SPAC Listings in India: Regulatory Hurdles and the Way Forward

[Devarsh Shah is a third-year law student at Gujarat National Law University]

One of the most significant developments in the international capital markets in the past couple of years has been the revival of ‘Special Purpose Acquisition Vehicles (SPACs)’. In 2020, around $80 billion was raised in the US by 247 SPACs representing almost 50% of the raised capital of about $174 billion. While SPAC is not a new concept and has been in existence since decades, its expeditious growth in global markets (especially in the United States) in recent times has received worldwide attention.

SPACs are commonly referred to as ‘blank cheque entities’ because they raise capital from an IPO to acquire an unspecified operating business. SPAC is essentially a shell company which has no active line of business or operation and is formed only for the purpose of capital raising through an IPO. The proceeds of the IPO are then held in a trust account until the target is identified for acquisition. Once a target is identified, approval of the shareholders of the SPAC is sought and those who do not consent to the proposed acquisition are given an option to redeem their shares in the SPAC. The final step is the acquisition of the target which is commonly referred to as the de-SPAC transaction. The average time taken for completion of such transaction is 18-24 months.

A SPAC listing is generally preferred by start-ups and tech companies as it is a relatively faster and a cheaper way of going public. It saves the entity to undertake intense marketing and roadshows. Secondly, since listing is through merger, regulatory compliance is minimized. Over and above that, an offshore listing enables a greater access to funds with a simultaneous increase in the brand value of the entity.

Deliberations regarding SPACs in India were reignited with ReNew Power’s (an Indian power company) agreement to list itself on Nasdaq through the SPAC route. While there have been several instances in the past where Indian companies like Citius Power (acquired by Phoenix India Acquisition Corporation in 2008 and presently delisted) and Yatra (acquired by Terrapin 3 Acquisition in 2016 and presently listed on NASDAQ) have sought listing on Foreign Stock Exchanges through SPAC route, till date there has been no foreign company which has availed the SPAC route for listing in India. A lot of this may be attributed to a restrictive Indian regulatory regime which places various practical limitations on any such transaction. The present article seeks to analyse the laws in India and the changes required in order to enable SPAC listing on Indian stock exchanges.

Regulatory Framework in India

Companies Act, 2013

While there is no explicit impediment for a SPAC listing in the 2013 Act, the SPAC company being an inactive (shell) company needs to be shielded against the government’s action against the shell companies. A SPAC company, essentially has no primary (real) business object. A SPAC entity is created only for the purpose of raising funds for the target company. Under such circumstances, if the name of the SPAC entity is struck off on account of it being inactive or the directors/promoters are penalised for noncompliance, it would lead to unnecessary trouble. An exemption to such SPAC company can easily solve the problem.

SEBI (ICDR) Regulations, 2018 and Stock Exchange Requirements

Regulation 6(1) of ICDR Regulations, 2018 prescribe the following eligibility criteria for an IPO:

  1. Net tangible assets of at least three crore rupees for the preceding three years.
  2. Average operating profit of at least fifteen crore rupees during the preceding three years.
  3. Net worth of at least one crore rupees in each of the preceding three years.
However, an entity not satisfying the main listing criteria as specified above, may seek listing upon compliance of the alternate listing norms specified under regulation 6(2) which provide that any entity not satisfying the main criteria may make a public offer only if issue is made through book building process and at least 75% of the net offer is allotted to qualified institutional buyers.

Although  a SPAC entity may list itself under alternate eligibility norms,, in order to comply with the mandate of regulation 32(2) read with regulation 6(2), the SPAC entity shall have to ensure that not more than 10% and 15% allocation is made to retail individual investors and non-institutional investors respectively. In other words, at least 75% of the net offer shall be allocated to qualified institutional buyers. The aforementioned condition which apparently seems to be unfeasible is in fact a blessing in disguise given the fact that a SPAC listing is a privately negotiated deal. It shall ensure a higher certainty of funds in the volatile Indian market.

Besides the ICDR Regulations, compliance with the listing requirements of BSE and NSE is also mandatory. Listing on the NSE requires a track record of at least three years of either the entity seeking listing (in our case, the SPAC entity), or the promoter/promoting company incorporated in or outside India (sponsors of the SPAC entity).

