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Author: Sameer Afzal Ansari, III year of B.A.,LL.B. from Guru Gobind Singh Indraprastha University

Special tPurpose tAcquisition tVehicles t(SPACs) thave temerged tas ta tpromising toption tto traise tpublic tfunding tfrom toffshore tmarkets. tThey tare tespecially tsuited tfor tstart-ups, twho totherwise tfind tit tdifficult tto texcite tthe tconservative tIndian tretail tinvestors. tThis thas tbecome tall tthe tmore tcritical tas tthere tis tevidence tthat tprivate tfunding tmay tbe tdrying tup tand tit tmay tbe ta twhile tbefore tit treturns tas ta tsubstantial tsource tof tcapital tfor tstart-ups. tWith tSPACs, tthe tstart-up tgets tlisted tthrough ta treverse tmerger twith ta tlisted tshell tcompany, ti.e., tthe tSPAC, twhich tacquires tthe tstart-up.

Indian tlaws talso tneed tto tbe tsuitable tamended tto tfacilitate toverseas tfundraising tby tstartups.

SPACs regulatory evolution- globally

Globally, tSPAC tregulations thave tevolved tover tthe tpast tmany tyears. tSPAC tstructures tare tmore tshareholder tfriendly tand thave tample tfail-safe tmeasures tto tprevent tfraud. tLock-in tperiods tensure tthat tfounders thave tsome t“skin tin tthe tgame” tand tminimize tagency tcosts. tSuccessful tSPAC tlistings tover tthe tyears thave treduced trisk tperceptions tand, tconsequently, tthe tassociated tupfront tcosts, tsuch tas tunderwriter’s tfee, thas talso tcome tdown. tIndia thas tseen ta treasonable tnumber tof tacquisitions tby tSPAC trecently:

  • Yatra twas tacquired tby tTerrapin t3 tAcquisition tCorp t(TRTL), ta tNASDAQ-listed tSPAC. tTRTL twas tlisted ton tNASDAQ tin t2014 tand tDeutsche tBank twas ttheir tunderwriter.

  • Videocon tDTH twas tlisted ton tthe tNASDAQ tthrough ta treverse tmerger twith tSilver tEagle tAcquisition tCorp, ta tSPAC. tSilver tEagle twas tlisted tin t2014 tand tDeutsche tBank twas ttheir tunderwriter.

  • Constellation tAlpha tCapital tCorp., ta tSPAC, twas tlisted ton tthe tNASDAQ tin t2017. tIt tis tfocussed ton tacquiring ta ttarget tin thealthcare tservices tand tmanufacturing tindustry tin tIndia. tCowen tacted tas tthe tunderwriter tfor tthe toffering.

In taddition tto tthe tabove, tthere thave tbeen tmultiple tSPAC tacquisitions tin tIndia tin tthe tpast, tincluding:

  • Trans-India tAcquisition tCorp.’s tacquisition tof tSolar tSemiconductor tin t2008; thowever, tthe tposition twas tliquidated tin t2009. tTrans-India twas tan tAMEX-listed tSPAC twhose toffering twas tunderwritten tby tJoseph tGunner tand tCo.

  • Presently tdelisted, tPhoenix tIndia tAcquisition tCorp. twas tlisted tas ta tSPAC ton tthe tNASDAQ tin tan toffering tunderwritten tby tGersten tSavage. tThey tacquired tCitius tPower tin t2008.

Two tinferences tcan tbe tdrawn tfrom tthe tabove tinformation. tMajor tinvestment tbanks, twho tare tactive tin tthe tIPO tmarket, thave tactively tunderwritten trecent tSPACs. tCompared tto tthis, tSPAC tunderwriters tin tthe tearly t2000s twere tmore tspecialized. tThis tgoes tback tto tthe targument tthat tunderwriter tfees thave tcome tdown tas tcompetition thas tincreased tand, tas ta tresult, tonly tthe tlarger tmainstream tinvestment tbanks tfind tit tprofitable tto tunderwrite tSPAC tlistings. tAnother timportant tpoint tto tnote tis tthat tthe trecent tIndia-focussed tSPACs twere tmore tsuccessful tand twere tlisted ton tmore tprominent texchanges tsuch tas tthe tNASDAQ. tAll tthis tpoints tto tthe tincreasing tacceptance tof tSPACs tas tan tadditional tavenue tto traise tcapital tin tIndia.

