An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001 Global Law Assembly Technical Report Series Manohar Samal Associate Advocate, Ratan Samal & Associates Bhavana J Sekhar Principal Researcher, Indic Pacific Legal Research LLP Sathyajith MS Research Coordinator, Global Law Assembly
© Global Law Assembly, 2021
Global Law Assembly Technical Report Series
Year: 2021 Date of Publication: October 15, 2021 ISBN (online): 978-81-954752-0-9 ISBN (paperback): 979-84-864681-1-7 Authors: Manohar Samal, Bhavana J Sekhar, Sathyajith MS All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher and the authors of the respective manuscripts published as papers. except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law. For permission requests, write to the publisher, addressed "Attention Permissions Coordinator," at the address below. Printed and distributed online by Global Law Assembly in the Republic of India. An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001, First Edition 2021. Price (Online): 200 INR Price (Paperback). 10 USD (Amazon.com) Global Law Assembly, 8/12, Patrika Marg, Civil Lines, Prayagraj, Uttar Pradesh, India - 211001 The publication is authorized by Indu Bala Srivastava, Head of Publishing. The authorship of the book is retained with the authors of the technical report, while the ownership is retained by the publishing organization. To cite, please follow the format for the list of references as follows 2021. An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001, Prayagraj: Global Law Assembly, 2021. You can also cite the book through cite this forme.com (recommended) For Online Correspondence purposes, please mail us at executive[at]globallawassembly.org For correspondence purposes, please contact at: 8/12, Patrika Marg, Civil Lines, Prayagraj, Uttar Pradesh, India - 211001
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An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001
Preface This is a technical report published by Global Law Assembly as a part of their Technical Report Series. The larger theme of the report is in the field of corporate governance & innovation. Manohar Samal, Bhavana J Sekhar and Sathyajith MS have authored this report. The authors were encouraged to undertake research and contribute to the present publication because the Indian legal perspective of Special Purpose Acquisition Companies have only been discussed through short articles by various professionals and a publication for comprehensive analysis of Special Purpose Acquisition Companies can seldom be found. Accordingly, the authors have worked and contributed to several portions and chapters of the publication depending upon their areas of interest. “Chapter 1: Prologue” drafted by Manohar Samal examines the history and origins of Special Purpose Acquisition Companies and lays down the objectives of the research in brief. “Chapter 2: Understanding Special Purpose Acquisition Companies” drafted by Bhavana Sekhar and Manohar Samal explicates the structure, process and phases, potential benefits of embracing the structure and the current legal framework governing Special Purpose Acquisition Companies in India. “Chapter 3: Regulatory Concerns of Special Purpose Acquisition Companies from the Indian Context” drafted by Manohar Samal, Bhavana Sekhar and Sathyajith MS discuss in detail, concerns under securities law, law on mergers and acquisitions, tax law, anti- money laundering law, company law and private international law. Concurrently, “Chapter 4: Recommendations to Solve Regulatory Concerns of Special Purpose Acquisition Companies” drafted by all the authors in unison has aimed to suggest few possible reforms which can be undertaken under the respective laws of concern for Special Purpose Acquisition Companies with an aim of solving the said concerns for regulators and Special Purpose Acquisition Companies alike. Finally, “Chapter 5: Epilogue” drafted by Manohar Samal gives a concise summary of the findings of the research. The authors hope that the readers enjoy the discussions and descriptions propounded in the publication.
Office of the Research Directorate Global Law Assembly
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Table of Contents
Prologue ................................................................................................. 6 Understanding Special Purpose Acquisition Companies ..................... 8 Structure of Special Purpose Acquisition Companies .............. 9 Units (Stocks and Warrants)....................................................... 9 Founder Shares .......................................................................... 10 Private Investment in Public Equity (PIPE) ........................... 11 Process from the Initial Public Offer to the Merger ............. 11 The Initial Public Offer Phase .................................................. 11 Seeking or Searching for a Target ............................................ 13 De-SPAC Transaction .............................................................. 14 Closing Phase ............................................................................. 15 Potential Benefits of Embracing the Special Purpose Acquisition Companies’ Structure in India .............................. 15 Current Mechanism for Governing Special Purpose Acquisition Companies in India ................................................. 17 Regulatory Concerns of Special Purpose Acquisition Companies from the Indian Context ............................................................................... 22 Concerns under Securities Law ................................................. 22 Concerns under Law on Mergers & Acquisition .................... 24 Challenges Concerning Valuations ............................................ 25 Challenges Concerning Legal Framework and Regulations .... 26 Concerns under Tax Law ........................................................... 28 Concerns under Anti-Money Laundering Law ...................... 29 Concerns under Company Law ................................................. 31 Concerns under Private International Law ............................. 33 Recommendations to Solve Regulatory Concerns of Special Purpose Acquisition Companies ........................................................................ 37
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Securities Law ............................................................................... 37 Law on Mergers & Acquisition ................................................. 38 Tax Law ......................................................................................... 38 Anti-Money Laundering Law .................................................... 39 Company Law ............................................................................... 39 Private International Law .......................................................... 40 Epilogue ............................................................................................... 41
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1
Prologue Traces of the world’s first “securities” can be traced back to the year 1602 where the Dutch East India Company (Verenigde Oost- Indische Compagnie) issued its shares to the public and consequently, the first securities market system in the form of the Amsterdam Stock Exchange came into being in the same year. 1 Since then, securities market systems have rapidly evolved and advanced across jurisdictions with the introduction of more complex financial products in the form of securities, complex trading strategies, focus on investor welfare, improved methods of surveillance and offences, wealth creation and risk management methodologies contributing to qualitative as well as quantitative global expansion of economies. An innovative type of business entity called “special purpose acquisition company” was introduced in the year 19932 and was eventually legalised leading to additional development in securities market systems across jurisdictions. This is because special purpose acquisition companies (SPACs) are shell companies floated by a promoter (referred to as the sponsor) which does not have any business operations as they are aimed towards acquiring a target company through the capital raised in the respective securities market system. 3 The present technical report is aimed at; firstly, understanding special purpose acquisition companies including its structure, operational process from initial public offer to merger to post(The World’s First Stock Exchange, 2021) <https://www.worldsfirststockexchange.com> accessed 08 August 2021. 2 Excelsior Capital, ‘What is a SPAC and Why are they so Popular?’ (Excelsior Capital, 2020) <https://www.excelsiorgp.com/resources/what-is-a-spac-andwhy-are-they-suddenly-so-popular/> accessed 08 August 2021. 3 Usha Rodrigues and Mike Stegemoller, ‘Exit, Voice and Reputation: The Evolution of SPACs’ (2012) 37 DEL. J. CORP 849, 851. 1 Lodewijk Petram, ‘The World’s First Stock Exchange’
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merger stages, benefits and responses of jurisdictions across the world; secondly, regulatory concerns of special purpose acquisition companies in the sphere of securities laws, tax laws, mergers and acquisitions, anti- money laundering laws, company laws; thirdly, concerns faced by SPACs themselves and liquidation risks faced by them; and fourthly, recommendations to solve regulatory concerns and the problems faced by SPACs.
