‘SPACs’ – No More a Chimaera for the Indian Market
[Hardik is a student at National Law University Delhi.]
Special purpose acquisition company (SPAC) has become a hot topic in recent years in the Indian and international business landscape. A SPAC is a type of a ‘shell company’ or ‘blank cheque company’ that has no underlying business operations and is incorporated for the sole purpose of merging with or acquiring an attractive private company. The SPAC is floated on the stock exchange by a group of experts, also known as ‘sponsors’, having 15-20% shareholding in it. It raises capital through an initial public offering (IPO) to public investors for financing such merger or acquisition. After listing, the SPAC locates a target and completes the business combination within the stipulated period, failing which they may be required to return the funding to the concerned investors. A SPAC acquisition, therefore, allows the acquired company to benefit from such a listing without having to go through the formalities and rigors of an IPO.
In the past few years, India has become a fertile land of buoyant business ecosystems, with businesses and investors looking towards SPACs for raising capital in an inexpensive and less cumbersome way. However, India does not have a legislative framework enabling the listing of private companies via the SPAC route. Additionally, current laws and regulations present several complexities, strict upper limits, and tax consequences in cross-border SPAC deals as well.
Consequently, Indian companies such as ReNew Power have started moving overseas and getting listed on foreign exchanges, causing a direct loss of business and revenue for India. This raises demand for the government to allow in-bound and out-bound SPACs in India.
Catering to the same, the government and the market regulator, i.e., the Securities and Exchange Board of India (SEBI), have begun undertaking steps to create a SPAC-conducive environment in the Indian market. This article focuses on the recent developments centered around SPACs that shift the current regressive regulatory regime towards the possibility of formulating laws enabling SPACs in India.
The Current Regulatory Regime
The regulations pertaining to SPACs place several roadblocks in the way of domestic and cross-border SPAC deals. To begin with, since a SPAC does not have any business objective barring the acquisition of an unspecified private company at the time of incorporation, it cannot fulfil the criteria for registration under Sections 7(1) and 4(c) of the Companies Act 2013. The SPAC would also be subject to action under Section 248(1), which provides that a company’s name may be struck off if it has failed to commence its business within one year of its incorporation if the SPAC fails to acquire a target within that period. Furthermore, the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 prohibit the listing of ‘blank-cheque’ companies under Regulation 6, which prescribes eligibility requirements for a company desirous of making an IPO in terms of net tangible assets, average operating profits, and net worth. Cross-border SPAC transactions also have to comply with the Foreign Exchange Management (Cross Border Merger) Regulations 2018, which mandate RBI approval. Moreover, the current Liberalized Remittance Scheme disincentivises Indian shareholders from investing in the overseas SPAC by fixing an upper-limit value of USD 250,000 per financial year for acquired securities.
Needless to say, a SPAC cannot fulfil the requirements under the aforementioned provisions. To resolve the same, the Authorities have taken steps to introduce SPACs in India and develop the governing regulations.
Analyzing Recent Developments
Primary Market Advisory Committee by SEBI
In March 2021, SEBI formed a group of experts under the Primary Market Advisory Committee (PMAC) to examine the feasibility of introducing SPACs, address its concerns, and look into the safeguards investors will need should SPACs be allowed. PMAC is currently in the process of finalising its report and issuing a consultation paper for public comments on the matter.
IFSCA Listing Regulations
One of the most significant steps in introducing SPACs in India has been the publication of the consultation paper on issuing and listing securities by the International Financial Services Centres Authority (IFSCA) in 2021. The consultation paper provided for the IFSCA (Issuance and Listing of Securities) Regulations 2021 (IFSCA Regulations) which, inter-alia, contain explicit provisions for SPAC listings under Chapter VI.
The IFSCA Regulations prescribe eligibility criteria for a SPAC to raise capital, including that the target business combination shall not have been identified before the IPO and that the SPAC facilitates redemption and liquidation. It stipulates the initial disclosures in the offer document, offer size (less than USD 50 million), minimum application size (USD 250,000), minimum subscription (75% of the offer size), sponsors’ post-issue holding (15-20%) and a timeline of 36-months to effect the acquisition. The IFSCA Regulations also provide for SPAC-specific obligations until the consummation of the SPAC’s business combination.
