Special Purpose Acquisition Company(SPAC) And Its Scope In The Indian Business Environment
AUTHORED BY-Shashank Rai And Vedant Sharma
Special purpose acquisition companies (SPACs) are blank-check companies that raise funds from investors vide a public offering of warrants and shares. The said public offering is made in the form of an Initial Public Offering(IPO). SPACs possess no assets, business plan or business strategy and their main objective is to acquire an operational business. In the recent times, SPACs have gained immense popularity in the USA. This has made the business community in India anxious and interested about the prospect of SPACs in India. Furthermore, the Indian authorities are also working on developing a sound framework for allowing SPACs to conduct business in India too. This paper focusses on the basics of SPAC, current Indian legal and regulatory regime with respect to the SPAC, future prospects of SPACs in India and risks associated with the SPACs.
Special Purpose Acquisition Company; Target Company; Acquisition; Investors; Business Structure
Abbreviations: SPAC- Special Purpose Acquisition Company; IPO- Initial Public Offering; IFSCA- International Financial Services Centres Authority; SEBI- Securities and Exchange Board of India
Introduction: What IS A Special Purpose Acquisition Company(SPAC)?
A Special Purpose Acquisition Company (SPAC) is an organisation or company formed solely for the purpose of raising investment capital through an initial public offering (IPO). The said type of business structure allows investors to contribute/invest money towards a fund or corpus, which is thereafter used for the purpose of acquisition of one or more unspecified businesses that are to be identified after the completion of the IPO. Therefore, this sort of shell business structure is often referred to as a “blank-check company”.
When the SPAC raises the requisite funds via an IPO, the money is held in a trust until a predetermined period of time elapses or the acquisition of the desired target company is made. In the event of non-fulfilment of the acquisition or in the cases where legal formalities are still
pending, the SPAC is required to return the funds to the investors, after deduction of bank and broker fees.
Working Of A Special Purpose Acquisition Company(SPAC)?
A SPAC is usually formed by experienced business executives who are confident and assured that their reputation and immaculate experience will help them in identifying a profitable company to acquire. Since the SPAC is nothing but a shell company, the founders act as the selling point when trying to raise funds from investors.
The founders provide the starting capital for the company and they are set to benefit from a sizeable stake in the acquired/target company. The founders usually hold an interest in a certain industry when kick starting a special purpose acquisition company.
Issuing the IPO
When issuing the IPO, the management of the SPAC appoints an investment bank to carry out the due procedures of the IPO. The investment bank and the management of the company agree on a fee to be charged for the service provided by the investment bank.
The prospectus of the IPO with respect to the SPAC primarily emphasizes on the sponsors, and less on revenues and history of the company since the SPAC is sans any performance history or revenue reports. All proceeds from the IPO or all the money raised from the IPO are held in a trust account until a company is identified as an acquisition target.
Acquiring a Target Company
After the SPAC has raised the requisite capital or funds vide an IPO, the management identifies a target and concludes the acquisition process. The total period may differ on the basis of the company and the industry. The fair market value of the target company must be atleast 80% of the SPAC’s trust assets.
Once acquired, the founders will make gains from their stake in the new company, generally 20% of the common stock, while the investors receive an equity interest on pro rata basis.
In the event where the specified period lapses and the acquisition is not completed, the SPAC is dissolved, and the IPO proceeds held in the trust account are returned to the investors. When managing the SPAC, the management is not allowed to collect salaries or remunerations until the deal is concluded or completed.
Special Purpose Acquisition Companies (Spacs) In The Indian Corporate Environment
Current regulatory regime
The present regulatory and legal framework of India does not support or allow SPAC structures. This can be inferred from the following:
The Companies Act, 2013 – Arrangements under the Companies Act, 2013 obligatorily require an organization in the form of a company to be incorporated with a business object. Further, companies are needed to file the memorandum of association, which shapes the
premise of registration of a company. This may not be feasible for SPACs since these are shell companies that are yet to distinguish a target and achieve a business combination. Further, the Companies Act orders Registrar of Companies to eliminate a company's name if it fails to commence business within a period of 1 year from the date of incorporation. Commonly, a SPAC is given two years to embrace or undertake the business combination which is extendable by a special resolution from shareholders. This makes a huge hindrance for SPACs in India.
