Budget 2022: Companies want FM to enable foreign listing

Ever since Special Purpose Acquisition Vehicles ("SPACs") gained popularity in 2020, the frenzy around the offshore listing of Indian companies using SPACs has not abated. 

Especially, after an Indian renewable energy giant adopted the SPAC route to get itself listed on NASDAQ, various start-ups and unicorns housed in India started considering the SPAC route to raise quick capital from global markets.   

SPACs, also referred to as blank cheque entities, are shell companies (initially) that are listed on foreign stock exchanges by certain sponsors/investments funds, with the aim of acquiring operating companies within a prescribed time. 

Consequently, such acquisition of operating companies, commonly referred to as the 'De-SPAC' process, results in listing of such target operating companies on the foreign stock exchange. 

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This route provides faster access to global markets in a less cumbersome and time-consuming manner, in contrast to traditional IPOs. From the perspective of a start-up, the SPAC route not only offers quick funds but also provides them access to global markets, eventually leading to global recognition.  

While the benefits offered by SPAC listing are galore, the step-motherly treatment meted out by the current tax regimes (and even regulatory regime) seems to be marring the enthusiasm of Indian companies from tapping foreign markets through the SPAC route. 

If an Indian operating company is to be acquired, there could be broadly two feasible options for de-SPACing (i) an outbound merger i.e. merger of the Indian operating company into the SPAC, or (ii) a share swap/transfer such that the existing shareholders of the operating company are issued shares of the SPAC and the SPAC acquires shares in the Indian operating company.   

While such outbound mergers are plausible, the current taxation regime does not consider such outbound mergers to be tax natural transactions, unlike domestic mergers. 

Thus, such an outbound merger is likely to trigger a capital gains tax event both at the level of the shareholder holding the shares of the Indian target, as well as, at the level of the target itself, which transfers its assets to the merged company. 

Further, acquiring shares of the Indian company through a swap or otherwise is also likely to give rise to a capital gains tax event in the hands of the shareholders of the target. 

Further, the current regulatory and tax laws require that such shares are transferred at the fair market value and such fair value realisation is likely to result in higher tax incidence for the shareholders.  

Even after such de-SPACing, there may not be a full respite for the SPACs. If one were to opt for the outbound merger, the Indian operating entity would lose its legal identity and the Indian office would be considered as the branch office of the SPAC. 

The branch office in India would be regarded as Permanent Establishment ("PE") of the SPAC in India for tax purposes and the income attributable to such PE would be taxed in India at 40% on its net income (as against the 25% or 30% corporate tax paid by an Indian company). Hence, even if outbound mergers are made tax neutral, it may require some structuring to attain tax efficiency.  

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Further, there may be a potential exposure on account of its 'place of effective management' ("POEM") being construed in India. If the SPAC is regarded to be effectively managed from India, in accordance with the guidelines issued by the tax authorities, the SPAC may be regarded to have a POEM in India. 

Accordingly, it would be considered as a tax resident of India and will be subject to Indian taxes on its global income.

Furthermore, the extraterritorial reach of the indirect transfer tax provisions may also give rise to a capital gains tax event in the hands of the shareholders of SPAC, where the shares of SPAC derive their value substantially from Indian assets. 

Thus, tax implications under the said provisions should be analysed every time there is a transfer of shares at the SPAC level.    

Thus, the tax hurdles involved in a SPAC listing are not encouraging Indian companies to opt for this route. With India gearing up for Budget 2022, stakeholders have their fingers crossed that some respite may be offered in this regard.  

In order to facilitate SPAC transactions, the budget may consider introducing a tax deferral regime, similar to that which exists for business trusts (i.e. real estate investment trust and infrastructure investment trusts). 

Pursuant to such scheme, the tax liability of the promoters, who swap shares in the operating entity for the shares in SPAC, may be deferred to their exit from the SPAC. 

Similarly, tax legislations may be amended to consider an outbound merger as a tax neutral transaction (akin to domestic mergers), subject to relevant conditions.  

Tax regimes on these lines are imperative to ensure that SPAC listing is a viable option for Indian companies to raise capital by tapping foreign markets. 

Such impetus would also be in line with the government's agenda of promoting startups, who would grab the opportunity of raising capital from global markets, in a tax-efficient manner, that too without having to go through the cumbersome process of a traditional IPO.  

(Kunal Savani, Partner; and Bipluv Jingan, Senior Associate; Cyril Amarchand Mangaldas.)