Crafting a Robust Regulatory

Framework for SPACs in India:

International Insights and Local
Adaptations

ILNU International Conference on Corporate Law

and Finance, 2023
Introduction

Special Purpose Acquisition Companies, are a unique financial concept that

gained widespread attention during the COVID-19 pandemic. Imagine SPACs
as empty shells created specifically to raise money from the public. Their
main goal is to merge with unlisted companies, helping these companies
become publicly traded.

In 2021, a whopping $160 billion was raised through SPACs in the USA. What
makes them stand out? Well, unlike regular ways of taking companies public,
SPACs offer a more predictable process, ensuring deals and prices are more
assured. Plus, they provide existing shareholders with a way to sell their
shares and exit the company once it goes public. This simplicity and speed
have made SPACs a popular choice in today's financial world.
 KEY FEATURES OF SPACs
➔ Management of SPACs organised and managed by a sponsor, who is typically a sophisticated investor and commercial
operator with certain acquisition targets.

➔ Trust Account As a matter of practice, and to comply with jurisdictional regulations, the proceeds from the public
offer of the SPAC are held in a trust account

➔ Time Period of Target Acquisition SPAC is required to consummate the combination with an unlisted company (a
de-SPAC Transaction) within a specified time. If a de-SPAC transaction cannot be completed within the specified time
frame, the SPAC may either seek approval from its shareholders for an extension of the time.

Process of Target Acquisition Once the target is identified, approval of the majority shareholders (including public
shareholders and institutional investors) of the SPAC is sought for the combination with the identified target. The
dissenting shareholders also have the right to redeem their shares

➔ PIPE Transaction SPACs often raise additional funds from private investors in the form of private investment in public
equity (PIPE) transactions to reduce the financial impact of redemptions by dissenting shareholders
SPAC Life-cycle
Navigating the
Regulatory Maze:
Understanding SPAC
Restrictions in India
 Restrictions on SPACs In India
Lack of Initial Business Objective:
SPACs, focused solely on acquiring unspecified private companies, don't meet registration criteria under Sections 7(1)
and 4(c) of the Companies Act 2013.

Striking off Company Names:

Section 248(1) allows striking off a company's name if it fails to initiate business within a year; SPACs failing to acquire
within this period face potential dissolution.

SEBI Regulations 2018:

Listing Prohibition: Blank-cheque companies, like SPACs, are barred under Regulation 6 of SEBI (Issue of Capital and
Disclosure Requirements) Regulations 2018, citing specific IPO eligibility criteria.

Cross-Border Challenges:
RBI Approval Requirement: Cross-border SPAC transactions must adhere to the Foreign Exchange Management (Cross
Border Merger) Regulations 2018, necessitating RBI approval. Investment Limitation-Indian shareholders face
limitations with the Liberalized Remittance Scheme, capping investments in overseas SPACs at USD 250,000 annually.
 Challenges in Indian-Foreign SPAC Mergers

Legal Compliance Burden:

Indian firms merging with foreign SPACs must navigate the intricate requirements of the Companies
Act, 2013, and the Foreign Exchange Management Regulations, 2018. This involves court procedures and
clearance from the National Company Law Tribunal.

Complex Share Swap Process:

Share swap mechanisms, while potential solutions, face hurdles in India. Non-resident investors can use
an automatic route, but Indian investors encounter challenges due to ambiguous regulations, requiring
time-consuming RBI approvals. These complexities offset the advantages of SPAC structures.
 COMPARING THE
SPACs FRAMEWORKS
USA

SPACs' origin in the 90s as an exemption to blank check company prohibition.

NYSE's significant increase in SPACs listings from 2017 (60 SPACs listed).

UK

Growth in SPAC formation, e.g., 15 SPACs listed in 2017, raising £1.7 billion.
Regulatory reforms discussed to attract growth companies.

Malaysia

Malaysian Securities Commission Equity Guidelines issued in December 2020.

Guidelines ensuring high-quality submissions, public investors' protection.
Factors considered: management team's experience, compensation, ownership.
 CREATING A ROBUST FRAMEWORK FOR INDIA

Implement Stringent SPAC Criteria:

Enforce strict standards for SPACs, ensuring only those with positive future
prospects are allowed in the market. Evaluate SPACs based on factors like
management team expertise, track record, and acquisition plans, akin to global
standards set by exchanges like SGX.
Set Higher Market Capitalization Thresholds:
Establish a higher minimum market capitalization requirement for SPACs,
similar to SGX's $225 million threshold.This higher threshold ensures that
SPACs entering the market are backed by experienced and credible
management teams, reducing the risk for investors.
Adopt an Economic Substance Approach
Adopt an economic substance approach in regulation, treating De-SPAC
transactions as cash stock sales.Ensure specific rules on forward-looking
statements and liabilities, similar to IPOs, enhancing transparency and investor
protection.
Differentiate Between SPACs and IPOs:
Clearly differentiate between SPACs and IPOs, recognizing their unique structures
and obligations.
Maintain stringent corporate governance standards for SPACs under Company law
while accommodating their practical differences.

Balance Investor Protection and Market Accessibility:

Strike a balance between protecting investors and allowing market accessibility.
Create fair rules that safeguard investors while encouraging wider public
participation, preventing a divide between investors and private enterprises.

Investor Education and Awareness:

Launch investor education and awareness programs to inform the public about the
changes in regulations, ensuring they understand the risks and benefits associated
with SPAC investments.

Collaboration with Global Regulatory Bodies:

Foster collaboration with global regulatory bodies to stay updated on international
best practices, ensuring Indian regulations remain in line with global standards.
Conclusion
SPAC is a specialized operating and investment entity
that brings together various stakeholders like
sponsors, private operating companies, and public
market investors. While the US experience gives some
solace that SPACs can offer a possible alternative to
traditional IPOs for publicly listing their shares, there
are many challenges concerning the same in India,
Domestic regulators such as the SEBI may come up
with amendments to current regulations and perhaps
new regulations which cover SPACs, which would
open up new vistas for such companies and domestic
investors.
Thank you