GIFT City’s SPAC Regulations – A Key to India's SPAC Framework?
[Nityesh is a third-year student at National Law University, Delhi.]
Special purpose acquisition Companies (SPACs) have become the hottest wall street discussion. In 2020, SPAC transactions shot up to $84 billion, which is nearly a six times increase from 2019. Within the first three months of 2021, the SPAC transactions in the United States have breached the $100 billion benchmark. In February 2021, Renew Power became the first major overseas listing of an Indian company through the SPAC route. In the coming months, the escape of Indian companies to the United States securities market is only expected to increase as Dream11, or Grofers amongst others, are considering the US-SPAC route. In this context, Gujrat International Finance Tec-City (GIFT City) has proposed in its Consultation Paper a SPAC framework allowing the listing of SPACs by the International Financial Services Centres Authority (IFSCA) i.e., GIFT City’s SPAC regulator.
However, the Indian legal framework, so far, does not allow SPAC listings. Firstly, Section 248 of the Companies Act 2013 empowers the Registrar of Companies to strike off the name of those companies that fail to commence their business within one year of its incorporation. SPACs, being shell companies, would not withstand this provision. Secondly, SPACs raise funds through an initial public offer (IPO Offer). Using these funds, the entity then acquires an unlisted company and thereby, the unlisted company goes public by avoiding the traditional IPO process. Each SPAC is managed by a sponsor team, which has to find a target company and complete the acquisition process within a fixed period, usually of 24 to 36 months.
Similarly, the SPACs would fail to meet the eligibility requirements for making an IPO offering as Regulation 6(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations) requires inter alia, the company to have at least an average profit of INR 15 crores and a net worth of INR 1 crore ‘for past three years’. An alternative to Regulation 6(1) is provided under Regulation 6(2) of the ICDR Regulations, which permits an IPO Offer through book-building process, provided that 75% of the net IPO Offer is made to qualified institutional investors, and at maximum, only 10% of the net offer is made to the retail investors. However, SPAC listing under Regulation 6(2) would alter the SPAC investment framework by restricting retail investors from investing in SPACs.
In this context, Regulation 66 of the IFSCA’s Consultation Paper permits SPACs to raise capital, provided that it does not have an operating business, and its primary objective is to effect a merger/ amalgamation with a company having business operations. This article attempts to evaluate GIFT City’s proposed SPAC framework and compare it with the SPAC frameworks adopted across jurisdictions.
Comparing GIFT City’s SPAC Regulations Against International Standards
In the past two years, the SPAC boom has been limited to the United States, but there are several other countries that allow SPAC listings. In Asia, South Korea and Malaysia are the only two countries that allow SPAC listings, while Singapore and Hong Kong are drafting their SPAC regulations. Consider Korea Exchange which, after allowing SPACs for over ten years now, only saw 19 SPACs debut in their market and raise a total of $146 million compared to the $84 billion raised by SPACs in the United States. Thus, India can benefit from over ten years of global SPAC experiences and develop a holistic environment to create SPAC regulations that suit India’s booming start-up ecosystem and offer significant growth potential to all the stakeholders involved in the SPAC process.
Firstly, for any jurisdiction to prevent a bubble-like situation with SPACs, the stock regulator must ensure that only those SPACs that could demonstrate a positive future prospect are allowed to enter the SPAC market. This would eliminate those SPACs from getting listed which show a higher tendency to perform poorly after listing. Regulation 68 of the IFSCA’s Consultation Paper provides that “IFSCA may consider the proposed listing of a SPAC issuer on a recognized stock exchange on a case-by-case basis” (emphasis supplied). The use of may consider in the proposed provision empowers IFSCA to allow SPAC listing without considering the background of the SPAC management team, its track record, etc. Moreover, the proposed listing rules do not indicate the manner in which IFSCA would exercise its power. Compare this provision with the “Proposed Practice Notice 6.4” released in Singapore Exchange’s (SGX) Consultation Paper on SPACs (Proposed Practice Note 6.4 (Requirements for SPACs). It provides that in assessing the suitability of SPAC for listing, the issue manager “must holistically consider” the factors such as experience and track record of the management team, the extent of the management team’s ownership and compensation in SPAC, and the time within which SPAC would finish its acquisition process. Thus, the abovementioned factors are mandatorily considered by SGX before SPAC listing, and along with this, it can consider any other factor(s) that it may find relevant. Moreover, the burden is upon the SPAC management team to demonstrate that it possesses the appropriate experience and track record to identify the evaluate acquisition targets, complete the business acquisition process, and achieve the business objective as disclosed in the prospectus.
