AN INCISIVE ANALYSIS OF THE REGULATORY FRAMEWORK GOVERNING SPACs IN INDIA
Akshat Dahate and Rutuja Raghushe
A Conceptual Primer:
Ever since the concept of Special Purpose Acquisition Companies [“SPACs”] has been introduced in India it has gained a significant amount of importance in recent times. The SPACs transactions have seen a spiked in India, with companies like Yatra Online Inc. which merging with Terrapin 3 Acquisition Corp (NASDAQ listing) in 2016. Even now start-ups like Zomato, Grofers, and Flipkart are making a move to explore the SPAC route for public listing. With India having more than 40,000 startups and 50 unicorns, bringing the SPAC regime would give talented and hardworking start-ups a huge scope for cross-border deals. In the year 2020, there was a rise in SPAC activity, with 248 SPACs raising roughly USD 83 billion, which represented approximately 50% of all public offerings in the US. In addition, UK’s London Stock Exchange (‘LSE’) has delivered the structure and objective but lacks stalwart guidelines on SPACs.
Currently, the modus operandi of SPACs remains intuitive. A SPAC is a management or a special company that is set up to look for potential private equity which the parent company can buy and then take public. The SPAC itself derives funding from the general public, much like how a company would pick funding through various modes like Initial Public Offering [“IPO”] or Follow-on Public Offering [“FPO”]. However, the SPAC need not take these routes to raise funds, and as a result, it benefits from the saved costs, time, and public scrutiny. The latter, i.e., lack of public scrutiny, is one of India’s major challenges facing the SPAC economy. This is the area where the regulatory framework is more or less silent.
The most intensive phase of becoming a SPAC is the De-SPAC process. Another key thing to remember is that De-SPACing is the step after the implementation of a final agreement and before the actual combination of the SPAC with the target company. This type of corporate structure permits investors to provide money towards building a fund, which is subsequently used to acquire an unspecified business or businesses to be identified following the IPO. Hence, this type of shell structure is popularly known as ‘Shell Companies.’ Therefore, the article highlights a detailed study regarding the regulatory framework in India governing SPAC under the Companies Act, 2013, Competition Law, 2002, and SEBI Act, 1992. At the outset, the article explains the regulatory framework governing SPAC under the Companies Act, 2013. In addition, it binds the Competition Law and M&A concerns relating to SPAC. It further analyses the interface between the SPAC and the Indian Capital Markets. It also explains the scope of the offer, specific obligations, etc. of SPAC. Furthermore, it outlines the need to have a proper framework to avoid the tussle regarding jurisdictional and regulatory mist so that the entities can ripe most benefits of out it.
Regulatory concerns in India – The Companies Act, 2013:
The paramount settled by the Companies Act, 2013 [“the Act”] is the most stringent regulatory concern in the matter of the SPACs proposal in India. The SPACs may have made a comeback on the Wall Street and international capital market, however, diving into the Indian market will be a tussle because of the barrier shaped by the Act. The reserve – IPO route the SPACs follow directly contradicts several regulatory concerns including the Act, SEBI Norms, FEMA, RBI Master Directions, and the Competition Act, 2002. One should understand that the SPACs have a time limit of 18-24 months to complete transactions but according to the principles invested under the Act, the Registrar of Companies [“RoC”] is authorized to exclude a company’s name which does not instigate any business operation within one year from the date of incorporation. Following this, the registrar made several operational decisions invalidating various shell companies to meet the requirements of theMinistry of Corporate Affairs. Considering this, the RoC disproved 2,25,910 shell companies in 2018-19, and 14,848 in 2019-20 encompassing the timeframe to complete the De-SPAC transition, it may be unobtainable to meet the requirement of the Act. To effectively sustain SPAC and claim some exemptions, the companies should be allowed to deliver a notification to the RoC disclosing the fact that the sole purpose of their incorporation is to raise capital and has no business objective to initiate in 1 year of the SPAC’s incorporation. If SPACs have to function prominently in India, then the Act needs to modify to avoid legal issues for the management of the Company and definitive uncertainly of shell companies.
