By Nikita Sharma (June 5, 2021)
Edited by: Naveen Dahiya, Partner
Ever since ReNew, the renewable energy plant, in late February 2021 used the SPAC route to get listed on the NASDAQ exchange in order to enter into a deal with RMF Acquisition Corporation II, a US-based SPAC company, the concept of SPAC has gained popularity in India.
SPACs are special purpose acquisition companies or shell corporations also notoriously called black cheque companies. They are formed with the purpose of raising funds from the public through Initial Public Offering (IPO). New companies often choose the SPAC route as they have no business of their own but aim to raise funds to take over another company.
Advantages of SPAC Route over Traditional IPO Route
In a country like India where markets are emerging, companies have started to opt for the SPAC route as the valuation of companies has decreased because of the global pandemic. SPACs, in comparison to the traditional IPO route, are more flexible and transparent during the execution of transactions with companies.
Following are some reasons:
SPACs are More Convenient
For a private company to become a publicly listed company, the SPAC route is easier, particularly for high leverage companies. Further, it helps startups to get themselves listed on the US stock exchange.
SPACs are More Expeditious
Usually, through the IPO method, it takes a private company eighteen months to become a publicly-traded company. On the other hand, an acquired company will take around six months to be considered as a public traded company through the SPAC route. So, for nascent companies, which seek to secure investments in the early stages, SPACs are preferable. Many times, companies that are on the verge of shut down go for the SPAC route as a survival measure.
SPACs are Less Costly
The procedural requirements and thus the time consumed and the cost to set up a SPAC is quite less when compared with IPO formalities. The documentation needed for the merger of the SPAC with the target company, called de-SPAC, is conceivably not as burdensome as IPO documentation which makes the SPAC route more business-friendly and comparatively economical.
Regulatory Drawbacks of SPAC in India
Not only will the SPAC regime benefit medium and large-scale companies but also small businesses and startups. It will be beneficial for startups that are ineligible for an IPO as per the criteria of the Securities and Exchange Board of India (SEBI), it would not constrain them from seeking investments from foreign stock markets. Hence, the SPAC route provides for a lifeline to the Indian startup ecosystem.
Although the SPAC regime may be suitable for Indian companies to eventually be publicly listed companies on foreign stock exchanges, the Indian implementation of SPAC may be lacking on the execution front. Certain regulatory challenges are faced in India:
Companies Act, 2013
On the perusal of the Companies Act, 2013, there is no definition of the term “SPAC/ blank cheque companies”. The main issue concerning this may be brought on by the fact that SPACs can stay non-operational for two years. This conflicts with Section 248 of the Companies Act, 2013 wherein the Registrar may strike off the name of any company from its register(s) if it is observed that a company has not commenced business within one year of its incorporation.
Inconsistency with SEBI’s Disclosure Requirements
SPACs are unable to fulfil the requirements that are given under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 due to the non-operation of business before acquisition. For instance, SPACs would not be able to satisfy the requirements under Section 26 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 mandates that any company making a public offer in an IPO requires it has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty per cent are held in monetary assets or it has a net worth of at least one crore rupees in each of the preceding three full years .
In addition to this, SPACs also fail to come under SEBI’s Takeover Code, 2011 as this Code applies only to the listed companies.
Non-Performance of Requirements under Indian Listing Exchanges
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are required to comply with the SEBI Guidelines. As previously mentioned, SPACs fail to comply with the SEBI Guidelines. Hence, they are ineligible to follow the listing exchange requirements. Moreover, the NSE has a condition that companies striving to be listed on the stock exchange need to continue favorable operational cash flow accruals for a minimum of two years before the offer. Once again, SPACs are unable to meet the requirements of law.
The SPAC Regime is an innovative measure that encourages corporates to enter into the stock market and become public companies. The Indian stock market needs to establish appropriate regulations for SPAC listing that equate with the dynamic functioning of the modern securities market. To ensure ethical, transparent and economically conducive de-SPAC transactions, SEBI might face some hurdles in policymaking and in ensuring the law is not abused for money laundering, but through amendments in the current regulations along with rectification in compliance hurdles, India may witness a shoot in SPAC listings. Mending the chinks in the current SPAC regime, SEBI, on 11th March 2021, announced the formation of an expert group under the Primary Markets Advisory Committee (PMAC) to discuss the viability of executing SPACs in India with competent checks and balances.
1 Section 26(a), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
2 Section 26 (c), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009