This article is written by Mansi Dixit, pursuing a Diploma in General Corporate Practice: Transactions, Governance, and Disputes from Lawsikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).

Introduction

Special Purpose Acquisition Companies (SPACs) are back on Wall Street and this time around they are not just louder sound than ever but are also being heard more than ever and that too globally, shocking all pundits. In 2020, SPACs in the United States shot up to $ 84 billion, which is six times more than what was in 2019.  In the first quarter of 2021, the SPACs reached the $ 100 billion benchmark booming Wall Street. 

Developments are riding the waves to shores other than the US and similar large economies. With India’s start-up culture booming like never before, anticipating to make it a unicorn rich country in the coming two decades, it is no news that the off-shore SPAC culture is the talk of the town in the developing Indian economy. The February year 2021 saw a major Indian overseas listing of renew power through SPACs even though the current Indian legislation is no less than a thorn in the road of domestic SPACs.

This article gives an overview of what SPACs are and discusses the current regime in India for the possibility of SPACs and the hindrances they face in the Indian legal ecosystem, listing Indian companies on the foreign stock exchange, a glance at GIFT City’s proposed regulations for SPACs, and news of new SPAC regulations in Singapore.

What are SPACs? 

Special Purpose Acquisition Company (SPAC) is a shell company i.e. an inactive company used as a vehicle for various financial manoeuvres or kept dormant for future use in some other capacity, also as known as a black-check company, which list on the stock exchange by issuing an initial public offering (IPO) with a sole objective to acquire another company (Target) and later demerge leaving the Target listed on the stock exchange without having to which list through a traditional IPO.

Founders

The founders of a SPAC generally have experienced business executives, hedge fund managers, investment bankers, corporate lawyers, etc. with such a reputation, that their mere name instills confidence in the investors to invest in the SPAC, which is otherwise nothing but a shell company. They are the selling point of the SPAC. Bill Ackman, an American investor and hedge fund manager, who had backed three SPACs as of 2015, including the SPAC that took Burger King, is one such example. 

Objective

Since SPACs are shell companies, they do not have any profitable operations or tangible assets. The primary and sole objective of such companies is to list on a stock exchange and raise funds, and then use those funds to acquire an unlisted operational company i.e. the target, making huge profits in the process and then de-merge from target leaving the target listed on the stock exchange without having to go through the traditional stock launch.

Capital structure

The founders of the SPAC provide the starting capital and the rest is raised typically through an IPO, where the public invests the SPAC, knowing that the company itself has no operations and its mere objective is to acquire the target and is granted shares and warrants in return. The raised funds are put in a trust account and are used to cover the expenses that are incurred in the process of acquiring the target and to compensate the management of SPAC. 

• Founders share

The founders of the SPAC purchase founder shares at the onset of the SPAC registration and pay nominal consideration for the number of shares that results in a large percentage ownership stake in the outstanding shares after the completion of the IPO. The shares are intended to compensate the management team, who are not allowed to receive any salary or commission from the company until an acquisition transaction is completed. 

• Public units
• Warrants

Issuing the IPO

The management of the SPAC generally engages with an investment bank to handle the IPO. The banker’s fee is pre-agreed upon between the bank and the SPAC’s management as a certain percentage of the IPO. 

As for the prospectus, it focuses on flaunting the achievements of the founders rather than on the company’s operations and financial history as the SPAC does not have any history and revenue reports. All proceeds from the IPO are held in a trust account until a private company is identified as an acquisition target.

Acquiring a target

After capital is raised through the IPO process a target is identified to acquire, which is put to vote and those who do not believe in the vision of the management walk away with their money, although it is then upon the management to make the difference. The management then gets to the acquiring process. This entire process takes somewhere between 18-24 months. The period may vary depending on the company and industry.

Hindrances for SPACs in the Indian regime

Companies Act, 2013

The Companies Act, 2013 currently does not define the term “Shell Company”. The “object clause” in the Memorandum requires that the company which is being incorporated has to state the object for which it is being incorporated. As for SPACs, the only objective for their incorporation is to acquire target.  This is one of the major reasons why SPACs are impossible under Indian laws. 

Section 248 of the Companies Act, 2013 gives the Registrar of companies the power to remove the name of the company from the register of companies if the company fails to commence its business operations within one year of its incorporation. A SPAC takes around 24-36 months to complete the process. The sponsors need this time to identify the most optimal target so that they are maximizing the shareholder’s wealth. This clause proposes a major hindrance for SPACs in India.

Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 

Section 26 sets conditions for an initial public offer.  These require the issuer to have:

1. it has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty per cent. are held in monetary assets: 

Provided that if more than fifty percent. of the net tangible assets are held in monetary assets, the issuer has made firm commitments to utilise such excess monetary assets in its business or project; 

2. it has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three out of the immediately preceding five years: 

Provided that extraordinary items shall not be considered for calculating distributable profits; 

3. it has a net worth of at least one crore rupees in each of the preceding three full years (of twelve months each);
4. the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year; 
5. if it has changed its name within the last one year, at least fifty per cent. of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

It is more than obvious that SPACs cannot meet any of the above conditions. They do not have any operational profits or non-monetary tangible assets. Above all, most SPACs cannot wait for three years before setting out for an IPO. 

Listing Indian companies on foreign stock exchange

In the era before liberalisation, privatisation and globalisation, it was only a dream that a foreign company could enter the Indian market without complying with a large number of licenses and other restrictions that haunted the Indian marketplace. Foreign companies in India were rare if not, unheard of. After 1991, India opened up and so did its markets. It was now easier for foreign companies to enter the Indian market. It also allowed for a whole new segment in the legal market with areas like mergers and acquisitions entering the picture.

