Emerging concept of Special Purpose Acquisition Companies (SPACs) in India

In line with its motto of ‘Ease of Doing Business’ an SPAC is one of the newest alternative fundraising option that is all set to be introduced by the Government of India. The Special Purpose Acquisition Company is a concept that is well-known globally and has been making rounds in high level discussions for a couple of years in India. Finally, the Company Law Committee Recommendations, 2022 provide for introduction of SPACs in India. What makes this new concept interesting is that under these amended provisions (as and when introduced) even a shell company can get listed in the stock exchange. This article digs deeper into the concept. Background A Company Law Committee was set up by the Ministry of Corporate Affairs in 2019 to make recommendations towards promoting ease of doing business in the country. The Company Law Committee which submitted its report on a fresh set of amendments to the Companies Act, 2013 earlier this year provided for introduction of SPACs in India with corresponding enabling framework in the Companies Act, 2013. What is an SPAC? SPAC is an investment vehicle that is used by institutional investors to fund their acquisitions. These are generally formed by private equity funds or financial institutions, with relevant expertise in a particular industry or sector. To explain in simpler terms, a Special Purpose Acquisition Company is an entity formed with the objective of raising investment capital through an Initial Public Offering (IPO). The basic idea behind floating such a company is to allow investors to come together to pool their resources to acquire one or more companies to be identified only after the IPO. After incorporation it goes straight away to the capital market to raise money through an IPO. Interestingly, as on the date of the IPO the company has no existing commercial operation (hence a shell company) or any target for acquisition but is formed strictly to raise capital through IPOs. The money raised through IPO is kept in an escrow account, which can be used only when making the acquisition after the target has been identified. Where the SPAC fails to make the acquisition within two years of the IPO, the money is returned to the investors and the SPAC is delisted and finally dissolved. The money as well as the assets in escrow is returned to the investors on pro-rata basis. Such an SPAC is also popularly referred to as a ‘blank-cheque company’. Recommendations of Company Law Committee In its recommendations made earlier this year, the Company Law Committee has recommended the introduction of listing of SPACs in India and for the MCA to come up with enabling framework in the Companies Act, 2013 for SPACs allowing entrepreneurs to incorporate an SPAC. The Committee has also recommended that for SPACs incorporated under the Companies Act, 2013 there should be an exit option for shareholders in case they do not agree with the choice of the target company. The provisions of #CompaniesAct, 2013 with respect to strike off has also been recommended to be modified in so far as they relate to SPACs as these companies do not have any business of their own. In fact, just like many provisions of the Companies Act, 2013 have been modified to accommodate the newest concept of One Person Company (OPC) therein, to make the concept of SPAC a reality necessary modifications will be required in many sections of the Companies Act, 2013.

Global Experience

It was reported that in 2020 about 250 SPACs were formed globally (mainly in the US) and the investment therein was about USD $80 billion. The next year, 2021, saw a hike with about 600 SPACs being listed globally. There are many US-based SPAC entities that are created by Indian promoters or which target Indian new-age tech companies. Stone Bridge Acquisition Corporation, one such SPAC, recently listed on the NASDAQ and raised USD $200 million in 2021. Another good example is the merger of Indian company ReNew Power Private Limited with US-based SPAC entity RMG Acquisition Corporation II and its listing on the NASDAQ and raising USD $8 billion. Advantages of an SPAC Raising of money through the IPO route is not only lengthy, but also involves heavy regulatory obligations. In contrast, by getting merged with a Blank cheque company, an entity can get listed on exchanges (even in foreign stock exchanges like the #NASDAQ) in a matter of days. Many companies prefer to choose to merge with or being acquired by an SPAC rather than going for an #IPO because of some inherent advantages of SPACs which are listed below: - Beneficial for target companies: SPACs provide better option of funding and liquidity to target companies. Compared to other IPOs they are valued higher with lesser dilution rates, lower fees and less regulatory hurdles. - Time and Cost Efficient: Even a private limited company can go public within few months by being acquired by an SPAC. Indian companies being acquired by foreign listed SPACs can get listed on foreign stock exchanges without incurring the huge costs involved. - Minimum Risk: For a target company, listing through an SPAC involves minimum risk since the entire process takes place within a well-defined agreement with assured security. - Opportunity of foreign listing and tapping foreign market: Some target companies prefer SPACs as a way of achieving higher valuation by tapping the foreign market and foreign consumer base where the demand for its products exist. - Safeguards dissenting shareholders: The recommendations provide for an exit route to #dissentingshareholders which ensures that their interests are safeguarded as they always have an option to sell their shares to the SPAC promoters if they are not in agreement with the choice of target of acquisition. Disadvantages of an SPAC The concept of a Special Purpose Acquisition Company also has its share of disadvantages as follows: - Less profitable to retail Investors: Most SPACs underperform in the long run and eventually stock prices fall below the IPO price. This makes SPAC more beneficial to acquired companies and less beneficial to retail investors in the long run. - Inability to attract target company: The SPACs are required to start looking for a target company soon after listing and complete the acquisition within two years of listing. This time-bound restriction cripples many SPACs who are unable to locate an attractive target company in that time frame. - Hasty Decision w.r.t. target company: The time restrictions for completing the take-over sometimes prompts the SPAC to take hasty decisions, which turn against the company in the long run. - Exit of dissenting shareholders: The option provided to dissenting shareholders to exit if they do not agree with the choice of the target company is another obstacle that limits the overall gains for investors. - Investors initiating Investigations: From the US experience with SPACs it has been seen that in many cases the disappointed investors initiate investigations or even class action suits against SPAC promoters. Concluding observation In India the concept of SPAC is only in a nascent stage and capital market regulator, the Securities and Exchange Board of India (#SEBI), is expected to come out with rules defining the scope of SPACs in the country and providing detailed regulations for their running. While SEBI is looking at the possibility of introducing an SPAC framework in India, the Ministry of Company Affairs (#MCA) will also have to modify several provisions in the Companies Act, 2013 should the SPACs become a reality in the country based on the recommendation of the Company Law Committee. Several amendments will also be required to be made in the tax laws in the country. In case SPACs become a reality in India, there will be a demand for the SPACs to be allowed to list in global Exchanges. This will enable Indian SPACs to target acquisition of foreign companies in order to achieve their fullest possible potential. However, foreign listing of Indian SPACs will attract the provisions of Section 23(3) and Section 23(4) of the Companies Act, 2013 which enables certain classes of companies to list their securities on stock exchanges in permissible foreign jurisdictions. However, one must remember that not all #SPAC experiences have been good. Globally, many cases of underperformance by SPACs have slowly begun to surface now. This is a cause for concern and only points towards the need to weigh the pros and cons before finalising the #SPAC regulations in the country. Regulations must be equipped with sufficient safeguards to protect the interests of retail investors. #CapitalMarket, #SPACs, #Specialpurposeacquisitioncompany, #easeofdoingbusiness, #blankchequecompany, #CompanyLawCommittee2022, #IPO, #ShellCompanies, #Escrow Account, #MCA, #SEBI