Special Purpose Acquisition Company (SPACs) have been gaining popularity since the past few years in the international capital markets regime. SPACs have been in existence for a very long time, however, the growth in SPACs that the markets have seen recently especially in the United States of America is tremendous. In India, SPACs have been a hot topic ever since the renewable energy giant ReNew Power has used the SPAC strategy to get itself listed in the Nasdaq exchange.
A SPAC is a special purpose acquisition company formed in order to raise capital funds through initial public offering (IPO). These are also commonly known as blank cheque companies. A SPAC is initially a shell corporation and the amount generated from the IPO is then stored in a trust fund account until the target operating business is identified. After the target company is identified, the consent of the SPAC’s shareholders is sought and those shareholders who do not want to sell their holdings are given an option to redeem them. Finally, the de-SPAC phase begins, wherein the acquisition transaction is completed.
The SPAC regime in India is once again in talks, especially after ReNew Power’s combination with RMG Acquisition Corporation II — which is a US-based SPAC Companies like Grofers, Flipkart, Videocon D2H and the travel agency Yatra have also indulged in or are in talks of indulging into US based SPACs, wherein the acquisitions would be multi-million-dollar deals. SPACs are generally used by start-ups to get listed easily. In light of these circumstances, it is imminent for India to redesign the SPAC regulations and GoPro SPAC, which currently is not the scenario in India.
Regulatory framework in India
- Companies Act, 2013[1]: After demonetisation, the Government has been keeping shell corporations under their thumbs. A Parliamentary Committee in 2018 had asked the Government to provide a proper definition for the term “shell corporation” to avoid any form of legal ambiguity to avoid unnecessary litigation. It generally takes 18-24 months to complete SPAC transactions. However, as per Section 248[2] of the Companies Act, 2013, the Registrar of Companies can eliminate a company’s name from registration if they fail to commence business operations within 12 months of its incorporation. This would lead to a lot of legal issues for the directors and promoters of the corporation. But, this problem can be easily avoided by revisiting the regulations and introducing amendments in Companies Act, providing exemptions to SPACs if the purpose of their registration is already made clear to the Registrar of the Companies, thereby clearing up any ambiguity which might arise due to the business operations not being able to commence within 1 year of the SPAC’s incorporation.
- Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009[3]: The SEBI regulations do not provide any relief to SPACs as well. According to Section 6(1)[4] of ICDR Regulations, as amended in 2018, state the eligibility criteria for public listing. For an IPO, a company must have[5]:
(i) Net tangible assets of at least Rs 3 crore for the preceding 3 years.
(ii) Average operation profits of the corporation must be at least Rs 15 crores during the preceding three years.
(iii) The net worth of the corporation must be at least Rs 1 crore in each of the preceding years.
SPACs definitely cannot meet these requirements and thereby get no acceptance under the SEBI regulations. SEBI has, however, since 2017 taken a leaf out of USA’s book and is starting to give recognition to SPACs. The Securities and Exchange Commission (SEC) of the United States of America supervises all SPAC transactions, SEBI must also take this into consideration and come up with a framework to regulate all SPAC transactions in India. This will lead to better augmentation of start-ups as SPACs are much more lucrative to investors than traditional IPOs. To achieve this, SEBI has mobilised a Committee to scrutinise the feasibility of pro-SPAC regulations in India.
Risk factors involved and the possible future of SPACs
Although, SPACs leads to easier and faster listing of start-ups, however, it means that the cumbersome and expensive listing process is not followed, thereby making it a huge risk for retail investors. As India lacks a specific framework for SPACs, the redemption of shares by the listed companies might not be permissible under the current regulations. Once again, India could take inspiration from the United States of America and bring about amendments in regulations to enable the investors to either redeem their holdings or claim a refund of the amount they have invested prior to the acquisition of the target corporation.
Another massive regulatory challenge that SPACs face in India are the stamp duty requirements. The SPAC route of listing is taken by start-ups as they are cost-effective in nature. However, the transactions through SPACs occur by way of reverse merger, which attracts heavy stamp duties. Due to this, the scheme of mergers also has to be floated and affirmed by the tribunals, which then leads to a lot of compliance issues of Companies Act, 2013. A possible exemption to SPAC transactions vis-à-vis stamp duties, could be an effective way of promoting the SPAC route of listing.
The abovementioned issues are further complemented by the RBI regulations for inbound mergers. It is most likely for the merger between SPAC and target company to be a form of cross-border merger. Therefore, this attracts various regulations as prescribed by RBI while dealing with inbound mergers. It is necessary for the transferee company to issue or transfer security to persons which are not residing in India as per the sectoral caps provided by the RBI guidelines. However, since SPACs do not have a specific business model to operate upon, the sector to which such SPAC belongs is subject to conjecture and speculation.
The taxation regime of India is also anti-SPAC in many ways. For example, the Indian tax authorities do not allow foreign listed SPACs to acquire Indian start-ups without capital gain tax. So, the capital gain is ensued at the hands of the shareholders. It is necessary to allow SPAC transactions in India. This would mean that both the SPAC and the target corporation would be based in India, therefore, such transaction would take the form of merger under a scheme of amalgamation. Such transactions are tax neutral in nature. This will also make sure that no tax liability is levied upon the shareholders involved.
On 10-3-2021 the consultation paper[6] on proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 was released. The provisions in this regulation do talk about SPAC listings under Indian Financial System Code (IFSC). As per the consultation paper, for a SPAC listing to be valid, the minimum amount of the offer should be USD 50 million. However, there is only one IFSC in India to date, in GIFT City, Gujarat, which is also not fully established and is still in the development phase.
Conclusion
It is about time for the Indian market regulators to adapt with the dynamics of modern market instruments and come up with pro-SPAC regulations, if India is to achieve its full capital market potential. Other Asian markets like Hong Kong and Singapore are already working on the regulations regarding SPAC listings and countries like USA, Australia, etc., have already seen a huge rise in SPAC listings eversince they came up with stringent regulations governing SPACs. As per Mckinsey’s research paper[7], India’s capital market has been sized up at a USD 140 billion. Further, through SPAC listings, it would be possible for India to bring its capital market potential to the fullest and being able to release USD 100 billion worth of funding each year.
Implementing de-SPAC transactions might seem to be very challenging, but it is not impossible and through proper amendments in the existing regulations and by rectifying the compliance and cost issues, India will soon see a rise in the numbers of SPAC listings.
† Pursuing BBA LLB with Business Law (Hons.), 4th-year student of law at ICFAI Law School, Dehradun, e-mail: karn1706@gmail.com.
[1] <http://www.scconline.com/DocumentLink/6ojfhdA2>.
[2] Ministry of Corporate Affairs, GoI, (last visited 13-5-2021) <https://www.mca.gov.in/SearchableActs/Section248.htm>.
[3] <http://www.scconline.com/DocumentLink/Xj38ATHA>.
[4] <http://www.scconline.com/DocumentLink/4u311Td3>.
[5] Securities and Exchange Board of India, (last amended on 8-1-2021) <https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-last-amended-on-january-08-2021-_41542.html>.
[6] International Financial Services Centres Authority (10-3-2021) <https://ifsca.gov.in/Viewer/ReportandPublication/9>.
[7] Nitin Jain, Fumiaki Katsuki, Akash Lal and Emmanuel Pitsilis, Deepening Capital Markets in Emerging Economies, (12-4-2017) <https://www.mckinsey.com/industries/financial-services/our-insights/deepening-capital-markets-in-emerging-economies>.