Dear PM Modi, Don’t Let ‘Babus’ Kill SPACs – Young India’s Dreams

Today, SPACs are the sexy thing on Wall Street. In first two months of 2021, $90 billion of SPACs have been raised.

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SPACs – Special Purpose Acquisition Companies – are the new gleam in first-gen entrepreneurs’ eyes. SPACs, also colourfully called “blank check companies,” are literally just a pool of cash listed on, say, Nasdaq or NYSE.

SPACs have no business, operations, or employees. They prowl to acquire valuable assets via a stock swap – they come across a fast-growing newbie, say in e-commerce or SaaS or renewable energy in America or Israel or India or other hot economies, pounce on it by issuing new stock to existing shareholders, then disappear with the acquired asset listed!

Today, SPACs are the sexy thing on Wall Street. In the first two months of 2021, $90 billion of SPACs have been raised, compared to $83 billion through all of 2020. This has ignited the gleam for India’s start-up unicorns. Remember, nearly $135 billion of cash is lying in trust, waiting to pounce.

How Could India’s 'Regulatory Inspectorate' Crash and Burn the SPAC Opportunity?

India’s regulatory trapdoors could imprison and kill so many young dreams. The core problem is that India’s regulations fail to evolve with swift innovations in the architecture of global finance. On top of that, our regulators ('inspectors'?) apply outdated laws with brute force:

  • freezing bank accounts
  • arresting hapless professionals
  • and impounding assets.

So, how could India’s “regulatory inspectorate” crash and burn the SPAC opportunity? Let me simplify the most egregious impediments:

  • Under Liberalised Remittance Scheme (LRS), resident Indians are allowed a max investment of $250,000 per annum in foreign assets. If this rule is applied to a first-gen founder, her cross-border share swap will be impossible. For example, if she owns 10 percent of a company valued at $1 billion, she is entitled to shares worth $100 million. With LRS, she can get only 0.25 percent of the wealth she has worked so hard to create. Just 0.25 percent. That’s cruel!
  • If you overcome the LRS problem, you run into a Capital Gains obstacle. Since it'll be a cross-border event, the share swap will be treated as a sale-and-fresh-purchase contract. Our poor founder will have to cough up almost $20 million in capital gains taxes.
  • Finally, the 'criminal' action of Round Tripping. Since our founder would have 'sold' a local asset to 'purchase' a foreign share which is 'invested back' in an Indian business, she will be guilty of round tripping and could even go to jail.

How 'Babus' Killed Superior Rights (SR) Shares

Am I being too pessimistic? Why can’t I cut some slack for PM Modi’s unalloyed commitment to Start-up India, Stand-up India, Digital India, Atmanirbhar India? Because I’ve seen this horror flick before, where a good-faith prime ministerial invocation is killed by didactic bureaucrats.

A few years back, I had described the policy pitfalls that had condemned our first-gen entrepreneurs to DACOITY, that is, Digital America and China were Obliterating Indian Tech. In response to that scathing criticism, several IAS officers had reached out and promised change. In fact, our bureaucrats were chuffed when, finally and I believe in response to the charge of DACOIT-y, Superior Rights (SR) shares were “permitted”.

The government believed it had put India’s first-gen founders on an even keel with their American and Chinese peers. Unfortunately, these grand sounding “incentives” were grudging, half-hearted, and too tiny to make a substantial difference on the ground:

  1. You can get 10x voting on your equity, but a bunch of government secretaries will have to certify that you're a 'genuinely tech savvy' outfit
  2. If your estranged wife or brother is wealthy, you could be barred since your net-worth could become > ₹500 crore
  3. You can only keep your SR shares while working 'full time' in the company – if you quit, they automatically convert to ordinary shares with 1x voting rights
  4. Five years after listing, your SR shares shall compulsorily become ordinary shares
  5. You can’t sell SR shares. The minute you transfer them, they become ordinary shares
  6. When you die, your family cannot inherit SR shares.

That’s how 'babus' killed Superior Rights (SR) shares. Now, don’t let them snuff the SPAC gleam.

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