Thus, SGX’s Consultation Paper gives certainty that each SPAC shall mandatorily be assessed on certain predetermined grounds (unlike IFSCA’s “may consider on a case by case basis”). Further, the SGX’s Consultation Paper clarifies that the burden shall be upon the SPAC management team to justify its listing. Unlike this, IFSCA’s proposed listing rule suffers from arbitrariness and vagueness. IFSCA’s proposed rules give no guidance regarding how SPACs shall be assessed and on what basis a SPAC can be listed even without its assessment. This gives IFSCA the unilateral power to determine whether it would consider the listing of each SPAC and the manner in which this power shall be exercised.
Secondly, consider the quantitative requirements proposed by SGX’s Consultation Paper. Under these proposed rules, each SPAC is required to have a minimum market capitalization of $225 million to get listed with SGX. Similarly, consider NYSE and NASDAQ’s SPAC listing rules which have a pre-requisite that the SPAC must have a minimum market capitalization of $75 million for making an IPO offering. For Singapore’s proposed rules, it has been suggested that the market capitalization threshold of $225 million would require target companies to have, at minimum, a valuation above $1 billion, which could limit the number of potential target companies for business acquisition purposes. However, SGX has justified its decision to keep a threshold for minimum market capitalization at $225 to ensure that only the SPACs that are backed by an ‘experienced and quality management team with proven track record’ are allowed to enter their SPAC market. When compared to this, IFSCA’s regulations stand at a lower threshold compared to these countries. Regulation 20 in IFSCA’s Consultation Paper proposes that each SPAC must make an IPO offer for a minimum of $50 million, and 75% of this share offer must be subscribed on its listing i.e., of $37.5 million. Thus, IFSCA’s proposed listing requirements stand a lot closer to the SPAC pre-requisites adopted by Canada and Malaysia, each of which requires a SPAC to raise a minimum of $24 million and $36 million respectively. But, both of these countries have failed to see many SPAC investments despite their long presence in global SPAC market (see here and here). IFSCA’s proposed low market capitalization threshold, coupled with minimum regulatory checks, would allow a SPAC that satisfies the minimum threshold to get listed without any rigorous evaluation of its management competence, its track record, ability to meet the proposed plans, etc. As SPACs enter the securities market without adequate assessment, an increasing burden is imposed upon investors to exercise caution before investing. For instance, the United States Securities Exchange Regulator had to caution investors from investing in SPACs since they have been increasingly influenced by celebrity endorsements, thereby raising bubble concerns within the market.
SPACs have democratized private equity investments by allowing retail investors to invest alongside institutional investors. As retail investors are allowed to make SPAC investments, it becomes even more crucial to keep a rigorous check on the quality of the firms getting listed by a securities regulator. However, at present, the proposed regulation that IFSCA ‘may consider’ listing of SPAC ‘on a case by case’ basis seems vague, and such provision carries a possibility of being misused. IFSCA’s SPAC regulations impose no duty upon the securities regulator to evaluate SPACs on subjective parameters, which should be relevant considerations before allowing its public listing. Additionally, even the market capitalization threshold adopted by IFSCA seems low, and the same has often been considered as the cause for SPAC bubble concerns in the United States. As India plans to allow SPACs, it must impose a rigorous check on the quality of SPACs being listed while striking a balance among all the stakeholders involved, and thus incentivizing the investors to engage more with the Indian securities market.