Lessons from ReNew Power overseas listing through SPAC

The frenzy of Special Purpose Acquisition Company (SPACs), which became the buzzword in 2020, has continued into 2021 with around 711 SPACs currently present in the US market seeking a target. SPACs are blank check shell companies listed on a stock exchange (such as NASDAQ), which are set up by investment funds/ sponsors exclusively for the purpose of acquiring operating companies within a prescribed time period, with the acquisition resulting in listing of such operating companies. This route of listing is relatively less time consuming and less cumbersome as compared to the traditional IPOs. Investors invest in SPACs based on the investment philosophy, the sector and geography which the SPAC indicates in its listing documents.

A typical SPAC process consists of two components: setting up and listing of SPAC and the De-SPACing. The listing of the SPAC consists of: (a) setting up of a shell entity by a sponsor with strong financial background and track record; (b) raising funds from public shareholders basis the identified investment philosophy; (c) listing of the SPAC on the recognised stock exchanges; and (d) holding the funds raised during listing of the SPAC in trust for a specified time period with the intent to achieve De-SPACing with a desired target entity.

A typical De-SPACing process consists of: (a) identifying the target entity in a prescribed time period; (b) negotiating an M&A deal with the target and its shareholders to achieve combination of the target with the SPAC (which is typically a merger of the SPAC with the target); (c) identifying and negotiating with PIPE investors if the capital requirements of the target are greater than the cash reserves of the SPAC; (d) filing of the relevant filings and registration statements (akin to DRHPs in India) with the relevant market regulators (for instance Form F-4 registration statement for exchange of securities under US securities laws) to obtain their consent for the combination and the De-SPACing; (e) obtaining the approval of the public shareholders of the SPAC for the business combination; (f) completion of the business combination/ acquisition by the listed SPAC of the target entity; and (g) finally, listing of the target entity as a consequence of the business combination.

India has not remained untouched with the SPAC trend, with the proposed listing of Renew Power Private Limited (“Renew India”) through the SPAC route grabbing headlines earlier this year. Renew India finally got indirectly listed on August 24, 2021 on NASDAQ through the SPAC route. Cyril Amarchand Mangaldas had the opportunity to act as the legal advisors to Mr. Sumant Sinha (founder of the Renew Power) (“SS”) from a corporate, financing and employment perspective. CAM also advised Renew India from a capital market and anti-trust perspective. This blog provides for our key learnings from the offshore listing of Renew India through the SPAC route.

Our Learnings

India is not a fully capital account convertible country. This means that assets in India or assets denominated in Indian currency cannot be seamlessly and automatically converted into foreign currency. Further, direct listing of shares of an Indian company in overseas exchanges is yet a distant dream. Accordingly, De-SPACing with an Indian target presents its set of unique challenges. Some of these are enumerated below:

