SPAC is an abbreviation for the term Special Purpose Acquisition Company. The present era isn’t the first time these instruments have been used; they have seen a comeback and a relatively strong one at that. So much so that even third-world countries that predominantly do not have a conducive legal framework for SPAC usage have also experienced a sudden increase of the same. They seem to be the next big thing in the world of investments, mergers, and acquisitions, and pretty much anything which typically seeks funding through an initial public offer (IPO).
SPACs, when described in their simplest form, are
shell companies that do not have actual operations but are set up with the sole
purpose of acquiring a specific target that is identified. They are
sector-specific and have a defined timeline for the said acquisition. The
individuals who initiate such companies’ operations are seasoned investors,
private equity (PE) firms, etc.… who
are termed, sponsors.
SPACs right now is the easiest route for a company
that does not have the resources, the time, or the desire to launch an IPO for
attaining public funding. The process is far more straightforward, and the
company seeking the financing also benefits from the sponsors’ expertise. The
steps for the formation of the SPAC are as follows. Initially, a
SPAC is formed by well-known investors, private equity firms, and
venture capitalists. This is followed by the SPAC being put through the IPO
process. At this stage, the target company is not identified yet by the
sponsors as that would require many more statutory requirements to be met. Once
the SPAC is approved, the time duration to find and acquire a target company is
two years, and if no such deal is carried out, the money raised for the IPO,
which was put in escrow, is now returned to the shareholders. However, suppose
the deal goes through, and the requirement of a majority shareholder approval
is met. In that case, the process nears completion, and the listing of the
target company on the stock exchange happens. Internationally, especially in the
US, the figures indicate a preference for SPAC usage, and the returns obtained
when the same method is used are skyrocketing. In India, the trend though
present does not seem to be moving at a similar pace. This does not mean that
there is no hope for a better performance of SPACs in India. The
concept of SPAC was introduced into India through some old deals, one of them
being the Yatra deal and then Videocon.
Regulatory Hurdles
The present legal system is not conducive to the
inception and growth of SPACs. This hindrance is not caused by just one statute
but by many statutes and the lack of a governing law solely applicable to
SPACs.
Antitrust Concerns
The SPAC
attracts the attention of the Competition Commission of India when it crosses
certain thresholds specified by Section 5 of the Competition Act, 2002. This section addresses combinations
and by virtue of crossing the thresholds mentioned the SPAC is treated as one. According
to the Act, it is now in a position to affect India’s competitive environment
adversely. However, to attain the Commission’s assent, inter alia, the sponsors have to disclose certain
information such as the nature of the voting rights enjoyed by the shareholders
of the entity formed at the end, the proposed acquisitions, and transactions to
be undertaken; etc. Most sponsors would not be willing to reveal the target as
that would affect their business prospects and the price of acquisition of the
target entity. Further, and more often, the case is such that there is no
target in sight yet. In such circumstances, it is difficult to disclose the
required information.
Company Law Concerns
The primary setback comes from the Companies Act, 2013,
wherein the crucial regulatory concern is the disapproval with which regulators
view shell companies. The recently conducted drive where shell companies were identified, and their identity struck off,
is an example. As SPACs don’t have actual operations in their existence, they
are essentially shell companies. Section 248 of the Act provides for the
Registrar to remove such companies from the record. Thus, this Section must be
amended, or a workaround be provided for SPACs to be initiated and encouraged
in India.
Further, the Memorandum of Association requires that
the company’s object be mentioned when the company approaches the Registrar. But SPACs don’t have such an
“object” as such Hence, this
proves to be another problem.
FEMA Concerns
The Foreign Exchange Management Act plays a role in the caps imposed by the Reserve Bank of India (RBI) with regard to the amounts transacted by the residents of the country. This is a point for consideration as currently, most SPACs are based abroad and seek to merge with Indian companies, and the shareholders receive the shares of the new company. The total amount remitted is capped at USD 250,000. If the deal involves a more significant amount, the approval of the RBI is required. Such approvals take very long, which defeats one of the purposes and advantages of SPAC, which is to reduce the period for formalities and compliances required to secure funding or to go public.
