Special Purpose Acquisition Companies or SPACs are popularly known as "blank cheque" companies due to the purpose for which they are incorporated. SPACs are incorporated for listing on equity markets but do not own any assets or business since their primary objective is to effect a merger, amalgamation or acquisition of shares or assets of a company having legitimate business operations. SPACs raise funding from the process of Initial Public Offering (IPO) to subsequently invest in a company while avoiding the arduous procedures involved in listing through traditional means. Typically, upon formation, SPACs execute share swaps or merger proceedings. Currently, SPAC's are regulated and recognised in the United States of America, United Kingdom, Canada, Singapore and Malaysia.
Earlier this year, the Primary Market Advisory Committee of Security Exchange Board of India (SEBI) was formed to assess the viability and associated risks of such structures in the Indian market. Accordingly, the International Financial Services Centre Authority (IFSCA) published a consultation paper on the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 which was subsequently codified into law on July 19, 20211.
SPAC Regulations
The International Financial Services Centres Authority (Issuance
and Listing of Securities) Regulations, 2021 ("IFSCA
Regulations") have paved the way for a much needed
regulatory clarity on SPAC. The IFSCA Regulations regulate not only
the sponsor of SPAC but also the SPAC transactions, business
combinations, fund management or merchant banking activities. The
public issue may be underwritten which shall be disclosed in the
offer document. Similarly, the the IFSCA Regulations also list the
initial disclosures which are to be mentioned in the offer document
including risk factors, capital structure, redemption rights,
liquidation, objects of the issue, use of proceeds, interim use of
funds, related party transactions etc. Additionally, at least 50%
of the underwriting commission shall be deferred until successful
completion of the business combination, and shall be deposited in
the escrow account.
Other important regulatory aspects introduced by IFSCA Regulations are as follows:
S. No. |
Particulars |
Regulation |
|
SPAC Eligibility |
|
|
Sponsor Eligibility |
Sponsor should not have been debarred from accessing the capital market, a willful defaulter or a fugitive economic offender. |
|
Offer Timing |
Offer shall be made within a period of 1 year from the date of issuance of observations by IFSCA. |
|
Offer Period |
The initial public offer shall be kept open for 3-10 working days only. |
|
Issue Size |
|
|
Pricing |
The price of the equity shares in the IPO shall not be less than USD 5 per share. |
|
Application & Allotment |
|
|
Management of proceeds |
|
|
Prospectus |
The SPAC is required to file a detail prospectus with the recognized stock exchange containing disclosures such as:
|
|
Shareholders' Approval |
|
|
De-SPAC transaction |
|
|
Warrants |
In the event warrants have been issued in the IPO, the SPAC is required to comply with the following:
|
|
Post De- SPAC transaction |
|
Going forward, the IFSCA Regulations could potentially put India on
the map of reinventing the path of investment not just in the
Indian market but also for overseas listing, which is currently
restricted under the extant Indian laws. SPACs could potentially
provide Indian entities access to foreign capital. However, despite
the introduction of IFSCA Regulations there still exist legal
impediments towards that end.
Existing impediments
Listing Restrictions
Section 23 of the Companies Act 2013 was amended in 2020, to enable
listing of companies in foreign jurisdictions; however, SEBI
permits equity listing of only operational companies with reported
and proper financials. Notably, Regulation 6 of the SEBI (Issue of
Capital and Disclosure Requirements) Regulations,
20181 sets out the conditions for listing in equity
markets. The provision requires an issuer to have net tangible
assets of at least INR 30 million in each of the preceding three
(3) years, and distributable profits for at least three of the
preceding five (5) years, and a net worth INR 10 million. Till its
amendment, Regulation 6 of the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018 shall continue to pose a
great threat to the overall permissibility SPACs in India.
Operational Restrictions
As per Section 248 of the Companies Act 2013, any company failing
to commence its business operations within a period of 1 year from
the date of incorporation is liable to be struck off from the
register of companies by the Registrar of Companies. Given the fact
that SPACs do not own any kind of business prior to a De-SPAC
transaction (one which entails acquisition of an existing
business), the provisions of the Companies Act 2013 are yet to
incorporate a company of this nature.
Conclusion
Besides the above, there could be subjective restrictions such as
levy of high stamp duty foreign exchange control and tax
implications. Sponsors and shareholders of SPAC will be required to
be mindful of the taxability of capital gains which may incur on
the swap or transfer of shares of the SPAC. The quantum taxability
on the transfer would depend the type of business combinations,
residential status of the shareholders mode of transfer etc. The
IFSCA Regulations holistically regulate the pre and post De-SPAC
Transactions which help manage companies to seek and implement
lucrative funding opportunities. As a result, it is predicted that
India's start-up ecosystem could heavily benefit from the
increasing permissibility on floating of SPACs. However, an
amendment in the extant laws to form in line with the IFSCA
Regulations is a much awaited for the marketability of such
securities in India.
Footnotes
1. The International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (https://ifsca.gov.in/Viewer/Index/202)
2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-_40328.html)
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