  • Direct merger of Indian targets with the SPAC: A typical SPAC transaction involves merger of the SPAC and the target entity. From an Indian perspective, a merger of the Indian target with a SPAC (an offshore entity) would require compliance with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross Border Regulations”), and Companies Act, 2013. Additionally, the merger would necessarily require an approval of the National Company Law Tribunal (“NCLT”) and may require an approval from the Reserve Bank of India (“RBI”) (unless the outbound merger is in compliance with the Indian foreign exchange regulations (collectively, “FEMA Regulations”)). While in theory, a direct merger of the Indian target with a SPAC is plausible, in practice (a) compliance with Cross Border Regulations may impose certain regulatory constraints, such as in case the Indian resident shareholders are individuals (who will be issued shares as consideration for the merger), Indian law requires compliance with LRS limit of USD 250,000 per financial year for Indian resident individuals and if such limit is being exceeded, an approval from the RBI would be required; and (b) the approval from NCLT would add a minimum 6-8 months to the entire process of De-SPACing. Hence, an alternate structure needs to be adopted wherein, in exchange of their shares in the Indian target entity, shareholders receive shares of the listed SPAC whilst complying with the FEMA Regulations on FDI and overseas direct investment (“ODI”), in a tax-efficient manner. In case of ReNew, this was achieved through creation of an intermediate holding structure overseas culminating into a three-way merger overseas with the SPAC entity. However, other options can be explored based on the specific requirements of the parties involved.
  • Round tripping: The second major challenge in a De-SPAC with an Indian target revolves around complying with the ODI regulations, and more specifically, the prohibition on round tripping. Normally, a person resident in India is not permitted to invest in an entity which holds shares in India. Ironically, that is the very purpose of a SPAC. Resolution of this existential issue requires treating the resident and non-resident shareholders of the target entity differently and requires a detailed analysis of the specific facts and circumstances of each shareholder. Illustratively, in ReNew, this issue has been resolved by retaining the shareholding of the resident Indian shareholders at the ReNew India level, whilst swapping the non-resident shareholders into the intermediate holding structure overseas.
  • Protections for Indian resident Shareholders: On account of the round tripping concerns set out above, the Indian resident shareholders would effectively be holding illiquid stocks of an unlisted entity and would not be able to reap benefits of a tradeable stock unlike the rest of the foreign shareholders. Hence, the Indian resident shareholders were accorded contractual protections to provide them benefits (both economic and management rights related) similar to those available to non-resident shareholders who directly received registered / listed shares of the SPAC. These too need to be analysed on a case-by-case basis to provide bespoke solution for each shareholder
  • Taxation: A typical De-SPACing transaction in India can be tax inefficient, as any transfer / swap of shares, other than pursuant to a merger, would result in a tax liability in the hands of the shareholders. Accordingly, a key consideration in any De-SPACing transaction in India is the tax liability arising from such transaction and the commercial agreement reached between parties for addressing the same. One perspective parties may consider is that any long-term tax paid on such a transaction, advances the payment liability (x) and only resets the acquisition cost for future. This perspective of course does not apply if the transaction would attract a short-term capital gains tax for any shareholder. This is, of course, not an uncommon problem in this age of start-ups and multiple rounds of fund raises and is to a certain extent solvable.
  • Identification of the target: Given all the issues highlighted above, and the Indian corporate regime, which is significantly promoter driven, identification of the target entity becomes critical for a successful De-SPAC transaction. An ideal target entity would have resident shareholding and shareholders with short-term capital gains tax concern of less than, in aggregate, 25-30% of the total share capital of the Company prior to the De-SPACing. Other considerations that are relevant include the long-term plans of the promoters and other shareholders, aspirations for overseas expansions, etc.
  • PN3 Implications: Given a De-SPACing transaction in India would necessarily require a swap up, analysis under the Press Note 3 of 2020 must also be undertaken to ensure that the ultimate beneficial ownership is not held by any entity from nations sharing borders with India and that no RBI approval is required for the transaction
  • Overseas listing process: Given the listing would be in another country, the offshore listing process would need to be complied with the relevant requirements for the De-SPAC transaction. For instance, the US securities law mandates filing of a Form F-4 registration statement with the US Securities Exchange Commission (“SEC”) for shares issued by a company proposed to be listed as part of an exchange transaction, and an approval from the SEC is a key requirement for the effectiveness of such an F-4 registration statement. Further, for any subsequent sale of the securities of the listed company by the shareholders, an effective registration statement (typically in the form of a shelf registration statement which can be drawn down when required) is required to be maintained by the listed company under the US securities law.
  • ESOPs: Another important consideration in a SPAC- De-SPAC transaction for an Indian target (especially for the start-up ecosystem) is the treatment of the ESOPs granted to its employees. Indian laws do not specifically legislate for swapping of ESOPs granted in an Indian entity in exchange of ESOPs of a foreign entity. Depending on the nature and category of employees, ESOP treatment would need to be legislated for contractually.
  • Treatment of Warrants: While Renew India De-SPACing process was underway, in April 2021, the SEC issued a statement in relation to the treatment of warrants which is required to be disclosed pursuant to the US securities law in the financial reporting in the Form F-4 filing. The statement was issued to highlight the potential accounting implications of certain terms that are common in warrants issued in SPAC transactions. Typically, SPACs issue warrants to investors as part of units issued in their listing and also to their sponsors in a private placement at the time of their listing. These SPAC warrants have been traditionally reported as equity instrument, in both pre and post De-SPACing audits. The statement challenged accounting treatment of the SPAC warrants as equity instruments and indicated that certain features of SPAC warrants would require them to be classified as liabilities rather than as equity. This required amendments to the warrant agreements across SPAC transactions to ensure their treatment as equity post completion of the business combination; such amendments may or may not require approval from the warrant-holders depending on the nature of the changes. Going forward, companies intending to list through the SPAC route would need to consider this statement issued by the SEC while issuing warrants to the sponsors and the SPAC investors in determining whether to categorise the same as equity or liability.