Given the present state of the country’s statutes, it is
evident that a SPAC cannot be incorporated in India. Conversely, the SPAC deals
that did take place had the company incorporated abroad. The relaxation in the Foreign
Exchange Management Act (FEMA) Rules
allows companies incorporated elsewhere to engage with Indian shareholders.
However, such a transaction is not tax neutral. There are specific tax rates
laid out. These rates cannot be predetermined as the value of the SPAC is not
available to the shareholders, and such high bills make come as a shock to the shareholders. This may even lead to Indian
entrepreneurs struggling to pay the requisite tax applicable on transactions.
Another benefit of SPAC, which is to reduce the costs incurred compared to IPOs,
is lost due to this taxation requirement.
Listing Concerns
The Issue
of Capital and Disclosure Requirements Rules issued by SEBI govern the IPO
process. According to these rules, for a company to be listed, information such
as profits for 3 years, tangible assets etc., needs to be disclosed. It is
impossible to disclose this information as SPACs are shell companies. However, the
listing of SPACs at the International Financial Services Centres Authority
(IFSCA) has been made possible through the IFSCA Regulations (Issuance and
Listing of Securities), 2021 issued by it. However, there are specific issues
that are faced with the same.
In case the
SPAC process is a failure, liquidation of the escrow account opened as a part
of the process shall be commenced. However, the sponsors of the SPAC will not
be entitled to a share of the proceeds from liquidation. This is
counterproductive as this dissuades them from forming other SPACs. SPACs can be
unsuccessful for several reasons, and it is not always due to the actions of
the sponsors. Penalizing them seems irrational. Venture capital funds are
barred from investing due to the Alternative Investment Fund Regulations issued
by SEBI, according to which they are allowed to invest only in venture capital
undertakings. This is a loss to the entities that choose the SPAC route, as
venture capital funds are a huge source of capital and technical know-how. The listing
regulations are also ambiguous concerning certain aspects. They lay down specific
qualifications for persons to be eligible as sponsors. One of them is that they
need to have experience in activities related to merchant banking, setting up
SPACs, fund management and business combinations. The ambit of who falls under
fund management according to the regulations has not been specified. It is
unclear whether private equity and venture fund managers can be a part of the
process.
The Future for SPAC in India
The facility of the SPACs being listed on stock exchanges recognized by the International Financial Services Centres Authority (IFSCA) has been created through the Proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021.[1] The rules intend on SPACs being listed on the Gujarat Finance Tec-City (GIFT). The rules allow the listing of SPACs incorporated in other countries, but apart from the ones mentioned above, there are further specific requirements. If there is a direct acquisition by an Indian company, there will be a secondary sale of shares. The shares being transferred to foreign companies and even Indian ones would still be subject to tax. There is an exemption for the foreign companies as, if they use the route of treaty jurisdiction for investment; they need not pay said tax.
The creation of a favorable financial eco-system with
steps like the ones described above is essential as there is potential which
can be tapped in the unicorn space of India, which is incredibly beneficial for
both the startup and the economy of the country. India currently has 38 unicorns and about
40,000 startups.
Conclusion
Given that SPACs in India has never been able to fully operate in their true sense due to regulatory constraints, there may be a fair chance of them being revolutionary. This is because of the high number of pre-existing unicorns and startups who require funding but aren’t mainly advocators of the IPO process. The slew of startups in India does not seem like it may disappear anytime soon. Further, the decline in the performance of SPACs in countries like the US can mainly be attributed to the fact that there is now a decrease in available targets. Therefore, the attention of sponsors is now turning towards Asia.
*The Author and Co-Author are 4th year (2018-2023) Undergraduate Students of Business Administration and Law at Symbiosis Law School, Hyderabad
Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author and co-author and not to the Jurisedge Academy.
Readers may submit his/her blog for publication. Click Here or Scan the QR Code to submit your Manuscript.