Stamp Duty Aspects

Perhaps the biggest regulatory challenge to a SPAC listing in India is the levy of stamp duty on a scheme of merger. As per the decision of the Supreme Court in Hindustan Lever Ltd. v. State of Maharashtra, the scheme effecting the merger is an instrument and the same is leviable to stamp duty. It was further clarified that stamp duty was leviable on the instrument and not on the transaction of purchase and sale. The Bombay High Court moved a step further in this direction in Li Taka Pharmaceuticals Ltd. v. State of Maharashtra, wherein it affirmed the position established in the Hindustan Lever case and further held that valuation for the purpose of stamp duty was to be determined by the authority only on the basis of the price of the shares allotted to the transferor company along with any other consideration. In light of the same, it can be asserted that an order of court/tribunal sanctioning the scheme of merger/amalgamation is subject to stamp duty. Generally, in a SPAC listing, the target company merges with the SPAC entity by way of reverse merger. A scheme of merger has to be therefore floated and also required to be affirmed by the tribunal in order to comply with the provisions of the Companies Act, 2013. As a result of which, stamp duty is attracted and the costs of listing increase significantly. Stamp Duty therefore makes merger a less favourable business combination for effecting a SPAC listing.

An alternative to merger can be acquisition of shares of the SPAC entity. However, it is not feasible because SPAC entity, being a listed entity, acquisition of shares of such company shall attract the obligations of open offer. This would again lead to an increased cost and time for a SPAC listing.

       Foreign Exchange Norms

  Since merger between a SPAC entity and the target is likely to be a cross border merger, various RBI Regulations are attracted (as has also been discussed in an earlier post on this blog). Foreign Exchange Management (Cross Border Merger) Regulations 2018 provides that in case of an inbound merger, the resultant company i.e., the transferee company, may issue or transfer security to persons resident outside India in accordance with the RBI Guidelines and subject to sectoral caps.

As noted earlier, a SPAC company does not have a specific business object and therefore a confusion occurs as to the sector in which such entity lies. Owing to that, one cannot determine the maximum foreign shareholding in such entity. In addition to that, the RBI guidelines prescribe intensive reporting requirements for cross border mergers. This leads to higher compliances for the SPAC entity further elongating the time required to complete the SPAC listing.

Conclusion: Recent Developments and Way Forward

The recent consultation paper issued by the International Financial Service Centre Authority (IFSCA) provides for SPAC listing in the IFSC. Presently there is only one IFSC in India i.e., the GIFT City at Gandhinagar, Gujarat. The said consultation paper seeks to regulate listing of securities of foreign/Indian companies on the stock exchange in an IFSC. It provides that for a SPAC listing, the offer size should be minimum USD 50 million. Minimum promoter (sponsor) contribution is prescribed to be at least 20% of the post issue paid up capital and the minimum application size in an IPO of SPAC is kept at USD 250,000.

While, SPAC listing at the IFSC is a welcome and commendable step, it needs to be remembered that GIFT City IFSC is still in the developing phase and not an established platform for fund raising. The reach of the IFSC and the access of capital it provides is nowhere close to the one provided by the BSE and the NSE. It is high time that Indian regulators embrace the modern market instruments for fund raising in order to utilize the potential of India’s capital market to its fullest.

Countries like the USA, Canada, and Australia already permit SPAC listing and have witnessed many successful listings till date through the SPAC route. On the other hand, Asian markets like Hong Kong and Singapore are expecting SPAC listings on their respective exchanges as early as by the end of this year. It is clear from the discussion undertaken here that Indian regulatory regime would need to be tweaked to enable SPAC listing. While the current regulatory regime does not completely rule out a possibility of SPAC listing in India, the SEBI regulations specific to SPAC listing accompanied with necessary amendments to the RBI Guidelines, Stamp Act and the Takeover Code will make such transactions financially and legally viable. It is high time the Indian regulators unlocked the immense potential of value creation of SPAC listings in India.

Devarsh Shah

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