Special Purpose Acquisition Companies, or SPACs, have been all the rage over the past couple of years and hailed as the ‘next big thing’ in the world of finance. SPACs are publicly traded companies that offer target companies a swift and hassle-free mechanism to list on stock exchanges compared to traditional IPOs. With the advantage of SPACs being ‘time-friendly’ (and hence ‘business-friendly’), seasoned investors and management professionals are embracing them as a tool for listing in order to undercut the risks associated with the IPO process. Therefore, it is not surprising that SPAC transactions have outnumbered traditional IPOs on US Stock exchanges in the last year, and generated a whopping sum of more than $160 billion.
While several Asian countries have enthusiastically enabled listing through SPACs, India is yet to follow in their footsteps. In light of the recently published recommendations of the Company Law Committee 2022, and the Securities and Exchange Board of India (SEBI)’s ongoing analysis of the feasibility of SPACs, it is expected that they will soon become an operational reality in India.
For India, while it is important to catch the SPAC wave and reap its benefits, it is arguably crucial to also tread with cautious optimism and greater regulatory oversight, given that instances of underwhelming performances by SPACs have slowly begun to surface.
Claim to fame
SPACs are, by nature, “blank cheque companies” that do not have any underlying business activities of their own and are formed with the sole objective of listing on stock exchanges. Given that the company has had no business activity prior to such listing, the entire process of listing on a stock exchange is undemanding – this is their USP. Once listed, SPACs begin their search for target companies that wish to get listed but are also wary of the painfully elaborate process involved in making a public offer therein. Once a target is identified, a restructuring agreement generally referred to as an “acquisition” is drawn up, resulting in the acquisition of the target company by the SPAC.
In contrast to IPOs, SPAC transactions are required to be completed within a stipulated time frame, failing which SPACs run the risk of being liquidated.
Similarly, listing through SPACs is also considered remarkable since the entire process takes place pursuant to a definitive agreement, with minimum risk and assured certainty. The interests of the dissenting SPAC shareholders are also well guarded as those that vote against the proposed acquisition are allowed to exit by selling their shares to the SPAC promotors.
SPACs particularly posit themselves as unique opportunities to niche Indian businesses that intend to get listed on foreign stock exchanges, without incurring the mammoth costs associated with the process. For instance, the recent listing of Renew Power Private Limited, an Indian renewable energy company, on NASDAQ through an internationally incorporated SPAC in August 2021, speaks to the popularity of SPACs. For certain businesses, SPACs also provide an opportunity for exposure to countries and consumer bases where demand for such niche products exist, consequently allowing such companies to attain higher valuation.
While the popularity of SPACs in the US is undeniable, Asian investors also seem to have warmed up to the idea. The first SPAC listed on the Singapore Exchange in January 2022 was met with open arms and heavily oversubscribed by investors, raising a massive $148 million. Countries such as the United Kingdom and Hong Kong have also hopped onto the SPAC bandwagon due to its multifarious benefits as an alternative fund-raising route.
A deflating bubble?
Despite the many advantages, the overall transaction process may not always be as rosy as it seems. Given that the SPAC is required to begin its search for a target entity after listing, and the entire transaction is expected to be completed under strict timelines, many SPACs scramble to find attractive target businesses.
The time-bound hunt – SPACs exist for two years – for an attractive deal could result in hasty decisions, thereby inducing dissenting shareholders to exit and reducing overall gains for investors. In multiple cases, disappointing results have caused shareholders to commence class action suits and initiate investigations against SPAC sponsors in the US. The U.S. Securities and Exchange Commission has noted the need for more disclosures to investors and called for greater protection against fraud and conflict of interest.
Resolving the regulatory blur
As SPACs continue to rise in popularity, the current regulatory framework in India warrants closer inspection and intervention to adequately build a robust SPAC infrastructure.
While the Primary Market Advisory Committee of SEBI has been vested with the task of examining the feasibility of SPAC-like structures in India, no concrete developments have taken place yet. Regulation 6 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 still requires the issuer of an IPO to have an operating profit of at least Rs 15 crore during the preceding three years, thereby making it impossible for shell companies to get listed.
The Company Law Committee Report 2022 recommends introducing an enabling framework to recognise SPACs under the Companies Act, 2013 and allow entrepreneurs to list a SPAC incorporated in India on domestic and global exchanges. In order to align SPACs with the existing scheme of the Act, the Committee has also recommended that an exit option should be provided to shareholders that do not agree with the choice of the target company. Further, the Report also underscores the need to suitably modify provisions relating to striking off companies in their application to SPACs, since they do not have any operating business of their own.
While recognising SPACs within the contours of the Companies Act is a welcome step, it may still require a more sophisticated analysis of SPAC-related issues based on prevailing market practices, in consultation with SEBI. Additionally, the foreign listing of Indian incorporated SPACs can only be achieved after the commencement of Section 23(3) and Section 23(4) of the Companies Act, which enables certain classes of companies to list their securities on stock exchanges in permissible foreign jurisdictions.
The road ahead
Market experiences across multiple jurisdictions indicate that SPACs pose their own set of challenges and constraints. However, given that they are still being widely used, and hailed as an alternative to the IPO process, turning a blind eye to SPACs will lead to no good. Instead, in order to strengthen the regulatory framework governing them and mitigate accompanying risks, it is necessary to extend statutory recognition to such companies and emplace sophisticated safeguards to protect the interests of investors.
Considering that the International Financial Services Centres Authority (IFSCA) has already laid down a detailed set of rules governing SPACs through the IFSCA (Issuance and Listing of Securities) Regulations, 2021, it is time for SEBI to follow suit.
Further, it is essential that SPACs incorporated in India should be allowed to list not only on domestic stock exchanges, but also on global exchanges, to enable target companies to ride the SPAC wave and achieve their fullest possible potential.
Manjushree RM is a Senior Resident Fellow and Lakshita Handa is a Research Fellow at the Vidhi Centre for Legal Policy. Vidhi assisted the Ministry of Corporate Affairs by providing drafting and research advice towards the Company Law Committee Report, 2022, which recommends an enabling framework for SPACs in India. Views are personal.
(Edited by Neera Majumdar)