With the regulations in place, the stage is all set to realize the Indian SPAC dream at the IFSC, to begin with. The IFSCA Regulations shall provide domestic and international sponsors opportunities to acquire unlisted companies in India and overseas. Further, these regulations are in line with international laws and provide benefits and safety measures for listing SPACs. Significantly, the IFSCA Regulations provide a skeletal framework for the central government and SEBI to serve as effective guidance for developing the national framework.
Report of the Company Law Review Committee
In March 2022, the Company Law Review Committee (CLRC) published a report wherein it recommended the introduction of enabling provisions to recognise SPACs and to allow SPACs incorporated in India to be listed on domestic and global exchanges. Noting the desirability of listing Indian companies on overseas exchanges and carrying out business in such jurisdictions, the Committee thought it necessary to enable the listing on global exchanges as well.
The CLRC recommended the recognition of SPACs as legal entities under the Companies Act 2013 and exempted them from the ‘shell company’ provisions. It further recommended amending existing laws that inhibit SPACs, such as the requirement of conducting business to avoid being struck off. CLRC referred to Section 23(3) of the Companies Act 2013, which enables certain classes of public companies to issue securities to list on permitted stock exchanges in foreign jurisdictions, and Section 23(4), which allows the Central Government to exempt such public companies, inter-alia, from the provisions of Chapter III and IV. It opined that the commencement of these sections is a necessary pre-condition for the foreign listing of an Indian-incorporated SPAC.
The CLRC recommendations are hailed as a progressive step expected to give much-needed regulatory clarity and solve several regulatory and tax concerns for companies and investors, thus developing a conducive ecosystem for listing SPACs in India.
Suggestions and Conclusion
The recent development envisaging the incorporation of SPACs in the Indian market reflects the positive outlook of the regulators to quickly adapt to the changing business requirements and welcome new investment routes such as SPAC.
The foremost thing to do to enable SPACs in India is to adopt a definition of ‘shell companies’ in a way to exclude SPACs, following the recommendation of CLRC. Inspiration can be taken from the definition of ‘shell companies’ under ¶1160.2 of SEC’s Financial Reporting Manual, which excludes a company having an asset-backed issuer from the ambit of a shell company.
It is also crucial to address the concerns about SPACs while formulating a framework regulating them. The sheer nature and structure of a SPAC raises some concerns—from dubious business practices to questionable disclosures and misalignment of interest between people selling SPACs and the people buying them. Hence, the national framework should provide minimum sponsor contribution and post-issue lock-in in the merged entity to ensure the sponsors’ skin in the game. Further, to ensure transparency and investor protection, it should provide for minimum thresholds of IPO subscription, sponsors’ shareholding, and lay down disclosure norms and accounting standards to be followed by the sponsors and the target company. It should also provide exit options to the dissenting shareholders who disagree with the proposed merger.
India can take inspiration from other jurisdictions that already have SPAC-centred regulations, especially the USA and Singapore. In the USA, the Securities and Exchange Commission has proposed ‘revised rules’ for enhancing transparency and investor protections by increasing the potential liability for SPACs, underwriters, and target companies and specialised disclosure obligations for SPACs. Singapore Exchange Ltd. has introduced a listing framework (SGX Rulebook) governing SPACs that strikes an appropriate balance between the interests of the sponsors and shareholders. Pertinently, it has introduced additional requirements (Rule 625) which mandate disclosures by SPACs, including the issuer’s structure and inherent risk factors, business strategy, acquisition conditions and potential conflicts of interest. These regulations can serve as a guide for SEBI and the Indian government in preparing a framework for SPACs.
In the string of recent developments and ever-increasing demand from the industry, it is evident that SPACs will no longer remain chimaera in Indian markets. While introducing SPACs would facilitate and promote greater ease of doing business in India, a cautious approach must be adopted to ensure appropriate dealing with the concerns and issues over SPACs. The best time for introducing SPACs in India can be best decided by the government and SEBI.