An influx of Special Purpose Acquisition Companies in India
– By Tanveen Kaur, Third year LL.B student, Campus Law Centre, University of Delhi
Since ReNew, a renewable energy industry, in February 2021 used the SPAC route to be included in the NASDAQ exchange list to enter into an agreement with RMF Acquisition Corporation II, a US-based SPAC company, the SPAC concept has gained ground thunder in India. SPACs are special purpose acquisition companies or shell corporations also notoriously called black cheque companies. They were created for the purpose of raising funds through the Initial Public Offering (IPO). New companies often choose the SPAC route as they do not have their own business but aim to raise funds to take over another company.
Advantages of the SPAC Route over the Traditional IPO Route
In a country like India where markets are emerging, companies have begun to choose the SPAC route as corporate prices have fallen due to the global epidemic. SPACs, compared to the standard IPO route, are flexible and transparent during the execution of transactions with companies.
Here are some reasons:
- SPACs are very simple
For a private company to be a publicly listed company, the SPAC route is easy, especially for high-leverage companies. In addition, it helps startups to enroll in the US stock exchange.
- SPACs are faster
Generally, in an IPO, it takes a private company eighteen months to become a publicly-traded company. On the other hand, the acquired company will take about six months to be recognized as a publicly-traded company through the SPAC. Therefore, for emerging companies, which want to protect investment in the early stages, SPACs are better. Most of the time, companies close to the closure go the SPAC route as a means of survival.
- SPAC regulatory restrictions in India
The SPAC regime will benefit not only medium and large companies but also small enterprises and start-ups. It will be beneficial for start-ups who do not qualify for an IPO in terms of the Securities and Exchange Board of India (SEBI), it will not prevent them from seeking investment in foreign stock markets. Therefore, the SPAC route provides a life route in the Indian startup ecosystem.
- SPACs are cheap
The process requirements as well as the time spent and the cost of setting up SPAC are very small compared to IPO processes. The documents required to merge SPAC with the target company, called de-SPAC, are not as burdensome as IPO documents which make the SPAC route business-friendly and economical.
While the SPAC regime may be ready for Indian companies to eventually be listed on foreign stock exchanges, Indian SPAC use may not be at the forefront of operations.
Some regulatory challenges are being addressed in India:
- Companies Act, 2013
When reading the Companies Act, 2013, there is no definition of “SPAC / blank cheque companies”. A major problem in this regard may be the fact that SPACs can remain inactive for two years. This is in contravention of Section 248 of the Companies Act, 2013 where the Registrar can delete the name of any company from its register/registers if it is recognized that the company did not start a business within one year of its establishment.
- Non-compliance with SEBI’s Disclosure Requirements
SPACs are unable to comply with the requirements set out under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 due to the inefficiency of the business prior to acquisition. For example, SPACs will not be able to meet the requirements under Section 26 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 authorizing that any company making a public offer in an IPO must have tangible assets of at least rupees three crores per year for the last three full years (for every 12 months), which is less than fifty percent held in cash or with a total value of at least one crore rupees over the last three full years.
- In addition to this, SPACs also fail to comply with the SEBI’s Takeover Code, 2011 as this code applies to listed companies only.
- Neglect of Requirements Under Indian Listing Exchanges
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are required to comply with the SEBI Guidelines. As mentioned earlier, SPACs fail to comply with the SEBI Guidelines. Therefore, they are not eligible to follow the listing exchange requirements. In addition, the NSE stipulates that companies striving to be listed on the stock exchange require that they continue to accumulate effective cash flow for at least two years prior to issuance. Again, SPACs cannot meet the requirements of the law.
SPAC Regime is a new initiative that encourages companies to enter the stock market and become public companies. The Indian stock market needs to establish appropriate SPAC listing rules equal to the dynamic performance of the modern securities market. To ensure SPAC’s ethical, transparent, and economically conducive de-SPAC transaction, SEBI may face some barriers to policymaking and ensuring that the law is not exploited by money laundering, but by amending current laws and redressing compliance barriers, India may witness a shoot in SPAC listings. Fixing chinks to the current SPAC regime, SEBI, on 11 March 2021, announced the establishment of an expert team under the Primary Markets Advisory Committee (PMAC) to discuss the effectiveness of the use of SPACs in India with effective checks and balances.