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2 Understanding Special Acquisition Companies
Purpose
Special Purpose Acquisition companies are companies that currently do not have any commercial operations and are exposed to raise capital through an initial public offer (IPO) for the sole purpose of acquiring an existing company or merging with another company. They are also commonly referred to as blank cheque companies or shell companies due to the absence of prior operational activity undertaken by the shell company. The only operation of SPACs is to find a prospective company for a smooth acquisition or merger after the process of IPO. SPACs have become an efficient mode for transactions and allow the process of transformation of a private entity to a public entity in a facile manner in comparison to the traditional route of an IPO. The incipient idea behind the purpose and formation of a SPAC is for carrying out an IPO. Post the IPO process, the funds gathered is utilised to acquire or merge with a private entity’s business and bring it within the sphere of public markets. A SPAC is formed by a group of highly experienced executive management team or sponsors with capital who are referred to as founders. In return, they receive founder shares which constitute about 20% of interest in the company or even 25% in the case of some companies. The founders become the significant point for selling the shares through an IPO and to gather investor funds. The founders also provide an adequate capital for the purpose of inception of the company and thereby hold a stake in the company that is acquired post the IPO. The process of SPAC begins with the sponsors and the risk capital or seed capital for covering the operating expenses of the firm. The funds and proceeds post the IPO procedure are held in the Trust Account of the company until the target company is identified for an acquisition or merger. The funds held in the Trust Account are extended towards maintaining the transaction costs and the working capital of the company after the De- SPAC process is
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initiated. The Trust Account usually has an agreement which allows the occasional withdrawals to be made from the funds held to cover the income taxes expenses. Once the target company is identified by the sponsors, which is usually done within a year or two, typically, the company does not disclose extensive information in which the merger or acquisition is speculated. However, the companies can mention the industry in which they would primarily seek an investment merger or acquisition. The merger will take effect and the shareholders who are unwilling of such an acquisition to take place can vote against it and would be allowed to redeem their shares when the merger is effectuated. Structure of Special Purpose Acquisition Companies When SPACs issue an IPO, the offer is targeted towards institutional investors, retail investors and sponsors. The proceeds from this IPO are held in the Trust Account. The investors receive an opportunity to gain units for their capital they have invested. Each unit comprises a share of common stock and a warrant with the agreement to purchase more stocks in the future.
Units (Stocks and Warrants) When SPACs begin the process of IPO, they begin by listing units at a purchase price. During the first few days of the IPO, the shares and warrants are to be traded in the public market and investors can choose to split their units into the components of shares and warrants. The sponsors usually provide the initial capital or seed capital that will be utilised by the SPAC to cover any expenses till the process of initiation of a merger. The sponsors usually receive founder shares which consist of equity and warrants. Institutional investors such as credit unions, banks, hedge funds and insurance companies and large funds namely mutual or hedge funds usually receive the added incentive of receiving the warrants as they invest before the IPO begins and receive the advantage for being an early investor into the IPO exercise of SPAC. Depending on the SPAC, the warrant may be issued for a fraction of share (either for half of the share, 1/3rd or 2/3rd) or for an entire stock. The warrants can be
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Global Law Assembly Technical Report Series exercised 30 days after the target company acquisition or merger takes place and after a year of the SPAC’s IPO. The capital structure of SPAC is beneficial to institutional investors due to the option of buying warrants allowing them to purchase more shares once the target company for acquisition has been decided. They can also choose to redeem their shares if they are unsatisfied with the SPAC’s decision of acquisition and receive their money invested. For instance, if an institutional investor buys 1,500 shares for USD 10 each, they receive 1,500 warrants to buy more shares in the future at an already decided price which is slightly higher than the original price at which the shares were purchased (usually at USD 11.50) which would garner a higher profit if the stock of the company rises. In contrast, the retail individual investors (RII) make the decision of an investment in the SPACs after it has gone public and before the decision of acquisition/merger. They do not receive the additional advantage of receiving the warrants and redeeming the shares in the future like the institutional investors do.