[1] Consultation Paper on Proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021.
Saurabh Kumar
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Authors- Prashastha Cormaty & Surabhi Srinivasan*
Introduction
SPAC is an abbreviation for the term Special Purpose Acquisition Company. The present era isn’t the first time these instruments have been used; they have seen a comeback and a relatively strong one at that. So much so that even third-world countries that predominantly do not have a conducive legal framework for SPAC usage have also experienced a sudden increase of the same. They seem to be the next big thing in the world of investments, mergers, and acquisitions, and pretty much anything which typically seeks funding through an initial public offer (IPO).
SPACs, when described in their simplest form, are shell companies that do not have actual operations but are set up with the sole purpose of acquiring a specific target that is identified. They are sector-specific and have a defined timeline for the said acquisition. The individuals who initiate such companies’ operations are seasoned investors, private equity (PE) firms, etc.… who are termed, sponsors.
SPACs right now is the easiest route for a company that does not have the resources, the time, or the desire to launch an IPO for attaining public funding. The process is far more straightforward, and the company seeking the financing also benefits from the sponsors’ expertise. The steps for the formation of the SPAC are as follows. Initially, a SPAC is formed by well-known investors, private equity firms, and venture capitalists. This is followed by the SPAC being put through the IPO process. At this stage, the target company is not identified yet by the sponsors as that would require many more statutory requirements to be met. Once the SPAC is approved, the time duration to find and acquire a target company is two years, and if no such deal is carried out, the money raised for the IPO, which was put in escrow, is now returned to the shareholders. However, suppose the deal goes through, and the requirement of a majority shareholder approval is met. In that case, the process nears completion, and the listing of the target company on the stock exchange happens. Internationally, especially in the US, the figures indicate a preference for SPAC usage, and the returns obtained when the same method is used are skyrocketing. In India, the trend though present does not seem to be moving at a similar pace. This does not mean that there is no hope for a better performance of SPACs in India. The concept of SPAC was introduced into India through some old deals, one of them being the Yatra deal and then Videocon.
Regulatory Hurdles
The present legal system is not conducive to the inception and growth of SPACs. This hindrance is not caused by just one statute but by many statutes and the lack of a governing law solely applicable to SPACs.
Antitrust Concerns
The SPAC attracts the attention of the Competition Commission of India when it crosses certain thresholds specified by Section 5 of the Competition Act, 2002. This section addresses combinations and by virtue of crossing the thresholds mentioned the SPAC is treated as one. According to the Act, it is now in a position to affect India’s competitive environment adversely. However, to attain the Commission’s assent, inter alia, the sponsors have to disclose certain information such as the nature of the voting rights enjoyed by the shareholders of the entity formed at the end, the proposed acquisitions, and transactions to be undertaken; etc. Most sponsors would not be willing to reveal the target as that would affect their business prospects and the price of acquisition of the target entity. Further, and more often, the case is such that there is no target in sight yet. In such circumstances, it is difficult to disclose the required information.
Company Law Concerns
The primary setback comes from the Companies Act, 2013, wherein the crucial regulatory concern is the disapproval with which regulators view shell companies. The recently conducted drive where shell companies were identified, and their identity struck off, is an example. As SPACs don’t have actual operations in their existence, they are essentially shell companies. Section 248 of the Act provides for the Registrar to remove such companies from the record. Thus, this Section must be amended, or a workaround be provided for SPACs to be initiated and encouraged in India.
Further, the Memorandum of Association requires that the company’s object be mentioned when the company approaches the Registrar. But SPACs don’t have such an “object” as such Hence, this proves to be another problem.
FEMA Concerns
The Foreign Exchange Management Act plays a role in the caps imposed by the Reserve Bank of India (RBI) with regard to the amounts transacted by the residents of the country. This is a point for consideration as currently, most SPACs are based abroad and seek to merge with Indian companies, and the shareholders receive the shares of the new company. The total amount remitted is capped at USD 250,000. If the deal involves a more significant amount, the approval of the RBI is required. Such approvals take very long, which defeats one of the purposes and advantages of SPAC, which is to reduce the period for formalities and compliances required to secure funding or to go public.