Regulatory framework in India

In tIndia, tthe tmajor tregulatory tdrawback tis tthe tlack tof ttargeted tlaws concerning tSPACs. tWe tsummarize tthe trelevant tregulations tbelow:

Company’s Act

Since tNovember t2016, twhen tthe tgovernment tannounced tdemonetization, tit thas tbeen tcracking tthe twhip ton tsuspicious tshell tcompanies tand tthere thas tbeen tan turgency tto tdefine tthem tbecause tthey tare tnot tpresently tdefined tunder tthe tCompanies tAct. tIn tMarch t2018, ta tParliamentary tcommittee tasked tthe tgovernment tto tdefine tthe tterm t“shell tcompany” tin tthe tCompany’s tAct tin torder tto t“avoid tlegal tambiguity tand tpre-empt tavoidable tlitigations”.

A tpaper tby tGarg tet tal. t(2011) identified tthe t“Objects” tclause tin tthe tCompanies tAct t1956 tas ta tmajor timpediment tin tthe timplementation tof tSPACs. tThe tclause trequires tapplicants tto tmention ttheir tbusiness tobjective. tUnfortunately, tSPACs thave tno tbusiness tobjectives tof ttheir town tand ttheir tsole tobjective tis tto tacquire ta ttarget. tCompany’s tAct t2013 thas tdone taway twith tthe t“Other tObjects” tclause, tthus ttaking taway tany tflexibility tin tdefining tthe tObjects. tThe tCompanies t(Amendment) tOrdinance tintroduced tin tthe tParliament tin t2017 tproposed tthe tremoval tof tthe t“Objects” tclause tall-together. tHowever, tthis tproposal twas tremoved tbefore tthe tAct twas tsigned.

As tper tSection t248 tof tthe tCompany’s tAct t2013, tthe tregistrar tcan tremove ta tcompany’s tname tfrom tthe tregister tof tcompanies tif tit thas t“failed tto tcommence tits tbusiness twithin tone tyear tof tits tincorporation”. tThe ttypical tacquisition ttimeline tof ta tSPAC tis t18 tto t24 tmonths. tThe tsponsors tneed tthis ttime tto tidentify tthe tbest ttarget tin torder tto tmaximize tshareholders’ twealth. tThus, tthis tclause tpresents ta tmajor thurdle tto tSPAC timplementation.

SEBI Regulations

In t2017, tSEBI tsuspended ttrading tin t331 tsuspected tshell tcompanies;however, tit tlater tgave ta tclean tchit tto tmost tof tthem.In t2018, tin tan tadvisory tcapacity tto tthe tgovernment, tSEBI tbased tits tdefinition tof tshell tcompanies ton tthe tU.S. tSEC tregulations.

SEBI t(Issue tof tCapital tand tDisclosure tRequirements) tRegulations, t2009 t(amended tAug t2017), tSection t26 tsets tminimum teligibility tconditions tfor ta tpublic toffer. tThese trequire tthe tissuer tto thave:

  • Net ttangible tasset tof tat tleast tINR t3 tcrore tin teach tof tthe tpreceding tthree tyears t(earlier trequirement tof tmaximum tof t50% tto tbe theld tin tmonetary tassets thas tbeen tdone taway twith tin tcase tthe tentire tpublic toffer tis tthrough tsale).

  • Minimum taverage tconsolidated tpre-tax toperating tprofit tof tINR t15 tcrore tduring tany tthree tof tthe tlast tfive tyears.

  • Net tworth tof tat tleast tINR t1 tcrore tin teach tof tthe tlast tthree tyears.

It tis teasy tto tsee tthat tSPACs tcannot tmeet tany tof tthese tconditions. tThey tdo tnot thave tany toperational tprofits tor tnon-monetary ttangible tassets. tFurthermore, teven tif tthe tfounders tinfuse tmonetary tassets, tmost tSPACs tcannot twait tfor tthree tyears tbefore tgetting tlisted.

Exchange requirement

All tmajor tSPAC texchanges tacross tthe tglobe thave ttheir town tSPAC-related regulations. tSome tof tthem thave tbeen thighlighted tbelow:

  • In tJanuary t2018, tin ta tbid tto tencourage tSPACs tand treduce tprice tdistortion, tthe tNASDAQ tproposed tthat tthe tnumber tof tround-lot tholders tbe treduced tand tthe tSPACs tshould tmaintain tnet ttangible tassets tof t$5 tmillion tto tremain tlisted.