Founder Shares As the name suggests, these are shares that are offered to the founders or sponsors of the SPAC during the inception of the SPAC registration. The founders pay a nominal amount to attain the shares which consist of 20% stake as owners in the total shares post the conclusion of the IPO. These shares are offered in the interest of the management team as they do not receive any money as commission for the participation in the SPAC process until the conclusion of the merger of acquisition with a private company. Founder’s stock is the equity that is offered to the sponsors and investors that played a vital role in managing and providing their expertise to the SPAC during its early stage. Founder’s stock is different from the common stock that is sold in the secondary market. In addition to the SPAC shares, they receive units which comprises one share and its subsequent fraction of warrants.4
Securities and Exchange Commission: Division of Corporate Finance, ‘Special Purpose Acquisition Companies’ (U.S. Securities and Exchange Commission, 22 4
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Private Investment in Public Equity (PIPE) Usually when the SPAC proceeds to make an IPO on behalf of the private company, they are prospectively about to acquire or set to merge with, they are set to raise an expected amount of capital which will assist in making the SPAC public. Once the De-SPAC is initiated, the sponsors and the investors will hold a stake in the acquired company depending on their investment. PIPE is effectuated when the cost of acquiring such a target company exceeds the funds held in the Trust Account. 5 PIPE is facilitated by issuing new securities to the institutionally accredited investors through the PIPE transaction. The capital produced through PIPE transaction will be utilised to assist the SPAC’s existing funds in acquiring the company. PIPE allows the SPAC to customize the investments towards specific target companies and commercial goals and provide an indication and confidence in the market that the SPAC is investment worthy to future investors as accredited investors have provided their funds to the SPAC. Process from the Initial Public Offer to the Merger There are various phases in a SPAC’s lifespan 6 which determines the regulatory aspect and comprehending the process of SPAC is formed and acquired with another company and other activities that should be undertaken for successful completion of the DeSPAC process.
The Initial Public Offer Phase The initial phase of the SPAC is the foundational structure for the formation of a SPAC. The course of this phase may be for a December 2020) <https://www.sec.gov/corpfin/disclosure-special-purposeacquisition-companies> accessed 17 September 2021. 5 Ramey Lane and Brenda Lenahan, ‘Special Purpose Acquisition Companies: An Introduction’ (Harvard Law School Forum on Corporate Governance, 06 July 2018) <https://corpgov.law.harvard.edu/2018/07/06/special-purposeacquisition-companies-an-introduction/> accessed 17 September 2021. 6 Maurice Lekfort, ‘The Lifecycle of A SPAC’ (Wharton Magazine, 12 April 2021) <https://magazine.wharton.upenn.edu/digital/lifecycle-of-a-spac/> accessed 17 September 2021.
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Global Law Assembly Technical Report Series period of three to four months or more depending upon the SPAC. The key players in this phase include the sponsors, the management, the underwriters and the investors. The sponsors provide a nominal amount of initial capital required that is utilised by the SPAC to cover expenses till the merger process is initiated with the target company. Additionally, the sponsors or founders receive founder shares which are converted into significant stake holding in the target company. The IPO is a relatively easier process that is usually different from the traditional IPOs. In the traditional IPO, they usually sell their common stock at a price based on the demand in the stock market and through the prospectus which displays the essential information upon the company. The SPAC IPO is unique in the sense that they attract investors to provide funds to the SPAC in the compromise of a future merger with a target company that would remain unspecified till the next stage. The unit of IPO in the SPAC comprises two components; one is the common stock option which is almost always priced at a standard price and subject to the pricing guidelines in different jurisdictions (in case of listing on US Stock Exchange, they are priced at USD 10). The other component are the warrants that facilitate the investors to buy the shares at an ascertained price in the future usually for a price that is slightly higher than the common stock. Warrants are an essential parcel of the risk arrangement complex underlying the investors and sponsors. Warrants are issued to majorly attribute the risks covered by the early investors and incentivise the subscription of the shares. The SPAC shareholders can redeem their shares upon the De-SPAC transaction process completion but can still hold the component of warrants in the company. The obligation and responsibilities undertaken by the SPAC upon the completion of the IPO process is for placing the proceeds or funds from the IPO process into a Trust Account which is only entitled to be released and utilised until the DeSpacing transaction is concluded. The only proceeds from the Trust Account funds that are allowed to be withdrawn for utilisation is for complying with the concerned stock exchange commission provisions and reporting responsibilities. Post the conclusion of the IPO, the Founders will typically occupy and
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form 20% of the SPAC’s total capital and the rest would be occupied by investors (institutional or retail as the case maybe). The Sponsors are also responsible for selection of Directors, board members and executive management and underwriters. The underwriters for the IPO process are selected for the SPAC to move forward with going public. Underwriters usually receive a higher discount on shares in the Traditional IPO whereas the underwriters of the SPAC IPO receive lower percentage of discount (around 5% discount) of the total proceeds from the SPAC IPO about which only 2% of the discount is applicable for payment at the conclusion of the IPO and the remaining payable discount will be credited to the Trust Account and the payment of the money is deferred until the stage of the successful completion of merger with the target company. If the target company business combination is unsuccessful, then the deferred amount is not liable towards the payment to the underwriters and rather would proceed to the Trust Account for redemption of the shares offered to the public.
Seeking or Searching for a Target When the SPAC funding is intact, the SPAC can start with the search to seek Target companies for acquisition. The time or search for Target company can extend from 8 months to 2 years. Sometimes, the SPAC can also identify a target industry. The SPAC usually does not disclose the target though the scope of search within a specific industry might be known. The SPAC target searches are usually start-up companies because most companies at this stage contemplate the option of IPOs to go public, raising capital, listing the company. SPACs can be viewed as the most viable and attractive options available for start-up firms since they can provide various solutions that are specifically tailored to the start-up businesses dedicated to formulating the business combination. This phase is inclusive of several negotiations that take place between the target company and the SPAC. It is the phase where the idea for merger is shared and pitched between the target company management executives and the sponsors. Conducting due diligence, repeated negotiations and arranging additional
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Global Law Assembly Technical Report Series funds such as PIPE or any other debt financing, filing, and preparing proxy offer documents and accounting considerations and audits and financial forecasts are some of the most common evaluations and information sharing between the target company and SPAC. Furthermore, for the opportunity of an acquisition and arranging the purchase agreement, if the SPAC has an additional capital requirement in pursuance of a business combination (i.e., the acquisition of assets and business of the target company), the PIPE arrangement is facilitated to expand the existing funds of the SPAC and reduce the risk of dilution of equity funds and warrants facilitated by the sponsors. PIPE also assists in providing a guarantee as a medium which balances the minimum funds invested would remain unaffected in the event where the original investors decide to back out from the arrangement. 7 The PIPE arrangement by the SPAC will assist in financing a portion of the purchase agreement and price that is decided upon by the business combination.