Even though Indian regimes do not allow the formation of SPACs, but foreign SPACs can still acquire Indian companies and get them listed on foreign stock exchanges like the London Stock Exchange, NASDAQ, and New York Stock Exchange. 

This requires the execution of an outbound merger in compliance with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, and Section 234 of the Companies Act, 2013, according to a National Company Law Tribunal’s sanctioned scheme of merger. According to the De-SPAC transaction, the shareholders of the Indian target company will receive shares of the combined entity as merger consideration and the Indian office of the Indian target will be treated as a foreign company/ branch office of the combined entity. Such outbound merger is assumed to have received prior Reserve Bank of India’s approval if the transaction is undertaken in compliance with the conditions prescribed under the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, which, inter alia, include compliance with the Foreign Exchange Management Act (Overseas Direct Investment) Regulations. Apart from Reserve Bank of India’s approval, a key consideration, in this case, will be obtaining National Company Law Tribunal’s approval, given that the SPAC entity is a shell and the primary objective of the merger is overseas listing and access to funds. 

GIFT City’s SPAC Regulations : a new light of hope in India?

The discussion of allowing the formation of domestic SPAC has been going on now for some time among legislators in India but has not borne any fruit. But recently, Gujarat International Finance Tech-City (GIFT City) has proposed in its consultation paper, an SPAC framework allowing the listing of SPACs by the International Financial Services Centres Authority i.e., GIFT City’s SPAC regulator which definitely has given a sense of hope. Two of the key regulations are making it possible for the development of domestic SPACs:

1. Regulation 66 of the proposed framework defines the eligibility for SPACs to raise capital by the way of IPO of specified securities on recognised exchange(s), only if:

1. The primary objective of the issuer is to effect a merger or amalgamation or acquisition of shares or assets of a company having business operations;
2. The issuer does not have any operational business. 
3. Regulation 68 of the proposed Regulation 68 of the IFSCA’s Consultation Paper provides that:

“IFSCA may consider the proposed listing of a SPAC issuer on a recognized stock exchange on a case-by-case basis.” 

(emphasis supplied)

This provision gives the power to the International Financial Services Centres Authority to pick and choose the ventures which should be allowed to take on the SPAC route.

SPAC in Singapore

Singapore is the go-to economy when it comes to incorporating a company with many parent companies of the Indian companies or they incorporated there (for example, Flipkart is an Indian e-commerce company, headquartered in Bangalore, Karnataka, India, and incorporated in Singapore as a private limited company) and now, it too has caught the SPAC fever. The country has come up with new SPAC regulations allowing investors ease in doing direct deals. Following the new framework, SPACs were allowed to be listed on the Singapore Exchange (SGX) starting September 3, 2021.  The Singapore Exchange decided on an SG$150 million minimum capitalisation, in contrast with the Nasdaq Global Market’s $75 million and the New York Stock Exchange’s $100 million.  The point to examine will be thought as to how this will impact Indian companies which have their parent companies incorporated in Singapore. 

Conclusion

The glee associated with SPACs does raise some scepticism and that is; why countries like India are still in a dilemma whether to allow such ventures in the country or not. The corporate boardrooms and the offshore economies are cooking on gas for SPAC to become the new normal around the world as they give a much easier way to list companies and save them from having to go through the arduous IPO process. 

The Indian regime does not presently allow SPACs to form in the country but that has not halted the SPAC transactions to happen in the country with several examples of India-focused SPAC entities such as trans-India acquisition, constellation alpha capital, Phoenix India Acquisition, etc. Although, their success, however, has been limited.  India is predicted to be unicorn-rich in the next two decades and is it imminent for the authorities to formalize the required regulations so that it can reach its full potential. GIFT City’s proposed regulations do bring a light of hope but still leave the future of SPACs in India in limbo. Certainty can only be expected when the admiration formulates some guidelines that allow such corporate entities to exist and these laws need to be India specific to derive the highest value from them.

References 

• SPACs break 2020 record in just 3 months, but the red-hot industry faces challenges ahead
• Wall Street’s $100 Billion SPAC Boom Upends the League Tables
• CCI gives nod to ReNew Power merger with RMG II
• Oxford Languages | The Home of Language Data
• Ackman’s Pershing Square a Quiet Winner in Burger King’s Tim Hortons Deal
• Special Purpose Acquisition Company (SPAC) – Overview, How It Works.
• Implementation of SPACs in India – Key Regulatory challenges
• Section 248 of Companies Act, 2013 – Power of Registrar to remove the name of the company from register of Companies
• SPACs: What You Need to Know
• ICDR) Regulations, 2009
• SPAC’S FUTURE IN INDIA: WORTH THE HYPE OR NOT?
• FEMA Cross Border Merger Regulations Issued By RBI
• Using SPAC Vehicles as a Means of Listing Outside India
• International Financial Services Centres Authority
• https://www.irccl.in/post/gift-city-s-spac-regulations-a-key-to-india-s-spac-framework?utm_campaign=c1d47ebe-0330-4799-8c8c-d2eff83e6452&utm_source=so&utm_medium=mail&cid=82bd79a7-149e-4379-a45b-6f1467d24468
• New Singapore SPAC Framework Attracts Investors
• Changes to Singapore’s Spac framework to draw regional interest | Alternatives
• Everything You Want To Know About SPACs – Blog by Tickertape

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