In recent years, SPACs, or ‘Special Purpose Acquisition Companies’, have snaked their way into the lexicon of every investor worth its salt. SPACs are the shiniest new ‘instrument’ on the block and the numbers lend into the hype; for instance, 2020 witnessed the execution of a record 248 SPACs raising a collective USD 83 billion on NASDAQ1, even as the world succumbed to a pandemic. Further, it is estimated that there are now close to 400 SPACs on the market with more than USD 120 Billion on their balance sheets2. Investors, always on the look-out for ever more creative and flexible investment structures, have embraced SPACs unmitigatedly. Globally, SPACs have become the investment vehicle of choice for raising seed money by start-ups and the like engaged in diverse sectors such as technology, media, healthcare, etc.
With the popularity of the instrument established, the next obvious step is understanding the nature of a SPAC. SPACs, to be concise, are shell companies, and more specifically, entities set up with the sole aim of acquiring a target company(ies), usually within a specific sector or industry accompanied by a defined timeline. Thus, as may be self-explanatory, SPACs also tend to be referred to as ‘blank cheque companies’. While, similar to a shell company, SPACs do not undertake any regular commercial operations or garner revenue, they differ from the former due to the aim for which they have been set up i.e acquisition. A SPAC is incorporated for the purpose of raising capital in an Initial Public Offering (IPO) for the ultimate acquisition of one of more target companies within the prescribed timeline. Once the money has been raised from the public, it is kept secure in an escrow account, to be utilised at the time of the acquisition(s)3. This acquisition can be in the form of a merger, share purchase, share swap or other traditional instruments.
At the time a SPAC lists itself on the stock exchange as an IPO, it is still a shell company, with no operational business or underlying assets. Therefore, the deciding factor in a SPAC IPO becomes the sponsor or the management team of the IPO, the focal point in which investors are reposing their faith and trust. The sponsors are people with well-established track records, who have gathered expertise in the chosen industry, relevant market segment and region4. On the culmination of the transaction, commonly called a de-SPAC, the company then continues the operations of the acquired company(ies) as a public company. Under the usual terms of a SPAC’s governing instruments, if the SPAC does not complete a business combination transaction within the specified timeframe, typically 2 (two) years, it must liquidate and make a pro-rata distribution of the aggregate amount held in escrow to its public shareholders5.
With a booming start-up culture and more than 50 (fifty) ‘unicorns’, India seems to be an ideal ground for SPACs to flourish. Currently, there is no comprehensive mechanism laid down by the concerned regulatory authorities specifically for SPAC, however it has been reported that SEBI has proposed to build a dedicated framework for the same6. In a positive first step, the Companies Act 2013 was amended in 2020 to allow the direct listing of Indian companies on foreign stock exchanges7. Taking advantage of the same, one of the largest renewable energy producers in India, ReNew Power, announced an agreement to merge with RMG Acquisition Corp II, a SPAC, a transaction which will involve ReNew getting listed on NASDAQ and generating gross cash proceeds of approximately USD 1.2 Billion8. Additionally, the Foreign Exchange Management Act, 1999 (“FEMA”) guidelines do not prohibit an Indian resident individual from investing overseas, provided that such investment is within the limits of the annual prescribed ceiling for the same9.
Providing further credence to the fact that India wishes to harness the potential of SPACs in earnest, the International Financial Services Centres Authority came up with a consultation paper on the issuance and listing of securities (“Consultation Paper”), containing an explicit carve-out for SPAC listings10. It envisages the listing of SPACs on the international exchange at Gujarat Finance Tec-City (GIFT) and stipulates that a SPAC shall be eligible to raise capital through an IPO of specified securities if: (i) the primary objective of the issuer is to effect a merger or amalgamation or the acquisition of shares or assets of a company having business operations; and (ii) the issuer does not have any operating business11. The Consultation Paper goes on to set forth the offer size, minimum application, minimum subscription and SPAC specific obligations including an acquisition timeline of 3 (three) years, extendable by 1 (one) year, etc.
The Consultation Paper has been looked at as an affirmative stride towards establishing a regime for SPACs in India, however regulations and compliances would have to undergo significant change in order to accommodate for SPACs in mainstream transactions in India. For instance, India has a very uncomfortable relationship with shell companies and the recent years have seen an increased tackling of the ‘menace’ by the Ministry of Corporate Affairs. In the same vein, the Companies Act 2013 authorises the Registrar of Companies to strike-off the name of companies that do not commence business operations within 1 (one) year of incorporation, a direct hurdle to the introduction of SPACs, which usually operate on timelines ranging from 18-24 months before de-SPAC transactions.
It therefore becomes evident that several regulatory alterations would have to take place in the Indian space before SPACs can become a successful and popular investment instrument in India. Jurisdictions have seen major transactions being effected through SPACs despite inherent risks involved. Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional IPOs12. SPACS have therefore become the favoured method for various transactions, as it allows companies to circumvent the otherwise cumbersome set of rules applicable to IPOs. In light of the outlined benefits of SPACs, unlocking the potential of SPACs in India could prove to be a huge boost to the brewing start-up ecosystem in India.
7 Section 23(3), Companies Act 2013
11 Paragraph 19, ibid.