De-SPAC Transaction After extensive searches for a favourable and desirable target company for acquisition by the SPAC, the De-SPAC procedure is initiated and is similar to the merger of a company. The SPAC will be in the position similar to that of a buyer and would require a compulsory voting process from the shareholders. Most SPACs require more than 20% of voting from shareholders which is treated as mandatory for the De-SPAC initiation to transcend smoothly. This offers the right of the public shareholders to redeem their shares at a pro rata price of the total funds held in the Trust Account. When the shareholders voting is regarded, the shareholders who vote against the De-SPAC transaction would be offered with the choice for redemption of their public shares, but the typical exercise from the documents warrants for the offer to be made to all the shareholders. This redemption option is not applicable towards the public warrants. Essentially the De-SPAC transaction should be completed within a limited time frame and an extension of such a date would effectuate the Max Bazerman and Paresh Patel, ‘SPACs: What You Need to Know’ (Harvard Business Review, August 2021) <https://hbr.org/2021/07/spacs-what-youneed-to-know> accessed 17 September 2021. 7
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redemption option to the shareholders. In the event of the DeSPAC transaction not occurring, the public shareholders will receive their portion of shareholding to the extent of their investment and their public warrants. The founder shares and warrants will expire effective immediately. The founders will lose their initial capital invested and the SPAC will be dissolved.8
Closing Phase The final phase sets in once the De-SPAC transaction has successfully concluded post the shareholders voting and the proposition of the redemption option has been effectively utilised by the dissenting shareholders. 9 The SPAC will be eclipsed by the reflection of the identity, business and operations of the target company which would officially now be listed. This phase majorly includes closing the deals, pending agreements and further negotiations and filling and documentation, audit and accounting considerations. Potential Benefits of Embracing the Special Purpose Acquisition Companies’ Structure in India There are several benefits of embracing the SPACs structure. Firstly, it is noteworthy that SPACs yield better results than traditional IPOs.10 This is mainly because, across jurisdictions which have formalised SPAC structures within their legal systems, fixed time frames to identify target companies, undertake acquisition and complete the IPO process are stipulated. Secondly, SPAC sponsors are often experienced entrepreneurs that have had success in running, managing and Ramey Lane and Brenda Lenahan, ‘Special Purpose Acquisition Companies: An Introduction’ (Harvard Law School Forum on Corporate Governance, 06 July 2018) <https://corpgov.law.harvard.edu/2018/07/06/special-purposeacquisition-companies-an-introduction/> accessed 17 September 2021. 9 Piyush Soni, ‘Special Purpose Acquisition Companies in India: Current Prospects, Regulatory Challenges, and the Way Ahead- Part I’ (Indian Corporate & Finance Law Review, 16 May 2021) <https://icflr.in/2021/05/16/specialpurpose-acquisition-companies-in-india-current-prospects-regulatorychallenges-and-the-way-ahead-part-i/> accessed 17 September 2021. 10 AMLegals, ‘Advantages and Disadvantages of SPAC’ (AMLegals, 9 April 2021) <https://amlegals.com/advantages-and-disadvantanges-of-spac/#> accessed 15 August 2021. 8
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Global Law Assembly Technical Report Series operating businesses which creates immense potential for the SPAC process to be undertaken with a huge operational and entrepreneurial expertise making the process smoother than it would normally occur. 11 Thirdly, volatility which is often intertwined with transacting in securities market ecosystems can be reduced mainly because of the fact that the subscribers to a SPAC IPO do not have to face the price discovery mechanism of the securities market ecosystem as prices are negotiated with the SPAC in advance creating opportunities for upfront price discovery.12 Fourthly, the use of Private Investment in Public Equity (PIPE) in SPAC IPOs create several benefits in terms of raising of capital. PIPE refers to the purchase of shares of publicly traded stock at a price below the current market value per share.13 Across several jurisdictions this system of raising capital is even referred to as “private placement” since the process involves choosing a limited number of private investors to subscribe to the shares. Considering the fact that this form of raising of capital is associated with comparatively lesser scrutiny and procedures from securities market regulators, it proves to be useful if assessed from the viewpoint of compliance and also enables SPAC to raise capital from sophisticated investors. 14 Fifthly, SPACs fosters innovation in the economy and creates opportunities for funding innovative start- up companies since most of the times the target companies of SPACs are companies indulging in innovative business activities and sectors. Sixthly, shareholders have an option to opt out in case the merger in which the SPAC has undertaken is disapproved by them leading
John Lambert, ‘Why So Many Companies Are Choosing SPACs Over IPOs’ (KPMG LLP, 2021) <https://advisory.kpmg.us/articles/2021/why-choosingspac-over-ipo.html> accessed 17 September 2021. 12 John Lambert, ‘Why So Many Companies Are Choosing SPACs Over IPOs’ (KPMG LLP, 2021) <https://advisory.kpmg.us/articles/2021/why-choosingspac-over-ipo.html> accessed 17 September 2021. 13 Troy Segal, ‘Private Investment in Public Equity (PIPE)’ (Investopedia, 07 November 2020) <https://www.investopedia.com/terms/p/pipe.asp> accessed 17 September 2021. 14 Anurag Agarwal, ‘A Primer on SPACs and PIPEs: How They Work’ (Menabytes, 01 August 2021) <https://www.menabytes.com/spac-pipe/> accessed 17 September 2021. 11
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to the reduction in risk for subsequently disapproving shareholders.15 In the Indian context, SPACs can prove to be a great tool in publicly listing companies from the start- up ecosystems which show promise. Not only this, but since the SPAC route is undeniably cost effective and quicker, it can prove to be extremely beneficial for other companies to list publicly as well. 16 Since SPAC acquisitions occur at a pre- determined price, there can be higher levels of certainty in the market which can prove to be beneficial in the Indian context. Unlike IPOs which focus on past performance and track records of a company, in the SPAC route, a higher reliance is placed on future potential of companies making it possible for boosting the capital for companies that opt for the route.17 However, it is necessary to point out that although the SPAC route is beneficial, several regulatory concerns have also been raised over a short span of time and thus, the next portion of this report has been dedicated towards highlighting the potential as well as looming concerns of SPACs from the Indian context.
