The Indian government is exploring the establishment of a regulatory framework for Special Purpose Acquisition Companies (SPACs), following recommendations from the Company Law Committee 2022. The aim is to facilitate the potential listing of Indian companies through this approach, enhancing the nation’s ease of doing business. The framework would be incorporated into existing statutes.
Understanding Special Purpose Acquisition Companies (SPACs)
A SPAC is a corporation created solely for raising investment capital via an Initial Public Offering (IPO). These companies have no existing business operations or specified acquisition targets at the time of their IPO. This structure allows investors to invest in a fund, which is subsequently used to acquire unidentified businesses post-IPO. Due to this flexible structure, SPACs are often referred to as “blank-check companies.”
Upon raising funds from the public, the money is deposited in an escrow account, accessible for making acquisitions. If no acquisition takes place within two years post-IPO, the SPAC is delisted, and investors receive their money back.
The Company Law Committee 2022 and SPACs
The Company Law Committee 2022 suggests introducing a supportive framework that recognises SPACs under the Companies Act, 2013. This will allow entrepreneurs to list India-incorporated SPACs on both domestic and international exchanges. The committee also proposed an exit option for shareholders who disagree with the choice of target company.
Moreover, the committee emphasised the need to appropriately adjust provisions related to striking off companies, especially for SPACs, as they don’t operate any business independently.
The Importance of SPACs
A company can go public via a merger or acquisition by a SPAC in a few months, bypassing hefty costs associated with traditional listings. This is advantageous to niche Indian businesses seeking to list on foreign stock exchanges. For example, the recent listing of Indian renewable energy company Renew Power Private Limited on NASDAQ via a SPAC confirms the popularity of this approach.
The SPAC listing process involves minimum risk due to its definitive agreement, providing security to investors. This process also protects those shareholders who vote against the proposed acquisition by allowing them to sell their shares to SPAC promoters. Despite being shell companies, SPACs are attractive to investors as they provide exposure to different countries and consumer bases, allowing companies to achieve higher valuations.
Understanding Shell Companies and Initial Public Offerings
Shell companies are corporations formally registered and incorporated, but have no business operations. They are sometimes used illegitimately to hide business ownership. An IPO is the sale of new securities to the public for the first time. It differs from a secondary market, where existing securities are traded.
An escrow account is a legal instrument where an asset or money is held by a third party during a transaction -commonly associated with real estate transactions, but applicable to any situation requiring payment transfer between parties.
Concerns Around SPACs
SPACs can theoretically limit returns for individual investors post-merger. Furthermore, not all SPACs succeed in attracting target companies due to the strict timeline and requirements after listing, leading to hasty decisions that may reduce investor gains. Disappointing results can lead to class action lawsuits and investigations against SPAC sponsors.
Future Direction for SPACs
India should cautiously optimise the benefits of SPACs, maintaining regulatory oversight to guard against underperforming instances. Strengthening the regulatory framework, implementing statutory recognition and sophisticated safeguards to protect investor interests are vital. Allowing India-incorporated SPACs to list on both domestic and global exchanges will enable target companies to maximise potential.
Analyzing SPAC-related issues based on current market practices in consultation with the Securities and Exchange Board of India (SEBI) will be beneficial. To achieve foreign listing for Indian SPACs, commencement of Section 23(3) and Section 23(4) of the Companies Act is needed, enabling certain company classes to list their securities on permissible foreign exchanges.