Given the present state of the country’s statutes, it is evident that a SPAC cannot be incorporated in India. Conversely, the SPAC deals that did take place had the company incorporated abroad. The relaxation in the Foreign Exchange Management Act (FEMA) Rules allows companies incorporated elsewhere to engage with Indian shareholders. However, such a transaction is not tax neutral. There are specific tax rates laid out. These rates cannot be predetermined as the value of the SPAC is not available to the shareholders, and such high bills make come as a shock to the shareholders. This may even lead to Indian entrepreneurs struggling to pay the requisite tax applicable on transactions. Another benefit of SPAC, which is to reduce the costs incurred compared to IPOs, is lost due to this taxation requirement.
Listing Concerns
The Issue of Capital and Disclosure Requirements Rules issued by SEBI govern the IPO process. According to these rules, for a company to be listed, information such as profits for 3 years, tangible assets etc., needs to be disclosed. It is impossible to disclose this information as SPACs are shell companies. However, the listing of SPACs at the International Financial Services Centres Authority (IFSCA) has been made possible through the IFSCA Regulations (Issuance and Listing of Securities), 2021 issued by it. However, there are specific issues that are faced with the same.
In case the SPAC process is a failure, liquidation of the escrow account opened as a part of the process shall be commenced. However, the sponsors of the SPAC will not be entitled to a share of the proceeds from liquidation. This is counterproductive as this dissuades them from forming other SPACs. SPACs can be unsuccessful for several reasons, and it is not always due to the actions of the sponsors. Penalizing them seems irrational. Venture capital funds are barred from investing due to the Alternative Investment Fund Regulations issued by SEBI, according to which they are allowed to invest only in venture capital undertakings. This is a loss to the entities that choose the SPAC route, as venture capital funds are a huge source of capital and technical know-how. The listing regulations are also ambiguous concerning certain aspects. They lay down specific qualifications for persons to be eligible as sponsors. One of them is that they need to have experience in activities related to merchant banking, setting up SPACs, fund management and business combinations. The ambit of who falls under fund management according to the regulations has not been specified. It is unclear whether private equity and venture fund managers can be a part of the process.
The Future for SPAC in India
The facility of the SPACs being listed on stock exchanges recognized by the International Financial Services Centres Authority (IFSCA) has been created through the Proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021.[1] The rules intend on SPACs being listed on the Gujarat Finance Tec-City (GIFT). The rules allow the listing of SPACs incorporated in other countries, but apart from the ones mentioned above, there are further specific requirements. If there is a direct acquisition by an Indian company, there will be a secondary sale of shares. The shares being transferred to foreign companies and even Indian ones would still be subject to tax. There is an exemption for the foreign companies as, if they use the route of treaty jurisdiction for investment; they need not pay said tax.
The creation of a favorable financial eco-system with steps like the ones described above is essential as there is potential which can be tapped in the unicorn space of India, which is incredibly beneficial for both the startup and the economy of the country. India currently has 38 unicorns and about 40,000 startups.
Conclusion
Given that SPACs in India has never been able to fully operate in their true sense due to regulatory constraints, there may be a fair chance of them being revolutionary. This is because of the high number of pre-existing unicorns and startups who require funding but aren’t mainly advocators of the IPO process. The slew of startups in India does not seem like it may disappear anytime soon. Further, the decline in the performance of SPACs in countries like the US can mainly be attributed to the fact that there is now a decrease in available targets. Therefore, the attention of sponsors is now turning towards Asia.
*The Author and Co-Author are 4th year (2018-2023) Undergraduate Students of Business Administration and Law at Symbiosis Law School, Hyderabad
Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author and co-author and not to the Jurisedge Academy.
Readers may submit his/her blog for publication. Click Here or Scan the QR Code to submit your Manuscript.
[1] Consultation Paper on Proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021.
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