Introduction
The Indian capital markets are increasingly exploring alternative mechanisms for private companies to access public funding and liquidity beyond the conventional initial public offering (IPO) route. Among these, Special Purpose Acquisition Companies (SPACs) and reverse mergers have attracted attention due to their potential to expedite public listings and reduce associated costs. While these instruments have gained traction globally, particularly in the United States, their adoption and regulatory acceptance in India remain nascent and evolving.
Understanding SPACs in the Indian Context
What is a SPAC?
A Special Purpose Acquisition Company (SPAC) is a publicly listed shell entity formed with the exclusive objective of acquiring or merging with a private operating company, thereby enabling the target to become publicly listed without undergoing the traditional IPO process. SPACs raise capital from investors through an initial public offering and place the proceeds in a trust account while seeking a suitable acquisition target, typically within a stipulated timeframe of 18 to 36 months.
The sponsors of SPACs, often experienced investors or private equity managers, bring operational expertise and credibility to the process. Upon identifying and completing a business combination, the private company effectively gains access to public capital markets, often with greater speed and certainty than a conventional IPO.
SPACs in India: Current Scenario
India’s regulatory framework currently presents significant hurdles to the widespread adoption of SPACs. The Companies Act, 2013, specifically Section 248(1), empowers the Registrar of Companies to strike off the name of any company that does not commence business within one year of incorporation.
This provision poses a fundamental challenge to SPACs, which, by design, do not commence traditional business operations immediately but instead focus on acquiring a target company within an 18 to 24-month window. Without an amendment to Section 248, SPACs risk deregistration, effectively barring their operation under the existing law.
Further, the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”) impose stringent eligibility criteria for IPO issuers. Regulation 6(1) mandates that issuers must demonstrate a minimum net asset base, operating profits, and net worth over the preceding three years. Since SPACs are shell companies without operational revenues or profits at the time of their IPO, they fail to meet these requirements.
Regulation 6(2) provides a conditional relaxation, allowing companies that do not meet these financial thresholds to list through a book-building process with at least 75% of the offer allotted to Qualified Institutional Buyers (QIBs). However, given the speculative nature of SPACs and the uncertainty surrounding their eventual acquisition targets, attracting institutional investors under this regime remains challenging.
Recognizing these constraints, the International Financial Services Centres Authority (IFSCA) introduced the IFSCA (Issuance and Listing of Securities) Regulations, 2021, which explicitly provide a regulatory framework for SPACs, but this applies only within International Financial Services Centres (IFSCs), notably GIFT City in Gujarat. This regulatory sandbox allows SPACs to be listed and operate under tailored norms, including timelines for business combinations and disclosure obligations. Despite this progressive step, the applicability is geographically limited, and no comprehensive framework currently exists for SPACs outside IFSCs.
Recent academic and industry analyses emphasize the need for legislative amendments to the Companies Act, SEBI ICDR Regulations, and related securities laws to accommodate SPACs more broadly in India.
Proposals include extending the commencement of business period beyond one year for SPACs, relaxing IPO eligibility criteria specific to SPACs, and introducing investor protection safeguards aligned with international best practices. Such reforms would enable Indian companies, especially startups and high-growth firms, to leverage SPACs as an efficient capital-raising vehicle, potentially reducing the reliance on foreign listings and enhancing domestic market depth.
Advantages of SPACs for Indian Companies
SPACs offer Indian companies a faster and more flexible route to public markets compared to traditional IPOs, which are often protracted and costly due to extensive regulatory scrutiny, market conditions, and underwriting complexities. By merging with a SPAC, private companies can access public capital with greater speed, often within months, and with more certainty on valuation and deal terms negotiated upfront with SPAC sponsors.
Moreover, SPACs provide an opportunity to circumvent IPO lock-up restrictions, allowing shareholders and early investors to monetize their holdings more flexibly post-merger. This liquidity is particularly attractive for venture-backed startups seeking exits or growth capital.
SPACs also facilitate access to global capital markets. Indian companies can list via SPAC mergers on international exchanges, as exemplified by Renew Power’s reverse triangular merger with a US-listed SPAC, which marked a milestone in cross-border SPAC transactions involving Indian entities. This route enables Indian firms to tap into deeper pools of capital and investor bases that may not be accessible through domestic IPOs.
Additionally, SPACs can be advantageous for companies with complex capital structures or significant debt burdens, as the acquisition process allows for tailored restructuring and recapitalization during the merger. The flexibility in deal structuring and negotiated terms can provide a more efficient capital infusion compared to traditional equity or debt offerings.