Securities Exchange Board of India (SEBI): According to Regulation 6 of SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations (SEBI ICDR Regulations), a company is expected to satisfy specific eligibility standards for listing (like minimum net worth, net tangible assets, average operating profits, and so on). a SPAC can not meet these standards because of absence of operating income and net tangible assets.
A mix of the above existing legal, regulatory and administrative framework in India presents barriers for a SPAC to be incorporated in India.
Notwithstanding the aforementioned facts, there are signs that the Indian government and regulators are thinking about legalising SPACs in India:
International Financial Services Centres Authority (IFSCA): IFSCA has figured out and formulated guidelines for listing of SPACs in International Financial Services Centers (IFSCs) vide issue of IFSCA (Issuance and Listing of Securities) Regulations, 2021 (IFSC Regulations). The IFSC Regulations perceive listing of SPACs in IFSCs and provide point
by point regulations overseeing SPAC eligibility, offer timing, initial disclosures on the offer document, underwriting and other SPAC explicit obligations.
SEBI: There have been media reports indicating that SEBI wants to come up with a framework on SPACs, which will empower and enable listing of startups on domestic stock exchanges.
CLC Report: The Companies Law Committee (Law Committee), constituted by the Ministry of Corporate Affairs (MCA) in 2019 released its report in March 2022. The Law Committee has recommended the following:
Introduction of an enabling provision in the Companies Act, 2013 for recognition of SPACs
Allowance to entrepreneurs to list a SPAC incorporated in India on domestic and global stock or securities exchanges.
Addition of statutory provision in Companies Act 2013 for the purpose of relaxing the requirement to carry out business before the company gets struck-off.
Addition of provisions in Companies Act 2013, providing an exit option to dissenting shareholders of a SPAC if they don’t agree with the choice of the target company identified.
Commencement of Sections 23(3) and 23(4) of Companies Act 2013 which is essential to enable an Indian incorporated SPACs to get itself listed on a foreign stock exchange.
Addressing Potential Risks Associated With Spacs
Taking into account the abovementioned facts, SPACs are an appealing instrument to enable listing of companies, whether locally/domestically or internationally. Be that as it may, there might be sure risks related with SPACs, for example,
These companies possess no assets other than the funds that they raise, which are dependent on the market, are based on the future of the company, and therefore can present a higher risk, particularly for retail investors.
Decisions of a SPAC are exclusively in the hands of the sponsors, who might be devoid of requisite expertise in their target company's market segment. This might prompt poor choices or conflicts between the SPAC sponsors and the owners of the company they are trying to acquire.
Investments in SPACs might pose higher risk with regards to the vulnerability or uncertainity because SPACs either don't reveal the relevant information about the target companies/target industry or are mandated to act in accordance with the revealed information, at the time of IPO.
These risks can be mitigated and handled with efficient regulatory oversight and balanced regulations governing SPACs in India. For instance, the following safeguards in the regulatory framework can be considered and adopted, such as,
Making it mandatory that the sponsors of SPAC need to be sophisticated and seasoned group of investors;
Prescription of minimum percentage of post-issue paid up capital that is to be held by the sponsors;
Prescription of maximum threshold percentage of total post-issue paid up capital that can be allotted to a single applicant;
Providing an opportunity to the dissenting shareholders to redeem their investment in a scenario where the investors do not approve the arrangement proposed by the SPAC sponsor;
Prescription of framework for due-diligence, audits, financial reporting etc.
Impact On Start-Ups, Indian Companies, Indian Securities Market
It is noteworthy that the government in India is thinking about legalizing SPACs and empowering their listing on foreign stock exchanges. We perceive that legalizing SPACs requires a top to bottom assessment by Indian controllers and regulators into the potential risks and as needs be introducing satisfactory and adequate safeguards in the regulatory framework.
We believe that legalising SPACs and permitting them to list on overseas stock exchanges can prompt more choices for Indian companies, particularly start-ups, to rai capital. This can be one of the ways of empowering overseas listing for start-ups, something that NASSCOM has prescribed to the government on numerous events. This is probably going to be welcomed by the start-up community, make India an appealing destination amongst the business community, thereby supplementing India's excursion towards turning into the world's biggest startup hub.
