INTRODUCTION
In the US, the UK, and many other countries, a private entity may convert into a public stakeholding through a traditional Initial Public Offering (IPO), direct listing, or a merger with a Special Purpose Acquisition Company (SPAC). Though their popularity has just recently increased, SPACs have been prevalent since the 1990s. During the first four months of 2021, SPAC rallies achieved even greater traction than in 2020, with cash raised exceeding that from the previous quarter.[1]The colossal renewable and sustainable energy company in India, ReNew Power, began trading its stocks through a SPAC listing last month on NASDAQ. Along with the value of the acquisition, which underscored the significant distress of the industry, NASDAQ’s greater investor pool made the deal a very liquid investment with the achieving a market capitalization of around $ 5 billion.[2]A SPAC plans on purchasing its target within the next 12 to 16 months, with a focus on new-age Indian tech companies with an enterprise value of $1 billion to $1.5 billion.[3] The purpose of a SPAC is to effect a merger, acquisition, or similar combination with one or more enterprises after it acquires equity from public investors through an IPO and listing. Essentially, a SPAC is a type of investment vehicle used to raise funds for acquisitions by institutional investors. A potential investor in such a product has no idea who they will eventually purchase. In the business world, SPACs are known as “Blank Cheque Companies” since they exist exclusively with the intention of acquiring another firm (the target). Within two years, the SPAC of specialist institutional investors must identify an IPO target and invest the proceeds, and on failure, such proceeds are to be returned to the investors.[4]
LIFECYCLE OF A SPAC
A SPAC typically lasts for two years, during which it can pose varying risks to investors. The sponsors/management team of a SPAC registers the shares with the appropriate government authorities, conducts presentations to potential investors, and raises funds by listing the shares of the SPAC on a stock market. As part of the business merger, the SPAC’s IPO proceeds will be parked in the trust. A transaction is used to acquire a target by the SPAC. If additional funds are required at this time, SPACs could seek to raise them from PIPE investors. Successful de-SPAC results in the target company becoming a subsidiary of the holding firm or a new corporate body that is listed on the stock exchange.[5] A merger between a SPAC and a private company is completed subsequently. In the merger, the private company is turned into a public company. Thus, the acquired company’s identity is assumed by the merged firm.
THE INDIAN SCENARIO
SPACs to be simple are just mechanisms with the single purpose to acquire a feasible target with no commercial or business activities undertaken. The number of SPAC-related discussions in India is rapidly increasing, even though SPAC transactions are still in their infancy there. SPACs based in another country are open to investors residing in India. The Liberalized Remittance Scheme, however, would have to limit such investments to US$2,50,000 per year. Tax implications for capital gains can vary between 20% and 30%, depending on their nature.[6]Listing of Indian companies directly on foreign stock exchanges is not permissible. Presently, the only way for companies to raise funds is to issue ADRs and GDRs on foreign exchanges. Thus though India is nascent enough to accommodate the concept of SPACs within the country, there are numerous regulatory steps taken to ensure governance and secure the interests of the investors. The SPAC governance in India would be on the following terms:
IFSC Regulations
In response to the pandemic’s economic consequences, the IFSCA Authority was established with the preconception to enable and regulate financial institutions, the services, and commodities within the International Financial Services Centres (“IFSCs”) in India. IFSCA Regulations (Issuance and Listing of Securities) set up a listing mechanism for SPACs on authorized stock exchanges within the IFSC. Thus though India is nascent enough to accommodate the concept of SPACs within the country, there are numerous regulatory steps taken to ensure governance and to safeguard investors’ affairs. SPACs must follow certain redemption and liquidation requirements outlined in IFC Regulations to be qualified for an IPO on the IFSC stock exchange. SPACs must not have discerned the target business alliance prior to the IPO undertaking. At least 75% of the issue size must be subscribed to. The issue size ought to be a minimum of USD 50 million, the number of subscribers should be a minimum of 50, and the number of subscribers must be a minimum of 50. The sponsor must own a minimum of 15% of the SPAC’s post-issue paid-up capital but not more than 20%.[7]
Securities Exchange Board of India (SEBI) Regulations
A framework is being developed by the SEBI for listing SPACs in India. The existing framework of SEBI does not succour to the relevance of SPACs in India. To become a public company, a company must have net tangible assets of at least 3 crores over the past three years, an average consolidated pre-tax operating profit of 15 crores in any three of the past five years, and a net worth of at least 1 crore over the past three years.[8] SPACs had been unable to make an IPO in India for public listing because of the absence of operating income and net tangible assets as a SPAC is not an ongoing commercial entity.