However, the lack of a comprehensive domestic SPAC regulatory framework limits these advantages for most Indian companies. The evolving regulatory landscape, including the IFSCA’s initiatives and ongoing discussions at SEBI and Ministry of Corporate Affairs levels, indicates a growing recognition of SPACs’ potential, with reforms expected to facilitate their broader adoption in the near future.
Reverse Mergers: A Strategic Alternative
What is a Reverse Merger?
A reverse merger, also known as a reverse takeover, is a corporate transaction wherein a private company acquires a publicly listed shell company, often one with minimal or no active business operations, to obtain a public listing status without undergoing the conventional IPO process. This mechanism serves as a backdoor listing, allowing the private entity to become publicly traded by merging into or acquiring the listed shell company.
Legally, reverse mergers in India are governed primarily by the Companies Act, 2013, particularly Sections 230 to 232, which regulate schemes of compromise, arrangement, and amalgamation. The SEBI also prescribes specific regulations and disclosure requirements to safeguard investor interests in such transactions. The process involves obtaining approvals from shareholders, stock exchanges, and sometimes the National Company Law Tribunal (NCLT), depending on the nature of the merger.
Reverse Mergers in India
Reverse mergers have gained traction in India as an expedient and cost-effective alternative to traditional IPOs, especially for companies seeking quicker access to public capital markets. The Companies Act, 2013, under Section 232(h), stipulates that when a listed company merges with an unlisted company, the resulting entity is treated as unlisted until it completes the formal listing process. This provision imposes a regulatory constraint on the backdoor listing approach, requiring the merged entity to fulfill listing requirements post-merger.
SEBI regulations further impose conditions to protect minority shareholders and maintain market integrity. For instance, SEBI mandates that the shareholders of the listed company and Qualified Institutional Buyers (QIBs) of the unlisted company must collectively hold at least 25% of the shareholding in the merged entity. The listed company must also obtain prior approval from the stock exchange for the merger scheme and provide detailed disclosures, including valuation reports prepared by SEBI-registered merchant bankers and fairness opinions, to ensure transparency.
Recent amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, particularly Rule 25A, have introduced significant reforms to facilitate reverse mergers, especially cross-border “reverse flipping” transactions where foreign holding companies merge with their Indian subsidiaries.
The amendment effective September 17, 2024, allows such mergers to be processed under a fast-track scheme pursuant to Section 233 of the Companies Act, eliminating the need for time-consuming NCLT approvals. This reform is expected to accelerate inbound cross-border mergers, benefiting Indian startups that were initially incorporated overseas but now seek to list domestically due to India’s expanding capital markets and favorable regulatory environment.
The Insolvency and Bankruptcy Code (IBC), 2016, has also been amended effective July 1, 2024, to streamline reverse mergers involving distressed or bankrupt companies. Under Section 242 of the IBC, the NCLT is empowered to sanction mergers during insolvency resolution, allowing financially sound acquirers to absorb insolvent companies through reverse mergers.
This approach offers a viable restructuring tool to revive distressed businesses while protecting creditor rights, as creditors have the right to challenge undervalued merger plans under Section 340 of the IBC. Compliance with Companies Act and SEBI regulations remains mandatory to ensure investor protection and market transparency.
The tax regime under Section 72A of the Income Tax Act, 1961, provides additional incentives by allowing the merged entity to carry forward accumulated losses and depreciation of the sick company, subject to conditions such as transfer of all assets and liabilities and continuity of at least 90% of shareholders post-merger. This tax benefit enhances the attractiveness of reverse mergers for restructuring financially distressed companies.
Despite these advantages, reverse mergers require rigorous due diligence to assess the financial health, compliance status, and potential liabilities of the shell company to mitigate risks of regulatory non-compliance and reputational damage. The growing trend of acquiring listed companies undergoing insolvency proceedings through reverse mergers reflects a strategic use of this mechanism to unlock value and access public markets cost-effectively.
Inverted Liability Structures: Concept and Importance
An inverted liability structure under the Goods and Services Tax (GST) regime in India arises when the tax rate applicable on inputs exceeds the tax rate on the output supplies. This scenario leads to the accumulation of unutilized Input Tax Credit (ITC), as taxpayers cannot fully offset the higher input taxes against the lower output tax liabilities.
The resultant excess ITC causes a blockage of working capital, adversely impacting the liquidity of businesses. This phenomenon is particularly prevalent in sectors such as textiles, where raw materials attract GST rates of 12% to 18%, but the finished goods are taxed at a significantly lower rate of 5%.
