The International Financial Services Centre Authority (“IFSCA”) recently released the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (“Regulations”). These are meant to serve as an all-encompassing unified regulatory framework specifying the requirements for issuance and listing of various types of securities, and disclosures.¹ The Regulations seek to create an ecosystem for listing of Special Purpose Acquisition Companies (“SPACs”) and of depositary receipts on the stock exchanges in the International Financial Services Centre (“IFSC”). They also provide for issuance and listing of securities by start-ups, Small and Medium Enterprises (“SMEs”), and debt securities focusing on Environment, Social and Governance (“ESG

General Eligibility Criteria

• Eligible Issuers: Companies incorporated in foreign jurisdictions, in India, and in the IFSC are to be eligible to list their securities on a stock exchange in the IFSC recognized by the IFSCA (i.e. a Recognized Stock Exchange, or “RSE”).

  The Regulations also seek to make the following entities eligible to list debt securities² on an RSE:

  a) Any supranational, multilateral, or statutory organization, institution, agency provided it is permitted to issue securities as per its constitution documents;

  b) Any municipality, statutory body, board, corporation, authority, trust or agency established or notified by any Central or State Act or any Special Purpose Vehicle notified by the State Government or Central Government including for the purpose of raising fund by the issuer to develop SMART city; and

  c) An entity whose securities are irrevocably guaranteed by a sovereign.

• Eligibility Criteria: An issuer shall be eligible to list its securities in IFSC only if:

  a) the issuer is duly incorporated or established according to the laws of its place of incorporation or establishment;

  b) the issuer is operating in conformity with its constitution; and

  c) the listing of securities in IFSC is in accordance with the laws of the jurisdiction of incorporation.

  The Regulations disqualify issuers if the issuer or any of its promoters, promoter group, controlling shareholders, directors or selling shareholders is:

  a) Debarred from accessing the capital market; or

  b) A willful defaulter; or

  c) A fugitive economic offender.

• Securities: The securities proposed to be listed on an RSE should be freely transferable, and held in dematerialized form.

Listing of SPACs

The Press Release by the Ministry of Finance announcing the release of the draft Regulations in March 2021 noted that SPACs have become an important and innovative structure to raise capital through an Initial Public Offer (“IPO”) for acquiring companies or assets, globally. Keeping pace with the evolving market, the Regulations seek to provide a suitable framework for raising capital and listing of SPACs on RSEs.

The key tenets proposed for listing of SPACs are:

SPAC regimes have been in existence in several jurisdictions, such as the United States, the United Kingdom and Canada, since a long time. However, their immense popularity is recent. In 2021, SPACs have raised a record USD 100 billion with 341 global IPOs.⁵

SPACs, also called ‘blank-cheque companies’, are essentially shell entities created to facilitate the financing of business acquisitions. They reverse the traditional IPO process, such that SPACs first raise money from investors and subsequently acquire a company using those funds through a merger or other method. This provides the target company a direct route to listing on a stock exchange that may not be otherwise accessible.

Since SPACs do not have any operations, investors typically invest in SPACs based on the track record of founders. Hence, as a safeguard, regulations generally require that funds raised by IPO be maintained in escrow till the time the business acquisition, also known as the “De-SPAC transaction”, is completed. Founders have a fixed period from listing, to identify a target company. From a founder’s perspective, a SPAC offers huge upside as founders typically get around 20% of the fully diluted capital of the SPAC on successful consummation of the De-SPAC transaction.

There are several reasons why SPACs have gained popularity recently. While the traditional IPOs continue, SPACs offer a quicker and less cumbersome method to raise capital. Traditional IPOs on domestic exchanges may also not provide as much value as foreign stock exchanges, not to mention that in many jurisdictions, listing regulations require a company to display a financial track record that a SPAC is unable to do. Indian companies also have the option of listing on foreign stock exchanges through the issuance of American depositary receipt (“ADR”) / global depositary receipts (“GDRs”), however, the regulations allow only a listed company to make an ADR / GDR issue. While the Indian government has long been mulling options to allow direct listing of Indian companies outside India, those regulations remain awaited.