Foreign Exchange Management (Cross Border Mergers) Regulations, 2018 (CBMR)
Foreign Exchange Management (Cross Border Mergers) Regulations, 2018 apply to cross-border mergers, such as when an Indian company merges with a foreign company with Section 234 of Companies Act, 2013. If an Indian SPAC accrues investment from international investors or if the SPAC is listed outside of India, the aforementioned legislation will apply. As a result of the merger scheme being approved by the NCLT, the target company’s Indian office will be considered as a branch office of the combined entity.[9]
Companies Act, 2013
Any corporate body created under the Companies Act, 2013 is ought to be for commercial purposes and if the entity does not set in motion the business within one year of establishment, the Registrar of Companies is empowered to strike down and the process of finding a target and performing due diligence for SPACs typically takes two years. If a SPAC does not have a target and has not completed an acquisition, this goal cannot be achieved. As a result, the Companies Act needs to be amended to include enabling clauses to allow SPACs to operate in India. Furthermore, pursuant to Section 4 of the Companies Act, the Memorandum of Association (MoA) must state the intention for which the business may be established, and a SPAC has no predetermined purpose.[10]
INFERENCE
SPAC is indubitably the best alternative for the traditional IPO process taking into account its exorbitant expenses, structural complexities, and lack of expert professionals in the field, yet whether India is ready to adopt the new process of merging through SPACs is yet to be determined. Various legislative provisions and listing criteria require distinct provisions and chapters to be enacted with amended additions to suffice the needs of the SPACs ecosystem and to demystify the regulatory hurdles associated with the SPACs. SPACs may qualify for the same tax breaks as startup companies, venture capital firms, and investment firms. SPAC acquisitions are typically carried out with the intent of the takeover firm becoming a publicly traded corporation after the acquisition. Thus, it proves essential to examine the acquisition without merging forms in the Indian context.
With the lessons of a recent pandemic, SPACs would be a preferred option over IPO with promising exponential growth specifically with the acceleration of IPO rollovers over the year 2020-21 with the major reason to prefer SPAC due to lesser amount of compliances to e adhered upon as compared to the customary IPOs. Sponsors of a ‘promote’ structure can reap returns as a result of a successful merger with a functioning company. A merger deal will then be built based on the sponsors’ experiences and networks, resulting in a lucrative deal for the sponsors along with easing the governmental policies of nearly a quarter-million suspected shell companies were purged for their direct acquisitions of Indian companies by offshore firms to encourage FDI inflows into the country. Despite India releasing a draft proposal for domestic SPACs to evolve according to the world securities market, it plummets short of preventing various companies from achieving targets for global investors since only domestic SPACs can acquire them and future listings are restricted to GIFT City financial zone.
Author(s) Name: Aathira Pillai (University of Mumbai)
References:
[1]‘Forbes India – The Rise Of Special Purpose Acquisition Companies (Spacs)’ (Forbes India) <https://www.forbesindia.com/article/essec-business-school/the-rise-of-special-purpose-acquisition-companies-(spacs)/72229/1> accessed 23 March 2022.
[2]Bhaskar U, ‘Renew Completes Merger With RMG II’ (mint) <https://www.livemint.com/industry/energy/renew-power-completes-spac-merger-with-rmg-ii-11629779029898.html> accessed 23 March 2022.
[3]Chakraborty C, ‘India-Focused SPAC Raises $200 Million, Lists On NASDAQ’ (The Economic Times) <https://economictimes.indiatimes.com/markets/ipos/fpos/india-focused-spac-raises-200-million-lists-on-nasdaq/articleshow/84553468.cms> accessed 23 March 2022.
[4] ‘Regulatory Challenges For SpacsIn India’ (Thehindubusinessline.com) <https://www.thehindubusinessline.com/business-laws/regulatory-challenges-for-spacs-in-india/article34124252.ece> accessed 23 March 2022.
[5] ‘SPAC And Its Growing Relevance In India’ (EY) <https://www.ey.com/en_in/tax/spac-and-its-growing-relevance-in-india> accessed 23 March 2022.
[6] Ibid.
[7] Role Of IFSC In The Indian SPAC Dream: An Overview – Part 2′ (India Corporate Law) <https://corporate.cyrilamarchandblogs.com/2021/09/role-of-ifsc-in-the-indian-spac-dream-an-overview-part-2/> accessed 23 March 2022.
[8] ‘SEBI | Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations, 2018 [Last Amended On January 14, 2022]’ (Sebi.gov.in) <https://www.sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-last-amended-on-january-14-2022-_56069.html> accessed 24 March 2022.
[9] ‘Creating Regulatory Eco-System For Spacs In India – Vinod Kothari Consultants’ (Vinodkothari.com) <https://vinodkothari.com/2021/08/regulatory-eco-system-for-spacs/> accessed 23 March 2022.
[10]‘Rise Of Spacs: An Indian Perspective’ (PWC) <https://www.pwc.in/assets/pdfs/services/deals/rise-of-spacs-an-indian-perspective.pdf> accessed 23 March 2022.