Current Mechanism for Governing Special Purpose Acquisition Companies in India In India, the concept of SPACs have been legally recognised vide the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021. 18 Regulation 2(s) defines a “special purpose acquisition company” as “a company which does not have any operating business and has been formed with Tomas De Heredia, Javier Fernandez- Galiano and Mayrin Garcia, ‘The SPACs Boom: Europe Picks Up the Pace’ (Deloitte Insights, 14 July 2021) <https://www2.deloitte.com/uk/en/insights/industry/financialservices/spacs-in-europe.html> accessed 17 September 2021. 16 James Surowiecki, ‘Why a SPAC Bubble is Actually Good for the Economy’ (Marker Medium, 30 November 2020) <https://marker.medium.com/why-aspac-bubble-is-actually-good-for-the-economy-4204d1b55d> accessed 19 September 2021. 17 Pranav Sayta, ‘SPAC and its Growing Relevance in India’ (E&Y, 10 May 2021) <https://www.ey.com/en_in/tax/spac-and-its-growing-relevance-inindia> accessed 19 September 2021. 18 International Financial Services Centres Authority (Issuance of Listing of Securities) Regulations, 2021 <https://ifsca.gov.in/Viewer/Index/202>. 15
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Global Law Assembly Technical Report Series the primary objective to affect a business combination”. Regulation 4 which lays down the applicability of the regulations stipulates through Regulation 4(e) that it applies to initial public offers of specified securities by a SPAC. Chapter VI of the regulations are completely dedicated towards the listing of SPACs. Regulations 67, 68 and 69 deal with the eligibility conditions. Firstly, it is stated that SPACs are eligible to raise capital through IPOs of specified securities on exchanges recognised by the International Financial Services Centre if the target business combination has not been identified prior to the IPO and if the SPAC has provisions for redemption and liquidation as prescribed by the Regulations. Secondly, it is stated as an eligibility condition that a sponsor of the SPAC issuer needs to necessarily have a good track record in business combinations, fund management activities, merchant banking activities and/or SPAC transactions which has to mandatorily be specified in the offer document. Thirdly, as an eligibility condition, it is stated that an issuer or any of its sponsor is not eligible to list securities in case any of its sponsors has been a wilful defaulter, has been debarred from accessing the capital markets or if the sponsor has been deemed as a fugitive economic offender. Regulations 70 and 71 lay down regulations on the IPO process of a SPAC. The regulations stipulate the mutatis mutandis application of Part A of Chapter III of the regulations in some instances. This would mean that the SPAC has to appoint one or more merchant bankers as a lead manager to the issue of securities and has to consult the lead manager and appoint additional intermediaries. Moreover, the SPAC has to also make an application to obtain in- principle approval from a stock exchange recognised by the International Financial Services Centre. The issuer SPAC has to also file a draft offer document through its lead manager who has to submit a due diligence certificate along with the draft offer document. It is mandatorily prescribed under the Regulations that the draft offer document has to be publicly released for a period of 14 days and on the basis of the comments received the lead manager has to inform the International Financial Services Centre Authority about the consequential changes going to be undertaken in the offer document. In pursuance of the above, the International Financial
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Services Centre Authority is empowered to make observations and the issuer SPAC through the lead manager has to carry out the changes and file the final offer document. Regulation 72 lays down a strict requirement that once observations are made by the International Financial Services Centre Authority on the offer document of a SPAC, then the SPAC is required to make the offer within one year of the issuance of such observations failing which a new offer document will have to be formulated and filed before the Authority. Regulations 73 and 74 lay down initial disclosures to be made by the SPAC in the offer document. It is envisaged that disclosures about offer document summary, introduction, general summary, risk factors, capital structure, redemption rights, liquidation, particulars of the issue of securities, tax implications, underwriting, information about the issuer, related party transactions, financial statements, legal information, Government approval information, group companies information, regulatory disclosures, statutory disclosures and all forms of material disclosures have to be made in the offer document. Regulation 75 deals with the issue size and prescribes that the issue size should not be less than USD 50 Million. This minimum issue size can be varied by the International Financial Services Centre. It is also specified that the SPAC sponsor has to hold a minimum of 15% but not exceeding 20% portion of post- issue paid up capital. Regulation 76 stipulates that the issue has to be made using a fixed price mechanism and the price has to be determined by the SPAC issuer after consulting the lead manager. Furthermore, it has been laid down that the price of equity shares cannot be lesser than USD 5 per share. Regulation 77 requires the IPO to be kept open for a minimum period of 3 days and maximum period of 10 days. Regulation 78 deals with underwriting of securities. Regulation 78 permits a certain component of the issue to be underwritten by an underwriter with the only condition being that disclosures about the underwriting agreements have to be made in the offer document. It is also mandatorily laid down that a minimum of 50% of the underwriting commission has to be deposited in the