The legal framework addressing inverted duty structures is primarily embedded in Section 54 of the Central Goods and Services Tax Act, 2017 (CGST Act), which provides for refunds of unutilized ITC in such cases. The refund mechanism is detailed under Rule 89(5) of the CGST Rules, which prescribes a formula to compute the maximum refundable amount.
The formula considers the turnover of inverted rated supplies, net ITC attributable to inputs, and adjusted total turnover, while deducting the output tax payable on such supplies. Notably, only ITC on inputs (goods) is eligible for refund; ITC on input services and capital goods is excluded from this benefit, as clarified by Circular No. 125/44/2019 issued by the CBIC.
Amendments to the refund formula have been introduced to enhance fairness and accuracy in refund claims. The 47th GST Council meeting recommended a revision to proportionately account for the ITC availed on inputs and input services in the refund calculation.
This led to Notification No. 14/2022-Central Tax dated 5th July 2022, which amended the refund formula to reflect the proportionate utilization of ITC on inputs and input services in the output tax liability on inverted rated supplies. This amendment aims to align the refund process with the actual tax credit utilization, thereby reducing disputes and litigation.
The GST Council, in its 55th meeting held on December 21, 2024, reiterated the focus on rationalizing GST rates to address the inverted duty structure issue comprehensively. The Council acknowledged that eliminating or minimizing inverted duty structures through rate rationalization would significantly reduce ITC accumulation and ease liquidity constraints for businesses. This reform is expected to simplify compliance, reduce refund processing time, and enhance the overall efficiency of the GST system.
Legal Implications in India
The legal implications of inverted liability structures under GST are multifaceted, involving compliance, refund claims, and dispute resolution. Section 54 of the CGST Act empowers registered taxpayers to claim refunds of unutilized ITC arising from inverted duty structures, subject to conditions and exclusions. The refund process requires meticulous documentation and adherence to procedural requirements, including filing refund applications electronically within prescribed timelines.
Judicial pronouncements have clarified the scope of refunds. For instance, courts have upheld the entitlement to refunds on ITC accumulated due to inverted duty structures, emphasizing the need to prevent cascading taxation and ensure tax neutrality. However, disputes often arise regarding the classification of inputs and input services, eligibility criteria, and the application of the refund formula, necessitating careful legal and tax advisory.
The government has introduced clarifications and circulars to streamline the refund process and reduce litigation. Circular No. 125/44/2019 clarifies that refunds under inverted duty structures are not available when supplies are nil-rated or fully exempt, except for notified goods or services. Additionally, refunds are not admissible if the supplier has claimed a refund under the IGST Act or availed duty drawback. These provisions underscore the importance of compliance and accurate tax credit management.
The ongoing reforms and rate rationalization efforts by the GST Council aim to minimize the incidence of inverted duty structures, thereby reducing the legal and financial complexities associated with refund claims. Businesses are advised to proactively monitor GST rate changes, maintain robust ITC records, and engage in timely refund applications to mitigate risks.
Mitigating Risks in SPAC-Driven Reverse Mergers
SPACs have emerged as a dynamic alternative for companies seeking public listings through reverse mergers, offering faster market access and valuation certainty. However, SPAC-driven reverse mergers entail significant legal, regulatory, and financial risks that require comprehensive mitigation strategies.
Due Diligence and Compliance
Due diligence in SPAC-driven reverse mergers is indispensable to ensure compliance with Indian and international legal frameworks. The process involves exhaustive scrutiny of the target company’s financial health, corporate governance, regulatory adherence, and contractual obligations. In India, compliance with the Companies Act, 2013, SEBI regulations, and sector-specific laws is mandatory. Recent amendments effective from September 2024 have heightened transparency and shareholder protection requirements, aligning India’s regulatory environment with global standards.
Cross-border transactions involving SPACs necessitate additional approvals, including those from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) and the Competition Commission of India (CCI) for anti-trust clearances. The Companies Act provisions, particularly Sections 230 to 233, govern merger procedures, requiring applications to the National Company Law Tribunal (NCLT) for sanctioning schemes of arrangement.
Adherence to disclosure norms, timely filings, and accurate representation of financials are critical to avoid regulatory penalties and investor litigation. Legal counsel must ensure that all contractual arrangements, shareholder agreements, and compliance documents are meticulously reviewed and updated in line with evolving regulations.
Protecting Minority Shareholders
The protection of minority shareholders in SPAC-driven reverse mergers is a cornerstone of corporate governance and legal compliance. Indian law, under Section 230(9) of the Companies Act, 2013, and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, provides dissenting minority shareholders with appraisal rights. These rights enable minority shareholders to petition the NCLT for a fair valuation of their shares if they oppose the merger scheme approved by the majority.
