The Special Purpose Acquisition Company (SPAC) entered the Indian market after its immense popularity on Wall Street and internationally. There were 613 and 248 SPAC initial public offerings (IPOs) executed in 2021 and 2020 respectively, which is way more than that of the period between 2009 and 2019.
SPACs are acquisition vehicles formed for the sole purpose of merging with another company with the proceeds of its initial public offering. The sole intention of such IPO is to fund a future merger or an acquisition of a privately-owned operating company within a predefined time-frame. On failure to find a target, the SPAC is dissolved and the proceeds from the IPO are returned back to the shareholders.
In India, the issues with respect to the SPAC economy are many, but the major bump is the Indian regulatory framework being muted on this aspect for the most part of it. There are no detailed regulations except the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (IFSCA Regulations). Regardless, there have been instances in the recent past where a few Indian companies have escaped to the US securities market though the SPAC route, such as Renew Power, Videocon D2h and Yatra.
Regulatory concerns for SPAC in India
Presently, the USA is the most chosen country for listing of SPACs, while the below stated regulations become the biggest roadblock for SPACs in India.
Firstly, Section 248 of the Companies Act, 2013 authorises the Registrar to remove the name of the company that has not initiated its operations within one year of its incorporation or has not been carrying on any operation for a period of the preceding 2 years and has failed to apply for dormant company status. SPAC generally takes around 18-24 months to identify and acquire a target. Therefore, in order to protect SPAC from unnecessary regulatory trouble, it is essential to tweak the existing provision for the smooth implementation of SPAC.
Secondly, the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 does not provide for listing of shell companies. Regulation 6 states the eligibility requirements for IPO and it provides that the issuer shall be eligible only if,
(i) it has net assets of at least three crore rupees in each of the preceding three years;
(ii) it has an average operating profit of at least fifteen crore rupees during the preceding three years; and
(iii) net worth of at least one crore rupees in each of the preceding three years.
Since SPAC does not have an operating business, it is far from fulfilling the abovestated eligibility requirements. Thus, Regulation 6 prevents SPAC from raising an IPO in India.
Thirdly, for the Competition Act, 2002 to carry out its functions, the Competition Commission of India (CCI) requires jurisdiction over companies. Compliance with the Competition Act necessitates extensive disclosures from the SPAC on various topics which may not be evident at the time of listing and the blank cheque company may not be in a situation to provide such disclosures.
Clearly, the Government will have to introduce amendments and exemptions in various regulations in India in order to facilitate SPACs in India.
Regulatory framework for SPAC as per IFSCA
The International Financial Services Centres Authority (IFSCA) has been established under the International Financial Services Centres Authority Act, 2019 (IFSCA Act, 2019). The IFSCA has combined powers of four domestic regulators i.e. Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA) and has vested with the power to develop and regulate financial services, financial institutions within the IFSCs in India. IFSCA has released the IFSCA Regulations which are meant to serve as a unified regulatory framework for issuance and listing of various types of securities.
To be eligible for raising capital through an initial public offering, the target entity for the business combination should not have been identified beforehand to the listing and SPAC must have the provisions for redemption and liquidation in compliance with the IFSC Regulations. The sponsors are expected to have good credentials in SPAC transactions, business combinations, fund management or merchant banking activities. Further, the size of the issue shall not be less than USD 50 million and the sponsor shall hold an aggregate subscription of not less than 2.5% of the issue size or USD 10 million, whichever is less. The minimum number of subscribers should be 50 and minimum subscription received should not be less than 75% of the issue size.
The IFSC Regulations also mandate that the issuer of SPAC must complete the business combination in not more than 36 months from the date of listing, extendable up to 12 months. By ensuring lock-in of sponsor shareholding, requiring minimum shareholding for sponsors, allowing restrictive ability for change of control before De-SPAC, making appropriate disclosures to shareholders, obtaining shareholders’ consent for potential business combination, and ensuring the completion of business combination within the prescribed time period, the IFSC Regulations have attempted to set up abundant firewall measured to make the SPAC structures more friendly and create a suitable ecosystem for them.
By codifying an overarching framework for the issuance and listing of SPACs, the IFSCA Regulations have strived to provide counterbalances and benefits that the regulatory framework in other countries have provided for listing of SPAC in their jurisdictions.
Challenges and opportunities
Given the speed of economic growth, it is imperative that new IFSC regulatory measures are accurately put in place to ensure long-term capital growth to the new age companies. SPACs allow rapid deployment of capital to take the benefit of opportunities. SPAC has comparatively an easier route for listing than traditional IPOs. SPACs generally are time-bound and cost much lower than traditional IPOs. SPACs allow start-ups to achieve their growth ambitions and potential through global listing opportunities. Apart from being a faster listing route, SPAC provides the advantage of an agreed upon valuation along with the added guarantee of a long-term investor base.
Employing SPAC as a listing vehicle will provide opportunities such as allowing retail investors to participate in the acquisition of private operating companies which are conventionally targeted by private equity firms and hedge funds and providing liquidity and visibility to private company investors.
For SPACs, the huge opportunities also pose huge threats. Allowing the listing of SPACs in India could permit the listing of start-ups on domestic stock exchanges without going through the cautious, stringent and exorbitant listing process. This may permit a faster and easier listing route for the listing of SPACs, thus, posing a risk to the interests of retail investors.
In India, a merger has to encounter a scheme of arrangements which is cumbersome, causing SPACs to lose their attractiveness over traditional IPOs. The transactions through SPAC route are materialised by the way of reverse merger, which attracts heavy stamp duties. As a result of this, the scheme of mergers has to be negotiated and affirmed by the tribunals, which then triggers a lot of compliance issues of Companies Act, 2013. The merger between the SPAC and target company can conceivably become a cross-border merger, thereby, attracting various regulations as prescribed by RBI referring to inbound mergers.
Moreover, the taxation regime in India does not permit foreign-listed SPACs to merge with Indian start-ups without capital gain tax. Therefore, stringent regulations and tweaks to certain rules to place significant checks and balances in the system, requisites for more disclosures and safeguards for investors could be very well on the cards.
Welcoming SPAC in India has both the pros and cons to it. While an excessively lenient framework risks a higher chance of failure, on the other hand, an overly restrictive regime discourages SPAC in India. However, it must be noted that there has been a steady increase in Indian companies reaching the international stock exchanges to list themselves since they are not qualified to do so in India.
While several provisions of the Securities and Exchange Board of India EBI (Issuance Issue of Capital and Disclosure Requirements) Regulations, 2018 attempt to make Indian SPACs a reality, ambiguities in the framework makes the task a hurdle. It is evident that in order to introduce SPACs in the Indian economy, several amendments need to be made in the Indian legal framework. This may seem a challenging task, but it is important to be done at the earliest given the start-up rich ecosystem that is flourishing in India, the longer it takes to adopt a SPAC-friendly legislation, the more chances of losing the business is present.
However, the capital market watchdog SEBI, ruled out rushing into formulating SPAC regime to help the domestic/global listing of new tech companies. Their contention is that there is no pressure as of now, since many firms are already being traded on the domestic stock market.
Furthermore, if a legal framework for SPAC is established in India, it would open up new options for start-ups and local businesses to access the domestic capital markets.
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SEBI Rules out SPAC Policy to Help Listing of New-Age Tech Companies (Business Standard, 29-12-2021) <https://www.business-standard.com/article/markets/sebi-rules-out-spac-policy-to-help-listing-of-new-age-tech-companies-121122801405_1.html> accessed on 7-1-2022.