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Global Law Assembly Technical Report Series escrow account and can only be deferred after the successful completion of the business combination. However, in case a situation of liquidation arises then the underwriters are required by the regulations to waive their rights on the deferred commission. Regulations 79 and 80 stipulate regulations on application and allotment. It is stated that the minimum application size of a SPAC IPO has to be USD 100,000. The minimum subscription received has to be minimum 75% of the issue size, the minimum number of subscribers need to be 50 (this number can be changed by the International Financial Services Centre Authority) and a single applicant cannot be allotted more than 10% of post- issue capital since the allotment needs to be on proportionate and discretionary basis. In case the subscription during IPO is successful, then the lead manager has to ensure that allotments are made within 5 working days of the close of issue and in case the IPO fails, then the lead manager has to refund monies back to subscribers within 5 working days of the close of issue. Regulations 82 to 91 stipulate SPAC specific provisions. Regulation 82 states that the SPAC has to ensure that the entire proceeds of the IPO have to be kept in an interest- bearing escrow account which will be controlled by an independent custodian until the completion of the business combination. The escrow funds can only be invested by a SPAC in securities instruments which have been disclosed in the offer document. The securities instruments can only be short term investment grade instruments which are liquid. Any income and the interest accrued can only be withdrawn by a SPAC for payment of taxes and for meeting with general capital expenses after obtaining shareholder approval. Regulation 83 requires SPACs to file a detailed prospectus with a stock exchange recognised by the International Financial Services Centre which contains information such as disclosures about the proposed business combination, information about the target company, information about the process going to be followed for the business combination, information about the consequent issuer company which would be formed after the business combination takes place and other prescribed information by the International Financial Services Centre Authority. Regulation 84 states that the SPAC has to take prior approval from its shareholders in
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respect of business combinations. In case any shareholder votes against the proposed business combination, then they retain the right to redeem their securities. The right of redemption of shareholders is also provided to them in case a change in control of the SPAC occurs. As per Regulation 85, the SPAC issuer has to complete the business combination within a period of 36 months. Regulation 86 states that in case a business combination does not occur within a period of 36 months then the escrow account has to be liquidated and the SPAC sponsor is not permitted to participate in the liquidation. Regulation 87 prohibits the transfer or sale of securities held by the SPAC sponsor before the completion of the business combination. Regulation 88 stipulates that the SPAC has to ensure that the business acquisition needs to have an aggregate fair market value equal to at least 80% of the aggregate amount deposited in the escrow amount, which does not include commissions for underwriting or taxes payable on the income earned through the escrow funds. Regulation 89 prohibits related party transactions of the SPAC with the business combination and Regulation 90 lays down the regulations for issue of SPAC warrants in an IPO. Regulation 91 empowers the International Financial Services Centre Authority to prescribe additional norms for SPACs. Regulation 93 lays down the regulations for post- business combinations wherein it has been stated that the resulting issuer has to disclose details of completed transactions to the stock exchange recognised by the International Financial Services Centre Authority, meet with eligibility criteria prescribed under the regulations, comply with listing obligations as per the regulations, ensure that the shareholding of the SPAC sponsors are locked up for a period of 1 year from the closing date of the business combination and to ensure that the shareholding of promoters, controlling shareholders and key managerial persons of the resulting issuer is also locked up for a period of 1 year from the closing date of the business combination.
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3 Regulatory Concerns of Special Purpose Acquisition Companies from the Indian Context Concerns under Securities Law Securities law in India is administered by the Securities and Exchange Board of India (SEBI) who is India’s securities market regulator. The first challenge which is faced by SPACs under Indian securities law is the eligibility conditions under the SEBI (Issue of Capital and Disclosure Requirements) (ICDR) Regulations, 2018 19. The eligibility criteria under Regulation 6 (1) of SEBI ICDR Regulations, 2018 for an IPO requires the company to; firstly, possess net tangible assets of at least three crore rupees for the preceding three years; secondly, have an average operating profit of at least fifteen crore rupees during the preceding three years; and thirdly, have a net worth of at least one crore rupees in each of the preceding three years. 20 Considering the fact that SPACs do not qualify the eligibility criteria laid down by the regulations, that is another impediment for development and functioning of SPACs. But under Regulation 6(2), there are alternative compliance norms if the said entity fails to conform to the criterion provided under subregulation (1). This in effect means that 75 percent of the net offer will have to be allocated to qualified institutional buyers through Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 <https://www.sebi.gov.in/legal/regulations/jan-2020/securities-andexchange-board-of-india-issue-of-capital-and-disclosure-requirementsregulations-2018-last-amended-on-january-01-2020-_41542.html> accessed 03 October 2021. 20 Shah D, ‘SPAC Listings in India: Regulatory Hurdles and the Way Forward’ (IndiaCorpLaw, 23 March 2021) <https://indiacorplaw.in/2021/03/spaclistings-in-india-regulatory-hurdles-and-the-way-forward.html> accessed 27 September 2021. 19
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the book building process. The only drawback with this alternative way of application is that the humongous masses of retail investors will remain untapped which can again lead to limited financing for SPACs. It is important to understand at this stage that these impediments only exist for SPACs while listing in the domestic stock exchanges of India. This is because the International Financial Services Centres Authority (Issuance of Listing of Securities) Regulations 2021 21 contains specific provisions for SPACs under Chapter VI of the Regulations. 22 Considering the fact that these regulations have specifically provided for SPAC listing regulations, this would mean that SPACs can successfully undertake an IPO process through the recognised exchanges which are a part of the International Financial Services Centre. However, some issues still seem to exist in this mechanism since it is not clear as to if venture capitalists and other alternative investment funds of the same class are permitted to freely invest in SPACs 23 as per the SEBI (Alternative Investment Fund) Regulations, 2012. 24 The second issue exists in respect of exchange control regulations for potential shareholders. Since the shareholders receive shares of the combined SPAC entity, the cap imposed by the Reserve Bank of India on fair market value of shares through the Liberalised Remittance Scheme may create obstacles in case