Concerns encircling Competition Law and Mergers & Acquisitions:
The competition law concerns also emerge from the similar thread of having a vague or non-existent operative history. Additionally, the Competition Commission of India [“CCI”], to execute the Competition Act, 2002, requires jurisdiction over entities (or entrants) like SPAC structures based upon their jurisdiction origins. Suppose these SPAC entities (build through reverse mergers or acquisitions of companies in India, subsequently taken public) have a significant presence in India, in that case, they might be capable enough to trigger competition concerns here. Additionally, even if they do not have such a significant presence in India, they might still affect competition by reverse mergers and strategically taking the reins of a company in India. To filter out SPACs that are unlikely to reduce competition, CCI and the Ministry of Corporate Affairs introduced a series of exemptions. Mergers and acquisitions that cross the threshold in Section 5 of the Competition Act, 2002 and do not qualify for any exemptions are considered combinations. The CCI and Ministry of Corporate Affairs have introduced exemptions for combinations unlikely to lessen competition. Combinations require prior approval by the CCI. Corporate restructuring in the form of mergers and acquisitions often results in anti-competitive issues. Hence, it is clear that these SPAC entities need to be brought under the purview of the CCI and relevant Mergers & Acquisitions statutes.
All this requires sizable disclosures on the end of the SPAC management or special company relating to sundry items like transactions, planned acquisitions, and the voting right power dynamics after the proposed acquisition, etc. These disclosures dramatically increase India’s time and money spent on the SPAC listing (if possible, from the security law end of the requirements) because if disclosed before having a target in sight, then it would make the listing process tedious and bunglesome. As there lay no mandatory following of these regulations, the SPAC entities might not be the most willing to hint out these disclosures. Apart from that, these disclosures are often sensitive, and the target company is often not deciding at the very outset of the SPAC formation. Instead, the modus operandi is such that, once a SPAC is formed, it is advertised (or publicized) for the general public as a model for their investments to be parked in private equity. After that, with proper due diligence, a target is meticulously chosen. So, at the time of listing, it might not be very clear, and the SPAC entity might not genuinely be in a position to make such disclosures.
The interface between the SPAC and Indian Capital Market:
Importantly, due to the regulations established by the Security Exchange Board of India [“SEBI”], the SPAC is a non-eligible entity for an IPO. The SEBI desires to explore the potential of SPACs in Indian Capital Market whereas at a similar time building adequate checks and balances within the regulatory framework because of the integrated risks involved. In addition, the SEBI to maintain the protection given to individual investors and the target company has laid down this roadblock for SPACs in India. The issue of capital and disclosure requirements invested under Regulation 6(1) of SEBI prescribes companies to possess the net tangible assets of at least 3 crores in the preceding three years, least average combined pre-tax functioning returns of 15 crores during any three of the last five years, and net worth of at least 1 crore in each of the last three years.
On the other hand, a company that does not meet the above criteria for primary listing may apply for listing if it complies with the alternative listing rule invested under Regulation 6(2) and 32(2). These particular Regulations provide companies to articulate their segments towards a public offer through only selling if the issue takes place as a part of the book building creation process and at least 75% of the net offer given to qualified institutional buyers.
Furthermore, the market regulator SEBI has considered the recent growth in the startup industry and the restrictions they come across coupled with an Innovators Growth Platform. Having said that, the platform allows a company to list if institutional investors maintain their 25% of capital requirements for at least one year before the issue, the delisting directions are general by nature, but still, the platform has not encountered any listing of any company.
The SEBI should take into account the curving flow of the industry and the regulations formed by the international market regulators like the United States Securities and Exchange Commission, which look into the transactions concerning SPACs. The US market has countersigned economic growth and raised about $26 billion in January this year in the US.
In addition, the Consultation Paper issued by the International Financial Services Centre’s Authority on the issuance and listing of securities including the SPACs listing formulations. The paper serves as suggestions for effective inspection for Pro-SPAC regulations to SEBIs – Primary Market Advisory Committee for the framework of SPACs listing in India. The paper exhibits the scope of the offer, the minimum requirement, the minimum subscription, and the specific obligations of the SPAC, including an acquisition period of 3 years, renewable for 1 year. Also, act as a projection towards the procedural aspect of the law to be issued and considered to the regulators.
As more stability in SPAC Regulations will give raise to Economic Development. The regulators should not leave the companies high and dry after this much complexion or in a negative spiral tightened by regulation. The significant objective should be to provide a framework that can clear the jurisdictional and regulatory mist regardless of the risks involved. Even if the present regulatory tussle settles, the aftereffect would be challenging as well because of the high cost of implementing tax conundrum and stamp duty requirements which act as Anti-SPAC regulations.
What’s more is that once the matter of regulatory framework for SPACs is settled in India, this would create various fresh opportunities for local companies and startups to get into Indian capital markets which can act as a key for economic growth. It is important to note that there is a constant flow of Indian startups joining the unicorn club and opting for listings themselves in the overseas market because they are ineligible to get listed in the Indian market. The expansion may generate more profit, better valuations, global visibility, and foreign direct investment.
The authors are fourth-year students at ILS Law College, Pune.