-By Nandini Shenai and Yashvi Gala
Special Purpose Acquisition Companies (SPAC) have gone from being unheard of to dictating strategies of major companies. SPACs are viewed as a highly touted means of obtaining public investment from international markets. They are particularly tailored for start-ups that would ordinarily struggle to lure conventional retail investors. After acquiring public funds through an Initial Public Offering (IPO), a SPAC is established to effectuate an M&A transaction. Authorities around the world are formulating appropriate policies to allow SPACs to acquire funds from investors, with nations such as the United States, the United Kingdom, and Malaysia setting the pace. It is critical to have a strong legislative regime because if investors are interested in SPACs but the authorities do not create laws that help the development of SPACs, then the economies of those countries might fall behind.
This Article aims to study the regulatory issues for SPACs in India, in light of SEBI’s plan to formulate a policy for SPACs. By way of this article, the authors have tried to navigate through the existing domestic policies for SPACs and the potential that it holds in the future.
Provisions revolving around regulation of SPACs
In layman terms, a SPAC is a non-operating corporation formed with the express purpose of acquiring a possible target. Notably, a SPAC is not relevant when there is an initial public offering. It is founded only for the purpose of acquisition of a target. SPACs are usually sponsored by investment firms. The sponsors provide funds, but the majority of the funds are raised by way of an IPO. The SPAC must execute the acquisition within a certain amount of time, otherwise the funds obtained from investors have to be returned. In India, SPACs are governed by three major instruments:
1. Companies Act, 2013:
A firm must be created with a corporate aim, according to the Companies Act, and a company’s memorandum of association is the instrument that serves as the foundation for incorporation. Due to this there seems to be a lack of understanding of what the SPAC’s commercial purpose is going to be from the start. For a SPAC that has not yet found a target and executed an acquisition, this objective cannot be to be achieved. Since the announcement of demonetization in November 2016, the authorities have been keeping tabs on dubious shell corporations, and this proves to be a tedious task since there is no definition for such corporations under the Companies Act. A Parliamentary committee suggested that the administration define the phrase “shell company” in the Company’s Act so as to “prevent regulatory confusion and eliminate needless lawsuits”
2. SEBI Frameworks:
SEBI has based its understanding of a shell company on the SEC regulations. Section 26 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, establishes the basic eligibility criteria for IPOs. These are:
- Minimum of INR 3 Crore of Net Tangible Assets in the last 3 years.
- Pre-Tax Profit of INR 15 Crore in the last 3 years.
- Minimum net worth of INR 1 Crore in the last 3 years.
SPACs generally have a target life of 1 to 2 years till the acquisition of the target takes place. Hence, it may not be possible for them to adhere to these requisites.
3. IFSC Regulations:
IFSCA (Issuance and Listing of Securities) Regulations were issued by IFSCA. It establishes the following listing mechanism for SPACs on authorized stock exchanges in IFSCs:
- To be qualified for an IPO on the IFSC stock exchange, a SPAC must not have recognized the proposed business combination after the IPO.
- It must follow specific redemption and liquidation requirements that are outlined in the laws.
A SPAC’s sponsors ought to have experience with SPAC transactions, combinations, management of the funds, and activities related to merchant banking. Sponsors who own any of the SPAC’s designated securities before the IPO are covered by the regulations.
4. Cross-Border Transactions:
If the merger between SPAC companies and the target involves a cross-border merger, the RBI has imposed a series of criteria. The Companies Act, 2013, Section 234 governs the transaction of an Indian Business with an overseas entity. Every foreign firm that wants to merge with an Indian corporation, or even otherwise, must first get permission from the RBI. Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 mentions an equivalent condition of prior RBI clearance. Furthermore, any merger with a foreign business must comply with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, which state that in the scenario of an outbound merger, all of the Indian company’s assets, holdings, obligations, and staff must be reassigned to the foreign corporation.
What does the Indian Market Want?
Recently there have been talks about certain regulations and framework in order to promote and govern SPACs transactions in India. However, in order to implement such rules, it is necessary to overcome various issues and challenges. It is also seen that certain US organizations have gone public using the SPAC method. It is gradually observed that US SPACs are primarily focused on prospects in India, which is indicative of international investors’ trust in Indian markets.
There are several perks that Indian companies have if they select a SPAC. Such as the timeline period for the listing on certain exchanges like NASDAQ is comparatively quicker and the number of investors are also more since they find a company listed on NASDAQ more reliable than the one on BSE and NSE. NASDAQ is a securities exchange, attracting more growth focused and tech companies than notably the dominant New York Stock Exchange. ReNew Power, an Indian renewable power corporation, recently merged into RMG Acquisition Corporation II, which is a US SPAC, and then was listed on NASDAQ in the United States.
The Indian government eased several restrictions on foreign listings for Indian firms in February. It was emphasized that Indian technology businesses that decide to enlist on foreign stock exchanges are not deemed listed in India. However, later in December, the SEBI stated that since most domestic tech companies are being listed nationally, the need for such a framework is not prominent. SEBI’s principal market advisory committee (PMAC) was charged in March with delivering a report on SPACs in India, as well as “sufficient checks and balances” to limit risks or difficulties in the SPAC route under Indian legislation.
Trends and demand for allowing Indian Companies to directly enlist abroad is growing. Byju’s, Swiggy, and other Start-ups wrote to the Prime Minister, urging that a policy authorizing domestic companies to list directly on international exchanges be implemented. Officials are yet to authorize companies to list in foreign exchanges, therefore Byju’s is considering a merger with a SPAC backed by Churchill Capital owned by prominent banker Michael Klein.
The Rajya Sabha passed the Companies (Amendment) Bill 2020 in September, 2020. The bill aims to amend Section 23 of the Companies Act 2013, which governs public and private placements. The structure for such listings is being developed by the Center, RBI, and SEBI. A SEBI Committee in 2018 recommended ten foreign countries for Indian businesses to enlist in, which included the United States, the United Kingdom, Hong Kong, China, and Japan.
What does the future hold?
As previously stated, various current laws and regulations are impeding the growth of SPACs in India. Some of these are outdated and need to be revised in light of the current status of the Indian Market. Shell corporations must be defined, and public beliefs that they are largely used for financial fraud must be changed. A separate committee should be formed to investigate the effectiveness of SPACs in other nations, particularly in terms of reviving their startup industries. SPACs are distinct from businesses that go through traditional IPOs, and as a result, they require special legislation. A distinct chapter of the Companies Act should handle the formation of a SPAC, as well as regulatory and accountability issues relating to its administration, directors, and investors.
A SPAC can operate under conventional terms once it has completed purchase. Likewise, all relevant legislation and listing standards require distinct provisions/chapters. SPACs may be eligible for the same tax exemptions as start-ups, venture capitalists, and investment firms. It’s past time for authorities to take a new look at SPACs and assist in unlocking the enormous possibilities they bring with them.
Merging with a SPAC instead of launching an IPO is becoming a realistic alternative for many private businesses. Considering that the importance of SPACs is growing in India, with 16th January now designated as National Startup Day, the Indian government’s decision to enable more FDI through SPACs has substantial opportunities. SPACs have the potential to aid Indian enterprises with overseas finance. As a result, there is a need for a legal structure in India to enable SPAC transactions so as to boost the economy of the country and provide the Indian start-ups with a stepping stool into the international market.