International Financial Services Centres Authority (Issuance of Listing of Securities) Regulations, 2021 <https://ifsca.gov.in/Viewer/Index/202>. 22 Dipak Rao and Prerna Kapur, ‘India: Special Purpose Acquisition Companies: Regulatory Feasibility in India Under the IFSCA Regulations’ (Mondaq, 29 September 2021) <https://www.mondaq.com/india/shareholders/1116130/special-purposeacquisition-companies-regulatory-feasibility-in-india-under-the-ifscaregulations?email_access=on> accessed 03 October 2021. 23 Yashesh Ashar, ‘The SPACs Notification and the Few Missing Sparks’ (The Hindu Business Line, 08 August 2021) <https://www.thehindubusinessline.com/business-laws/the-spacsnotification-and-the-few-missing-sparks/article35801466.ece> accessed 03 October 2021. 24 Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 <https://www.sebi.gov.in/legal/regulations/aug2021/securities-and-exchange-board-of-india-alternative-investment-fundsregulations-2012-last-amended-on-august-13-2021-_34621.html> accessed 03 October 2021. 21
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Global Law Assembly Technical Report Series the fair market value of the De- SPAC exceeds the cap limit. 25 The third major issue which exists is the lengthy compliance requirements which are prescribed which include obtaining approvals for amalgamation or merging with foreign entities that often seems to be a challenge since the time taken to obtain these approvals and the rate of approvals given are frankly, quite low.26
Concerns under Law on Mergers & Acquisition The fundamental nature of mergers happening through SPACs is different from the traditional method of mergers and acquisitions taking place. Presently, India does not provide for a legal recognition of SPAC except those permitted by the International Financial Services Centre Authority through its regulations. Since SPACs situated in other jurisdictions can still acquire Indian companies through mergers and acquisitions, it would be pertinent to state that the concerns or challenges that could arise are similar to any cross border mergers and acquisitions. In the view of the same, it would be important to consider a paradigm of the regulatory challenges that India may face if SPACs are given legal recognition. In order to correctly highlight the merger and acquisition concerns of SPACs in India, it is important to analyse and discuss concerns from other nations as well, where SPACs have been successfully implemented. In the United States of America, SPACs have to identify the target company and complete acquisition within two years from the inception. This throws out different challenges as far as valuations, harmonising the accounts and conforming to the standards of disclosure inter alia are concerned. 27 The detailed Soumya Kanti De Mallik, Prithviraj Chauhan and Kshitij Gupta, ‘Statutory & Regulatory Amendments in India to Make SPAC Effective’ (Mondaq, 11 August 2021) <https://www.mondaq.com/india/shareholders/1101002/statutoryregulatory-amendments-in-india-to-make-spac-effective> accessed 03 October 2021. 26 Ajay Kumar and Himanshu Dubey, ‘Creating Regulatory Eco- System for SPACs in India’ 18 August 2021 <https://vinodkothari.com/2021/08/regulatory-eco-system-for-spacs/> accessed 03 October 2021. 27 Mark Maurer, ‘Companies Merging With SPACs Face Challenges Around Valuations, Controls’ (The Wall Street Journal, 13 April 2021) <https://www.wsj.com/articles/companies-merging-with-spacs-face25
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discussions below not only showcase the challenges faced in other jurisdictions in terms of mergers and acquisitions by SPACs, but also highlight the potential concerns which may be faced in India.
Challenges Concerning Valuations For the SPAC to acquire any target company, it is important for the target companies to disclose the valuation of their assets. These assets include buildings, real estate properties and intangible assets like trademarks, copyrights, brand goodwill and the like. The target companies have to undertake rigorous procedures and provide details to support the valuation of the said company. The target companies have the option to hire external entities for the purpose of evaluation. However, considering the complexities involved, valuation of a company is often considered to be a complex judgement due to the multiplicity of estimations that are possible. 28 Apart from the challenges concerning initial estimates, anecdotal evidence suggests that share prices of the SPACs have decreased by over 33% on an average in the first twelve months of merger. 29 This downfall may be noticed even after the executives concerned test the fair market value of the assets when there is an economic volatility after the merger. Data suggests that share dilution in structure that takes place upon the merger is the primary reason for such reduction in the valuation. The major reason is that the share dilution occurs with respect to the shares of the promoters which is generally around 20% of SPACs stock. Since the promoters would have incurred expenditure for the purpose of processing IPOs and incurred the costs thereof, in the postacquisition company the shares are diluted. The challenges challenges-around-valuations-controls-11618350611> accessed 19 September 2021. 28 Mark Maurer, ‘Companies Merging With SPACs Face Challenges Around Valuations, Controls’ (The Wall Street Journal, 13 April 2021) <https://www.wsj.com/articles/companies-merging-with-spacs-facechallenges-around-valuations-controls-11618350611> accessed 19 September 2021. 29 Dayton Nordin and Mayis Kirakosyan, ‘Three SPAC M&A Risk Factors and Ways to Mitigate Them’, (E&Y, 19 May 2021) <https://www.ey.com/en_us/strategy-transactions/spac-m-a-risk-factorsand-ways-to-mitigate-them> accessed 19 September 2021.
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Global Law Assembly Technical Report Series concerning the entire exercise of estimating and the process of valuation get compounded when multiple companies are combined in one SPAC. 30 This happens since there are complexities for synergizing several aspects of valuation which may also have provided a primary impetus to the deal. Furthermore, the executives are also required to determine the proportionate holding of the SPAC shareholders in the acquired company and determine the ratio of converting the warrants that the shareholders held in the SPACs into equity in the postacquisition. Since warrants can be sold or traded, it becomes important to consider that the same has to be accounted for in a correct manner, failing which there can be a problem in share dilution and post-merger acquisition.