Eligibility for appraisal rights requires shareholders to hold fully paid-up shares, abstain from transferring shares between the notice of dissent and the merger meeting, and formally reserve their right to contest the merger. The NCLT appoints an impartial appraiser to determine the fair value, ensuring equitable treatment.
However, practical challenges persist, including procedural delays, valuation disputes, and limited jurisprudence on reverse mergers involving SPACs. Recent case studies, such as the Yatra Online Inc. reverse merger, highlight the need for enhanced regulatory clarity and robust frameworks to safeguard minority interests and ensure transparent evaluation processes.
Taxation and Financial Reporting
Taxation in SPAC-driven reverse mergers involves complex considerations under the Income Tax Act, 1961. Sections 47(vi) and 47(vii) provide exemptions from capital gains tax for transfers of capital assets and share exchanges in mergers and amalgamations, including reverse mergers, subject to prescribed conditions. These provisions incentivize companies to opt for reverse mergers by mitigating tax liabilities on asset transfers.
However, the distribution of shares by the public company to the private company’s shareholders may be treated as a deemed dividend under Section 2(22)(c), attracting tax on amounts exceeding accumulated profits. Additionally, capital gains tax under Section 46(2) may apply to certain transactions. Transfer pricing regulations also come into play, requiring adherence to arm’s length pricing for inter-company transactions post-merger.
Financial reporting obligations under Indian Accounting Standards (Ind AS) and SEBI disclosure norms necessitate transparent presentation of merger transactions, including fair valuation, goodwill recognition, and disclosure of contingent liabilities. Companies must ensure compliance with these standards to maintain investor confidence and regulatory approval.
Case Studies: SPAC-Driven Reverse Mergers Involving Indian Companies
ReNew Power’s Listing via SPAC
ReNew Power’s listing on the NASDAQ in August 2021 through a merger with RMG Acquisition Corporation II, a US-based SPAC, represents a landmark transaction for Indian companies utilizing SPACs to access international capital markets. Structured through a UK-domiciled holding company, ReNew Power circumvented Indian regulatory restrictions on direct foreign listings, enabling it to raise approximately $1.2 billion in gross proceeds.
The transaction provided ReNew Power with significant capital to expand its renewable energy portfolio, aiming to commission 18-19 GW of capacity by 2025. The SPAC route offered advantages such as expedited access to deep capital pools, alignment with Environmental, Social, and Governance (ESG) investment themes, and valuation certainty. Legal advisors ensured compliance with cross-border regulatory requirements, including RBI approvals and adherence to US securities laws.
ReNew Power’s case exemplifies the strategic use of SPACs for Indian companies in capital-intensive sectors, highlighting the importance of sophisticated legal structuring, investor relations, and regulatory navigation to leverage global market opportunities effectively.
Yatra Online Inc.’s Reverse Merger
Yatra Online Inc., an Indian online travel agency, executed a reverse merger with Terrapin 3 Acquisition Corporation, a NASDAQ-listed SPAC, in 2016. This transaction facilitated Yatra’s public listing in the US without a traditional IPO, enabling it to access growth capital and enhance market visibility.
The merger involved complex legal and financial due diligence, with compliance under the Companies Act, SEBI regulations, and US securities laws. The deal valued Yatra at approximately $218 million and included significant participation from venture capital and strategic investors such as Intel Capital and Reliance Capital.
Yatra’s experience underscores the potential of SPAC-driven reverse mergers for Indian companies seeking rapid public market entry. However, it also highlights challenges such as minority shareholder protections, valuation transparency, and cross-border regulatory compliance, necessitating robust legal frameworks and investor safeguards.
Future Outlook: SPACs and Reverse Mergers in India
Special Purpose Acquisition Companies (SPACs) in India
The concept of SPACs, also known as blank check companies, is emerging as a significant alternative for Indian companies, particularly startups, to access public capital markets. SPACs raise funds through an IPO without having any commercial operations, with the sole purpose of acquiring a private company and thereby facilitating its public listing via a reverse merger. This mechanism offers a faster and potentially less cumbersome route to public markets compared to traditional IPOs.
In India, the regulatory framework for SPACs is still evolving. The SEBI has acknowledged the need for a dedicated regulatory framework to accommodate SPACs, which would require either introducing new legislation or amending existing securities laws to allow the listing of such non-operating or investment companies.
The primary regulatory challenge lies in balancing the facilitation of this innovative capital-raising mechanism with adequate protection for retail investors and minority shareholders, given the inherent risks associated with SPACs, such as the uncertainty of the acquisition target and the potential for conflicts of interest.
