By Neha Goyal and Priyanshi Mittal
The Special Purpose Acquisition Vehicles (SPACs) have been the rage in the United States for a few months. Though the concept has existed for nearly a decade, the year 2020 has been a record year for SPAC IPOs which has already been surpassed by the SPAC deals of 2021. As of 31st March 2021, the number of SPAC IPOs in 2021 is a whopping 298 which is higher than 248 listings in the previous year.
A SPAC is a ‘blank cheque company’, without any financial history, which is set up merely to raise funds through an IPO and eventually acquire another company to help it go public without hitting the longer and traditional IPO mechanism. A SPAC is a publicly traded entity that is supported by sponsors who have well-established track records. The sponsors invest the capital raised through the SPAC listing into a target private company that has high growth potential. They usually have a period of two years to identify and invest the funds failing which they are required to return the capital to the investors. These funds are kept in escrow which can be accessed only during the acquisition of or merger with the target company.
In this article, the authors shall discuss the leverage that SPACs provide over the traditional IPO mechanism and then analyze the Indian legal framework with respect to the possibility of having SPACs in India.
Why do companies choose the SPAC route over IPO listing?
The SPACs offer a novel way of public listing to the companies and distinct advantages over the traditional IPO process. They provide greater market certainty in the pricing of the stocks, lesser transaction costs, flexible deals, larger access to the market, stronger brand value and market confidence in substantially lesser time.
The sudden gain in momentum is partly attributed to the extreme market volatility caused due to worldwide lockdown. Many companies all across the globe had deferred their IPOs due to the pandemic but the SPACs are believed to provide them a way out by helping them gain access to the capital even at times of high volatility.
Regulatory Challenges in India
The Indian companies have long demanded approval for a direct listing on the overseas stock exchanges but India still lacks a detailed framework on the same. Meanwhile, many companies have sought alternatives and SPACs have come to provide an option. Recently, SEBI has formed an expert committee to look into the feasibility of SPACs in India. However, to allow SPAC listings in India, it will require a revisit of a host of Indian laws.
Under Section 2(71) of the Companies Act 2013 (“The Act”), “a company which is a subsidiary of a company, not being a private company” is deemed to be a public company. Since SPACs are eventually publicly listed entities, private companies acquired by them shall be deemed to be public companies under the Act.
The Act does not define shell companies. It has also done away with the ‘other objects’ clause under Section 4(1)(c). Earlier, a company could split its objects into the ‘main’ objects and the ‘other’ objects. The ‘other objects’ clause could enable a SPAC to define its objectives with more flexibility. However, under the present laws, it is mandatory for the companies to specify the objects in the memorandum of association, a condition which a SPAC with an unidentified target company will find difficult to comply with.
Section 248(1) of the Act empowers the Registrar of Companies to strike off the name of a company that fails to commence business within one year of its incorporation. A typical SPAC usually takes up to 2 years to identify and acquire the target. However, Rule 3 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 provides a breather by putting a bar on the removal of names of listed entities.
Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Regulation 6 lays down the eligibility criteria for making an initial public offer. It requires a company to have net tangible assets of at least 3 crore rupees, average operating profits of 15 crore rupees and net worth of at least 1 crore rupees; in each of the three preceding years to be eligible to make an IPO. The absence of these requirements in most of the typical SPACs will keep them from listing in India.
Apart from these, there are several other considerations like tax concerns including capital gains tax and compliances under FEMA which will require overhauling to bring in the SPAC regime in the country.
Investing in SPAC is certainly not risk-free either for the sponsors or the retail investors. According to SPACInsider, out of 298 SPAC listings that happened in 2021, only 3 have announced their acquisition targets i.e. 295 companies are searching for their potential targets. From 248 SPACs that completed their IPOs in the year 2020, only 107 have been able to announce or complete the acquisitions. If the SPAC listings maintain the same pace, the required number of target companies by the end of 2021 might reach over a thousand companies. However, the number of lucrative targets is bound to remain limited. If the sponsors are unable to find a target or if the shareholders do not approve the deal, the sponsors are hardly left with any recourse. Furthermore, in the US, retail investors are allowed to redeem their shares and claim a refund even before the acquisition. However, such an option might not be available to Indian investors for listed entities.
The practice of going public through SPACs instead of taking the longer route via IPO listing has become the new normal in the United States. With a strong SPAC regime, India too can embark upon this new trend. Start-ups have an important role to play in the Indian economy. Having a robust SPAC regime will help India in building a strong startup ecosystem. It will boost the market sentiments and provide new channels for capital growth. It will also lead to increased foreign inflows to help India in its journey towards a $5 trillion economy.
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