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What is permitted now is a one-way traffic. No changes in the tax regime that facilitate a tax neutral de-SPACing prove to be a significant dampener for an overseas direct listing.
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The government’s move towards permitting a Special Purpose Acquisition Company (SPAC) listing in International Financial Services Centre Gujarat International Finance Tec-City (IFSC GIFT-City), has come at an opportune time as demand picks pace for accessing overseas capital.

According to the comprehensive regulatory framework issued by the government, a SPAC is eligible to raise capital through an initial public offering (IPO) of specified securities on the recognised stock exchanges in IFSC, if the issuer is an Indian company (domestic or IFSC incorporated) or foreign company (incorporated in a recognised foreign jurisdiction).

The primary objective of the issuer is to effect a merger or amalgamation or acquisition of shares or assets of one or more companies having business operations. The issuer should not have any operating business.

Three concerns over direct overseas listings vis-à-vis IFSC listing

Private companies are increasingly going public through SPAC, rather than take the traditional IPO route, given the speed to achieve listing while getting the right valuation. So, why limit the move to listing in IFSC in India versus opening the possibility of a direct overseas listing?

First, the risk of exposing the rupee to global currency fluctuations (especially downward pressure) on capital account (shares) could make our liability position as a country adverse. Indian companies have raised capital in the past in rupees and a direct overseas listing may give opportunity to the investors to exit in foreign currency.

While the IFSC listing would also be in foreign currency, it provides a good experimenting ground for the government to understand how this will play out if it were permitted directly.

Second, India’s earlier experience in allowing an American or Global Depository Receipt (ADR/GDR) listing of domestic companies led to foreign direct investment by suspected shell companies, including round tripping of funds into India. This caused potential profit offshoring and tax avoidance. An IFSC mitigates this risk because it is treated as an overseas location for exchange control purposes but is within the country’s overall legal framework to monitor.

Third, the Reserve Bank of India (RBI) has also been averse to allowing round trip ownership structures. On one hand, it has clarified that any overseas direct investment by a resident in a foreign entity, which has directly or indirectly invested in India and is designed for the purpose of tax evasion/avoidance, is not permitted.

Any contravention shall be considered serious. On the other hand, it has also clarified that an Indian party that sponsors an overseas/IFSC SPAC will be treated as an outbound investment. All conditions (including the restriction on round tripping) will need to be satisfied for such investment. It also means that the Liberalised Remittance Scheme limit of USD 250,000 is available for retail investors to participate in SPAC’s listed overseas/IFSC.

The dampener for overseas listings

"What is permitted now through the IFSC SPAC listing is one-way traffic in which, a foreign sponsor can use IFSC to acquire an Indian target OR on the other hand, a domestic sponsor can use an IFSC entity to acquire an overseas target. A swap of shares under a merger with the Indian target will be freely allowed under the current RBI rules."

The merger can also be tax neutral in India (if it is inbound or between two Indian companies). However, only an inbound merger with the IFSC SPAC will be considered as tax neutral in India.

No changes in the tax regime that facilitate a tax neutral de-SPACing, where the SPAC is overseas, prove to be a significant dampener for an overseas direct listing.

Three ways how the IFSC can be made attractive

The government’s move to allow listing in the IFSC has the potential to be a one-step, giant leap for India. However, it can look at sweetening the deal by:

  1. Providing a limited period tax incentive of dividend and capital gains exemptions to all primary investments done into and by IFSC SPACs in Indian targets, for the next two-three years.
  2. Permitting unlisted Indian companies to issue and list ADR/GDR in the IFSC (and perhaps overseas) via media. This can be achieved easily with safeguards that can be brought through under the Companies Act.
  3. Clarifying tax incidence on outbound mergers/demerger applying tax at one level, either at the level of the company or its shareholder. Currently, both are susceptible to tax in India.

The above three moves can prove to be a game changer and permit greater access to the IFSC and overseas listing markets, consequently, increase SPAC interest in India.

This article was originally published in ET CFO.