that a sponsor or a manager would form a SPAC with a nominal capital. They would then go and write a prospectus, which would be cleared by the regulator in the US. After that they go public. They raise capital from public shareholders, generally class A, ordinary shares. Once the shares are subscribed into the SPAC, that pool of cash is kept in a trust account. After that, the managers and the sponsors would go and invest that money in 18 to 24 months in an operating company. So very briefly, the way it happens is once the pool of cash is collected, they would actually do the due diligence, transaction structuring, and do a business combination of operating company with SPAC and that would be further dilution of capital in a sense that the promoters and shareholders of operating company would also be given shares of SPAC, which are already listed.

Q: Why would a company choose this SPAC route and not go ahead and list in the traditional way?

Uchat: We have seen companies going for traditional IPO route. In the traditional IPO route, a company would first need to have certain track record. It would then need to invest a lot of time, energy in road shows and making investors understand that. After that, it would go for a listing procedures. The advantage of SPAC is there is a pool of capital which is already available and the promoters or shareholders of the operating company actually discuss the prospect of the company with the managers and sponsors of the SPAC. There’s one-on-one discussion and the transaction is struck out. Overall the timeframe for the entire transaction for an operating company to list through SPAC route is crunched as against the traditional IPO process.

Q: With the sudden surge in the number of companies looking at listing internationally, what are the regulatory challenges that they possibly face in India? Is it due to capital deficiency that they are taking this route? 

Uchat: Last year, we saw huge surge of capital and more than 250 SPACs got listed in the US. All of them collectively gathered some $80 billion of cash. Now that cash has to be deployed. So there is the flood gate of capital, which is already open on one side and on other side are the Unicorns emerging in India and other Asian countries. So that is the reason Indian companies would want to go for global listing and getting listed quickly.

There is an immediate question in the minds of shareholders of Indian operating companies, that what would happen to the tax position because as and when the swap happens, they transfer the shares holding in the Indian company as against the SPAC shares. There is an immediate tax incidence which could arise in the hands of selling shareholders. And that is discouraging because the tax incidence arises and there is no liquidity of cash available to discharge the tax liability. So that is a deterrent on one hand from a tax standpoint. From a regulatory standpoint also, the exchange control regulation does not permit to do it automatically. Most of the cases would require prior permission of the Reserve Bank of India.

Q: What happens to retails investors? Can they participate in this IPO journey ?

Uchat: There is a window available through Liberalised Remittance Scheme (LRS) of RBI. But the investment procedure as such are a bit complex. You will not be able to invest as easily as you apply for a domestic IPO.