Specifically, during last year, investors and founders have clearly found SPACs to be more favourable during the disruption caused to traditional IPOs by COVID-19. Several large private equity players like Apollo Global Management, TPG Capital, RedBird Capital etc. have launched their own SPACs.⁶

An Indian company substantially held by foreign shareholders that have invested prior to March 31, 2017 through a treaty jurisdiction (such as Mauritius or Singapore) may be a good choice for a SPAC target, owing to grandfathering of capital gains tax exemptions under those treaties.

Proposal for SPACs in the IFSC

All of the aforesaid addresses SPACs listed in foreign markets, and not in India. Currently, there is no specified regulatory framework for SPACs in India. Given that SPACs are shell companies, they may be struck off from the register of companies under the Companies Act, 2013. Further, listing of a SPAC-like entity on Indian stock exchanges can be challenging owing to requirements to demonstrate financial track record. Considering the above, it is clear that the Regulations are well timed, may offer several opportunities for Indian start-ups and promoters to externalize their structures.

Establishing a SPAC in the IFSC may help resolve certain issues that Indian start-ups and promoters could face with a foreign SPAC. Typically, there two ways in which a De-SPAC transaction may take place. First, a SPAC may simply acquire an identified Indian target and second, the identified Indian company may be folded up in the SPAC through a merger.

In case of direct acquisition by a SPAC of an Indian target company, there will be a secondary sale of shares of the Indian company. The transfer of shares of an Indian company to the SPAC (whether foreign SPAC or an IFSC SPAC) by foreign shareholders would be subject to tax in India unless, the foreign shareholder has invested through a treaty jurisdiction and is eligible for tax exemption. Further, there may be implications under the indirect transfer tax provisions if the foreign SPAC is deriving substantial value from the Indian company. In case of an IFSC SPAC (i.e. a SPAC incorporated in the IFSC) holding an Indian company, this issue does not arise for foreign shareholders as the IFSC SPAC is considered to be an Indian resident from tax perspective and transfer of shares of the SPACs by non-residents is exempt from tax under the ITA provided the consideration for such transaction is paid or payable in foreign currency. As far as Indian shareholders are concerned, there are regulatory challenges to the Indian shareholders holding shares in a SPAC (whether foreign SPAC or an IFSC SPAC). In this regard, the market practice is that the Indian shareholders usually enter into a put-option agreement with the SPAC wherein the SPAC agrees to buy the shares held by the Indian shareholders at a specified price.

In case the Indian company is folded up in the SPAC through a merger, the implications may differ depending on whether the SPAC is a foreign SPAC or an IFSC SPAC. The merger of an Indian company with a foreign SPAC (outbound merger) is permitted under the Companies Act, 2013 provided prescribed conditions are fulfilled⁷ and after obtaining prior approval from the Reserve Bank of India (“RBI”).⁸ However, outbound mergers have not been accorded tax neutrality under the (Indian) Income-tax Act, 1961 (“ITA”). Accordingly, capital gains (if any) should be subject to tax in the hands of the Indian company (on transfer of assets to the SPAC) as well as the shareholders of Indian company. However, in case of merger of an Indian company with an IFSC SPAC, the merger will be akin to a merger of two domestic companies and accordingly, the complications in relation to outbound merger should not arise. Once a SPAC is listed on the RSE in the IFSC, transfer of shares of the SPACs by non-residents is exempt from tax under the ITA provided the consideration for such transaction is paid or payable in foreign currency.⁹

The Regulations in relation to SPACs mimic the regulatory framework worldwide. Considering the benefits of SPACs in the IFSC, the structure may be a feasible one for Indian start-ups and promoters, giving them opportunities to raise capital from non-resident investors. Having said this, the success of the SPAC IPO in the IFSC will depend on the marketability of securities on the RSE in the IFSC and also the comfort of investors in investing in the IFSC, aspects only time can provide clarity on.