Concept relating to Special Purpose Acquisition Companies (SPACs) have been in news lately in India. Popularly referred to as "Blank Cheque Companies", these piqued the interest of markets around the globe especially in view of the performance of the US markets during the COVID-19 pandemic. Also, the recent listing of Renew Power Private Limited, an Indian renewable energy company, on NASDAQ (an American stock exchange) through an internationally incorporated SPAC in August 2021, speaks to the popularity of SPACs.
These are shell companies, formed by a sponsor to raise capital, primarily through an initial public offering (IPO). Their intention is to use the proceeds from the IPO to acquire one or more unspecified businesses or assets, which is to be identified after the IPO. Generally, the SPAC leverage the goodwill, reputation and credibility of the sponsor to raise capital and identify a target. Unlike an operating company that becomes public through a traditional IPO, a SPAC is a shell company, which does not have an underlying operating business prior to the IPO.
Generally, a SPAC transaction involves the following phases / steps:
1. Sponsor incorporates a blank cheque company under the applicable laws. Sponsors are experienced individuals or entities managed by individuals experienced in the field of finance, investment and have a goodwill and reputation in the relevant industry.
2. Such company is subsequently floated on the stock exchange. Investors, relying on the goodwill and reputation of the sponsor, subscribe to the shares / units of such companies.
3. Pursuant to successful listing, the sponsor commences the search of potential target business / undertakings for acquisition. This involves due diligence of the target business along with the negotiations amongst the relevant stakeholders (sponsor / management team, target business, etc.)
4. If the negotiation / discussions materialise into successful closing of acquisition / merger of the target business, such entity is automatically listed on the stock exchange where the SPAC is listed. This is called de-space transaction. After a successful de-SPAC, the target company becomes a subsidiary of the SPAC or a new holding company whose shares are automatically listed on the stock exchange
5. In case the negotiations do not fructify, then the SPAC is dissolved, and the funds or the proceeds of IPO are returned to the respective investors. Repayment of funds to the investors is in accordance with the memorandum of listing of SPAC.
6. A sponsor, typically, has 12-24 months to identify and acquire target businesses, post expiry of which, it is dissolved in accordance with its listing memorandum.
Key Features
Some of the key features which may be advantageous to all the stakeholders involved in a SPAC transaction are:
1. Cost Efficient
Listing of companies through SPAC mode does not involve huge costs generally associated with traditional IPOs.
2. Time
Given the limited scope of compliances / due diligences required by the relevant stock exchange, the companies are able to go public within months.
3. Minimum Risk
A SPAC listing involves predetermined prices. Therefore, they are less vulnerable to the risk of volatility in the public markets. Unlike traditional IPO processes, where companies' securities are valued through market-based price discovery approaches, and hence, can be affected by market conditions.
4. Advantageous for emerging technology businesses
New start-ups and businesses with new age technologies and innovation may leverage the SPAC method of listing, whose potential value might not be fully apparent to public investors. By way of SPAC, they can access wider pool of capital.
Indian Context
Indian legal and regulatory framework, currently, do not recognise the SPAC transaction. Rather, there are significant hurdles which impede such transactions in India, which are as under:
1. Business operations
The registrar of companies has the discretion to strike off the name of the company if a company fails to commence its business within one year from its incorporation[1].
2. Charter Documents
Company has to be mandatorily incorporated with a business object, and is required to file its memorandum of association, which forms the basis of registration of a company.
3. Listing Requirements
From a securities law perspective, Securities and Exchange Board of India has prescribed certain eligibility criteria for listing, which a company is required to fulfil such as minimum net worth, net tangible assets, average operating profits, among others[2].
4. Liberalized Remittance Scheme (LRS)
Reserve Bank of India under the Liberalised Remittance Scheme (LRS) has permitted current and capital account transactions up to USD 250 thousand per financial year for individuals. Therefore, if Indian shareholders are individuals and they are getting shares in the overseas merged entity, then the fair market value of shares acquired cannot exceed USD 250 thousand in a financial year.
Latest developments in Indian legal and regulatory framework
Recently, International Financial Services Centre Authority (IFSC) has issued the Issuance and Listing of Securities Regulations, 2021, which introduced a listing framework for SPACs on the recognized stock exchanges in IFSCs. Some of the key features are – (a) no target is required to be identified prior to IPO, (b) sponsors to have good track record in SPAC transactions, business combinations, fund management or merchant banking activities, (c) minimum issue size must be USD 50 million, and (d) business combination to be achieved within 36 months from the date of listing.
The Company Law Committee in its report of March 2022, has come out with its recommendations. These include – (a) enabling provision in the Companies Act, 2013 to recognize SPAC, (b) relaxation in mandatory commencement of business operations within one year, and (c) enabling provision for Indian SPACs to get listed on foreign exchanges.
While the SPACs have multiple advantages both for investors and investee, there are challenges to it. The time bound search for a target business may result in acquisitions without proper diligence. Non-disclosure with respect to the target at the time of listing is also one such contentious issue as more disclosure would lead to more informed decision by the investors.
In view of the above, while domestic regulators have shown their willingness to recognise and regulate the SPAC transactions, a closer inspection is warranted in order to align the proposed framework with the prevalent market conditions in India. Also, it is necessary to build in sophisticated safeguards in order to protect investors' interests.
Author: Bharat Sharma (Partner) And Manish Parmar (Senior Associate) at Naik Naik & Co. Views are personal.