This may likewise prompt strengthening India's securities regulations further, by placing in shields for possible abuse/underhandedness connected with SPAC listings. This might make the Indian capital markets more trustworthy for investors and draw in more capital (foreign and domestic) into the Indian economy.
Special Purpose Acquisition Company Or SPAC’s Tremendous Interest Among Indian Companies Looking To Raise Funds In Stock Exchanges Overseas:
In September 2020, the Indian government altered the corporate regulations to allow direct listing of shares of Indian companies in overseas stock exchanges. Albeit nitty gritty rules on the most proficient method to accomplish something similar, alongside other amendments and explanations from tax and regulatory viewpoint are as yet anticipated. As an alternative to this, special purpose acquisition companies (SPACs) stand out for the majority Indian companies hoping to open up to the world oustide India.
As visible from the charts above, SPACs in USA have raised a record US$83 billion in the calendar year 2020, accounting for 46% of total US IPO proceeds and 55% of the total number of US IPOs, and an additional US$95 billion was raised in the first three months of 2021 (in comparison to just over US$5 billion in the initial three months of the 2020). On the basis of news reports, it is understood that there are currently 400+ active SPACs as on date, with an aggregate cash capital in excess US$ 140 billion waiting to be deployed in potential targets across the globe in the subsequent 12 to 18 months.
In India, while noteworthy SPAC arrangements are rare (most remarkable names being the Silver Eagle - Videocon d2h deal and the Terrapin - Yatra Online arrangement), there has been a new spike in interest - with renewable energy major ReNew Power going down the SPAC road with RMG Acquisition Corporation.
Taking into account the wait and interest around this new vehicle, International Financial Services Center Authority (IFSCA) is additionally now hoping and looking to aid the listing of SPACs in the GIFT City of India. A new conference or consultation paper has been issued by IFSCA for this reason - the vital highlights of the SPAC in the GIFT City are:
a minimum public offer size of US$50 million;
compulsory sponsor holding of no less than 20% (of post issue paid up capital);
minimum application size should be of US$250,000 and;
a minimum subscription of no less than 75% of the offer size.
Companies need to be patient and see how these regulations advance further.
Presently, the greatest worry for Indian companies (with Indian resident promoters and shareholders) examining the SPAC course is the expense and regulatory contemplations overseeing transitioning into a SPAC. Usual structures to transition into a SPAC consists of a share swap or a merger of the target into the SPAC. Under both the choices, resident shareholders would ultimately surrender their holdings in the Indian target company in return for shares of the overseas SPAC/listed company - this would result, inter alia, in following two difficulties for the shareholders:
An explicit RBI approval might be required by Indian resident shareholders for transitioning into a SPAC which might include extensive vulnerability or uncertainty. Among other contemplations, either of the choices examined above is probably going to bring about a full round-trip structure, by which Indian resident shareholders might hold shares in an overseas company possessing significant majority stake in an Indian target. Gaining RBI approval is probably going to be a rigorous process and would rely upon benefits of each case and is probably going to be exposed to examination and scrutiny by the regulators. Moreover, vulnerability and uncertainty around timelines may likewise create worries for the SPAC — which needs to deploy its finances inside 18 to 24 months
Also, there would be capital gains tax for the shareholders under both the choices, regardless of the way that they might not have monetized their investment, and only got shares in the SPAC. This would be a reasonable obstruction for the shareholders to transition into a SPAC, and one might have to assess the potential tax results, and consider/find out substitute structures and conceivable possibilities relying upon facts of each case to guarantee smooth transition into the SPAC structure.
There is no doubt about the positive prospect and attractiveness of the SPACs. They have taken over the US Capital Market by storm. India is planning to develop a healthy environment to allow SPACs to operate in the Indian market as well. However, realistically speaking, the development of a sound regulatory and legal framework for operation SPACs in India may still be little far because of the already existing regulatory, administrative and legal challenges. Till then, all we can do is wait and watch how this pans out.