Recent amendments effective from September 2024 to the Companies Act, 2013, and SEBI regulations have focused on enhancing transparency and shareholder protection in the context of SPACs and reverse mergers. These regulatory updates align Indian practices more closely with international standards, emphasizing disclosure requirements and governance norms to mitigate risks for investors. The rise of SPACs is anticipated to significantly impact the Indian startup ecosystem by providing a quicker access route to public markets, thereby accelerating growth opportunities for innovative companies.
Reverse Mergers and Their Regulatory Environment
Reverse mergers in India serve as an alternative pathway for private companies to become publicly listed without undergoing the lengthy and complex traditional IPO process. This process involves a private company merging with a listed company, thereby obtaining a public listing through the listed entity. The regulatory framework governing reverse mergers is primarily anchored in the Companies Act, 2013, the SEBI regulations, and the FEMA, 1999, for cross-border transactions.
Under Section 232 of the Companies Act, 2013, mergers and amalgamations require approval from the National Company Law Tribunal (NCLT), with specific provisions under Section 232(h) clarifying that the merged entity retains unlisted status until it complies with listing requirements. SEBI mandates stringent disclosure norms, corporate governance standards, and minimum public shareholding requirements for companies undergoing reverse mergers. SEBI circulars issued in 2013 have further tightened regulatory oversight by requiring prior approvals and adherence to mandatory disclosure standards for listed companies involved in mergers.
Cross-border reverse mergers, where a foreign holding company merges with its Indian subsidiary, are subject to additional layers of regulation under FEMA. These include compliance with pricing guidelines, sectoral caps, and documentation requirements to ensure foreign investment norms are met.
The RBI plays a crucial role in approving such transactions to ensure compliance with foreign exchange laws. Tax incentives under Section 72A of the Income Tax Act, 1961, also encourage reverse mergers of sick industrial companies by providing tax benefits, provided the companies maintain operations and shareholder continuity.
Regulatory Developments
Amendments to Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016
In 2024, the Indian government introduced significant amendments to the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, particularly easing the norms around reverse flipping and cross-border mergers. The new Rule 25A(5) under the Companies Act, 2013, enables a fast-track merger process under Section 233, removing the mandatory requirement for NCLT approval in certain cases.
This amendment allows mergers between foreign holding companies and their Indian subsidiaries to be approved more swiftly by the Reserve Bank of India and other regulatory bodies, reducing bureaucratic delays and costs. This is a strategic move to attract startups that initially incorporated overseas to re-domicile in India, leveraging the expanding IPO market and government incentives.
Expansion of Fast-Track Merger Rules
Building on the 2024 amendments, the Ministry of Corporate Affairs (MCA) in 2025 proposed further expansion of the fast-track merger framework under Section 233 of the Companies Act, 2013. The draft amendments to Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules seek to broaden eligibility criteria for fast-track mergers beyond small companies and wholly-owned subsidiaries.
The proposed changes include permitting mergers between unlisted companies (excluding Section 8 companies) that meet specific financial thresholds and have no default records, mergers involving non-wholly-owned subsidiaries, and mergers between fellow subsidiaries sharing the same parent entity.
Additionally, the draft consolidates cross-border merger provisions by incorporating Rule 25A(5) into Rule 25, creating a comprehensive, self-contained regulatory regime for both domestic and cross-border fast-track mergers. These amendments aim to simplify group restructuring processes, reduce regulatory hurdles, and promote ease of doing business in India.
SEBI’s Role and Future Regulatory Framework for SPACs
SEBI’s intention to develop a dedicated regulatory framework for SPACs reflects a proactive approach to accommodate this new vehicle for capital formation. The framework will likely address the unique characteristics of SPACs, such as the listing of non-operating companies, timelines for acquisition of target companies, investor protections, and transparency norms. Given the potential risks to retail investors, SEBI’s regulations will emphasize robust disclosure requirements, governance standards, and mechanisms to ensure the return of funds if acquisition targets are not identified within stipulated timeframes.
Conclusion
This regulatory evolution is expected to bring Indian capital markets closer to global practices, providing startups and innovative companies with alternative routes to public listings while maintaining investor confidence and market integrity.
The future of SPACs and reverse mergers in India is marked by significant regulatory progress aimed at facilitating faster, cost-effective, and transparent routes to public markets. The Companies Act amendments, expanded fast-track merger rules, and SEBI’s forthcoming SPAC framework collectively create an enabling environment for corporate restructuring and capital raising. These developments position India to better integrate with global capital market trends while safeguarding investor interests through enhanced regulatory oversight.
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