  • In tthe tcase tof ta treverse tmerger twith ta tlisted tentity, tthe tLondon tStock tExchange t(LSE) trequires tthe tlisted tentity tto tdelist tand tthen treapply.

  • The tAustralian tSecurities tExchange tand tHongKong tExchange tallow treverse tmerger ton ta tcase-by-case tbasis.

  • Canada’s tToronto tStock tExchange t(TSX) thas tseparate tguidelines tfor tSPACs tand tis tactively tpromoting tit.

The tNational tStock tExchange t(NSE) tand tthe tBombay tStock tExchange t(BSE) tare tthe ttwo tmost tprominent tstock texchanges tin tIndia. tBoth texchanges trequire tcompliance twith tSEBI tregulations. tIn taddition, tthe tNSE trequires tthe tcompanies tto thave tpositive toperational tcash taccruals t(Earnings tbefore tDepreciation tand tTax) tfor tthe tlast ttwo tyears, tmaking tSPACs tineligible tfor tlisting.

In taddition tto tabove tthe tActs tand tlaws, tGarg tet tal. t(2011) tidentified tSEBI t(Substantial tAcquisition tof tShares tand tTakeovers) tRegulations, t2011 t(amended tMar t2017) tand tForeign tExchange tManagement t(Acquisition tand tTransfer tof tImmovable tProperty tin tIndia) tRegulations, t2018 t(FEMR) tas thaving tsignificant timpact ton tSPAC tmergers tin tIndia. tThe tTakeover tcode tis tapplicable tonly tif tthe ttarget tcompany tis tlisted, tin twhich tcase tit tputs tsevere tlimitations ton tthe textent tof tcontrol tthat tcan tbe tacquired tand tfurther tincreases tthe ttime tperiod tfor tthe ttransaction. tFEMR tis tapplicable tin tcase teither tone tof tthe tSPAC tor ttarget tis tlisted toutside tIndia, tor tif tan tIndian tSPAC treceives tinvestment tfrom toffshore tinvestors. tFEMR tguidelines tallow toverseas tinvestment tonly tupon tthe tacceptance tof tthe tapplication tby tthe tReserve tBank tof tIndia t(RBI). tFEMR tCross tBorder tregulation t2018 tallows tboth tinbound tand toutbound tmergers, tsubject tto tadherence tto tall trelevant tlaws tand tregulations.

Possible regulatory amendments and future of SPACs in India

As tdiscussed, tsome tof tpresent tlaws tand tregulation tare tdetrimental tto tthe tdevelopment tof tSPACs tin tIndia. tSome tof tthese tare tarchaic tand tneed tto tbe tredesigned twith ta tfresh tlook tat tthe tstate tof tIndian teconomy. tShell tcompanies tneed tto tbe tdefined tand tperceptions tabout tthese tbeing tprimarily ta tmoney tlaundering tvehicle tneed tto tbe taltered. tA tspecial tcommittee tneeds tto tbe tconstituted tto tstudy tthe timpact tof tSPACs tin tother tcountries, tespecially ttowards tinvigorating ttheir tstart-up tindustry. tSPACs tare tdifferent tfrom tcompanies tthat tundergo tnormal tIPOs tand thence twe tneed tspecific ttargeted tlaws tfor tthem. tThe tCompanies tAct tshould thave tseparate tchapter tcovering tthe tincorporation tof ta tSPAC tand tcompliance tand tgovernance taspects trelated tto tits tmanagement, tboard tand tshareholders. tOnce tit tconcludes tacquisition, ta tSPAC tcan tgovern tunder tthe tnormal tprovisions. tSimilarly, tseparate tprovisions/chapter tare trequired tunder tall tthe tapplicable tlaws tand tlisting trequirements. tIncome tTax tlaw tcan talso tinclude tSPACs tunder tthe texemptions tand tdeductions tcurrently tavailable tonly tfor tStart tUps, tVCs tand tangel tinvestors.

India tInc. tis tat ta tcusp tof ta tchange. tMcKinsey thas tsized tIndia’s tcapital tmarket tat tapproximately t$140bn. tAs tper tits tresearch tpaper, tit thas tfound tthat tdeeper tcapital tmarkets tcan thelp trelease t$100 tbillion tof tfresh tfunding tevery tyear tthat twould trapidly taccelerate tthe tindustry tgrowth. t tIt tis ttime tfor tregulators tto ttake ta tfresh tlook tat tSPACs tand thelp tunlock tthe tpotential tfor timmense tvalue tfrom tthese tstructures.