The special purpose acquisition company (SPAC) frenzy caught the attention of the Indian Government which released a consultative paper to allow SPAC listing on the recognised stock exchanges in the International Financial Services Centre (IFSC) and notified the same on July 16, 2021.

The notification provides detailed guidelines for the listing of SPACs and acquisition of targets by SPAC. These include eligibility criteria for the sponsor, IPO process, initial disclosures in the offer documents, due diligence by the lead managers, issue size, post issue stake of the sponsors, pricing, underwriting, application and allotment.

It also provides SPAC specific conditions such as escrow mechanism, filing of detailed prospectus for the business combination (reverse merger), which achieves listing of the target, requirement for majority approval from all shareholders to a business combination and also redemption rights of dissenting shareholders and completion of business combination within 36 months from the date of filing of the prospectus.

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Also, the SPAC is to ensure that the target has a fair market value of 80 per cent escrow amount post-business combination (BC). Related-party transactions between sponsors and business combinations are prohibited. There are also post-BC conditions and lock-in requirements.

The Securities and Exchange Board of India (SEBI) has formed a high-powered committee to look at such offerings in the Indian capital market. The period of 36 months, provided to the SPAC to consummate a BC, is of a longer duration compared with 18-24 months in the US. Moreover, the option to SPAC stoop for a shorter period is not provided for.

SPAC sponsors are required to possess a track record in SPAC transactions, BC, fund management (FM), or merchant banking activities. While the first and last conditions are clear, more clarity is required with regard to experience in BC and FM.

In case of FM experience, whether fund managers of private equity and/ or venture funds would also be permitted to become sponsors or only mutual fund AMCs be considered requires clarification.

Though the notification provides for detailed disclosures both at the time of listing and BC, IFSCA/SEBI would need to be mindful of the disclosures to be made by the sponsors of the SPAC at the time of IPOs. Considering the inherent conflict of interests in the SPACs wherein the sponsors and anchor investors usually have more favourable terms than retail investors, valuations, and methods used, due diligence is required by lead managers and underwriter’s role. Further, the post-BC projected valuations of the target and meeting the valuation threshold would also need to be considered.

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The compliances and disclosures by the SPAC have been aligned to a conventional listing requirement with a cooling period of 180 days after BC. IFSCA/SEBI would even need to consider checking on the preparedness of the targets (which is usually start-ups) to comply with reporting and governance requirements immediately after listing.

However, there is little clarity on the consequences of not complying with the norms post the cooling period. In addition to the above, the following key aspects under other laws/regulations also need due consideration:

Corporate laws

Under the Companies Act, 2013 (Cos Act), a company is required to carry on business as per the object clause as per the constitution documents. Further, a company must commence its business within a year of its incorporation to avoid being de-registered. Considering that (i) the SPACs do not have objects as well as operating business of their own and adopt the objects and the business of the target operating companies; and (ii) the timeline of 36 months provided to a SPAC for an acquisition, both the above conditions need to be relaxed.

The SPAC may make investment in the target prior to BC. This entails relaxation for SPACs under the non-banking finance company regulations during the period of investment upto the BC.

Securities laws

The SPACs offer flexibility to the existing investors to redeem securities, even if the target is approved by all the investors in SPAC. Thus, an exemption under SEBI takeover regulations for dilution of shareholding of the SPAC investors by more than 25 per cent pursuant to BC and subsequent funding would also be required.

Also read: Regulatory challenges for SPACs in India

At present, venture capital funds in India are allowed to invest only in venture capital undertakings (VCUs) which are unlisted operating companies. The definition of VCUs under the SEBI (Alternative Investment Funds) Regulations, 2012 would need to be tweaked to allow venture funds to invest in SPACs which are listed shells.

Indian Exchange control regulations

For SPACs, the Indian exchange control regulations would have to be relaxed to allow for foreign investment in a SPAC at the time of IPO. Also, the provision for redemption of securities by investors (at the time of BC) and facilitating issue of warrants for a period exceeding 18 months will need to be provided for. For SPACs in IFSC, the participation by the Indian investors could be substantially limited by the exchange control regulations and also entail round-tripping considerations. These issues will also require suitable addressal.

Scheme of mergers in India

Usually, a merger in India takes approximately 8-10 months to be approved by the NCLT. Thus, for SPACs transactions to work smoothly, a fast-track approval process for BC needs to be explored.

Globally, SPAC regulations have evolved over the past many years. India, to be competitive, should quickly learn from the experiences of other jurisdictions, obtain feedback, and suggestions from the counter-part regulatory bodies and exchanges in other countries for formulating a holistic framework for SPACs in India. Ideally, each of the above-mentioned regulations would require a separate carve-out or a chapter for facilitating SPACs in India. A more plausible approach seems to allow SPACs in IFSC before introduction elsewhere.

(The author is Partner, Bhuta Shah & Co LLP)

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