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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, 2021[1].
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 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, 2018[1] 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.
[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)