Challenges Concerning Legal Framework and Regulations Firstly, there can be issues concerning conflicts of interests which may be real or artificial. In the United States of America, since the promoter’s shareholding will be reduced to nothing if SPAC fails to acquire the target company within the time-frame of 24 months (and 36 months in India), in order to protect their own interests, there can be a possibility wherein the promoters pay a higher price in order to complete the acquisition. This results in inflated valuation of the target company before acquisition and becomes detrimental to the minority shareholders upon the acquisition. This can prove to be a threat in the Indian context as well if sufficient safeguards to tackle this issue are not implemented. While it is true that there are safeguards concerning the same wherein the board of directors and the promoters have to demonstrate that the price paid is not in substantial variance with the fairness value that is estimated, in the Indian context this aspect would require higher scrutiny since even appointment of independent directors in companies have been bundled with its own challenges. 31 Secondly, the
Dayton Nordin and Mayis Kirakosyan, ‘Three SPAC M&A Risk Factors and Ways to Mitigate Them’, (E&Y, 19 May 2021) <https://www.ey.com/en_us/strategy-transactions/spac-m-a-risk-factorsand-ways-to-mitigate-them> accessed 19 September 2021. 31 Monika Prajapat, ‘Independent Directors as Watchdog of Companies: Key Role and Challenges’ (The Indian Commercial Law Review and Practice Blog, 26 30
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companies which intend to go public are required to satisfy higher standards as far disclosures are concerned. It is also noticed that a substantial number of companies restate their financials in the first two years after the acquisition. 11.7% of SPAC transactions restated their filings in the first year, followed by 15.7% in the second year as compared to 6.3% within the first five years of the non-SPAC mergers and acquisitions. 32 Since SPACs themselves may not have any tangible assets, but carry certain liabilities, the disclosure requirements require them to state such liabilities when they go public. Recently, the Securities and Exchange Board of India has signified its intent to change shareholder accountability in traditional IPOs and sought more information from 15 of the 42 IPOs in the pipeline. This comes after of the eight companies listed in August 2021, only two were trading above the offer price. Therefore, the need to quickly adapt the increased standards of disclosure and scrutiny from regulators is another challenge that the targeted company, as well as the SPACs face. Balancing the interests of the minority shareholders without discouraging formation of SPACs by potential sponsors is a regulatory challenge that the lawmakers and policy-makers face. As on date, for cross border mergers and acquisitions, the important regulations and laws include Foreign Exchange Management Regulations, 2018, the Companies Act, 2013 and other approvals as may be required by the Reserve Bank of India (RBI) on a subjective basis. 33 When such acquisitions take place by non-resident entities, the viability or feasibility of the office located in India changing to a mere ‘branch office’ may have to be considered. Further, the regulations introduced in 2020 which require government approval for investments from residents of countries sharing a land border in India may also have to be considered since it is unclear whether even SPAC mergers and acquisitions would require to undergo May 2020) <http://iclrap.in/independent-directors-as-watchdog-ofcompanies-key-role-and-challenges/> accesse 19 September 2021. 32 James Surowiecki, ‘Why a SPAC Bubble is Actually Good for the Economy’ (Marker Medium, 30 November 2020) <https://marker.medium.com/why-aspac-bubble-is-actually-good-for-the-economy-4204d1b55d> accessed 19 September 2021. 33 PWC, ‘Rise of SPACs: An Indian Perspective’, (PWC, May 2021) <https://www.pwc.in/assets/pdfs/services/deals/rise-of-spacs-an-indianperspective.pdf> accessed 19 September 2021.
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Global Law Assembly Technical Report Series the same process when there are sponsors and shareholders who are residents of the countries sharing a land border with India. The present concern here is that there would be a pressing need to streamline the regulatory approvals for SPAC mergers and acquisitions.
Concerns under Tax Law In India, the law of taxation is classified into two parts, viz., direct and indirect taxes. The direct tax portion is governed by the Income Tax Act, 196134 containing levy of tax on salaries, business income, capital gains, house property and income from other sources.35 The other types of taxes which are covered under the Income Tax Act, 1961 include securities transaction tax, minimum alternate tax, equalisation levy, fringe benefits tax and dividend distribution tax. 36 In the indirect taxes portion, the governing law includes the various Goods and Services Tax laws such as the Central Goods and Services Tax Act, 2017, State Goods and Services Tax Act, 2017, Integrated Goods and Services Tax Act, 2017 and the Union Territory Goods and Services Tax Act, 2017.37 Furthermore, even the law on Customs governed by the Customs Act, 1962 38 and the Customs Tariff Act, 197539 are covered under the indirect tax portion. However, for the purposes of the present report, only issues pertaining to tax on business income (corporate tax) and capital gains tax will be discussed. The Income Tax Act, 1961 <https://legislative.gov.in/sites/default/files/A1961-43.pdf> accessed 03 October 2021. 35 Vinod K. Singhania and Kapil Singhania, Direct Taxes Law & Practice: Professional Edition (Taxmann 2020). 36 Vinod K. Singhania and Kapil Singhania, Direct Taxes Law & Practice: Professional Edition (Taxmann 2020). 37 Central Board of Indirect Taxes & Customs, ‘GST- Goods and Services Tax’ (Central Board of Indirect Taxes & Customs, 2021) <https://www.cbic.gov.in/htdocs-cbec/gst/index-english> accessed 03 October 2021. 38 The Customs Act, 1962 <https://legislative.gov.in/sites/default/files/A1962-52.pdf> accessed 03 October 2021. 39 The Customs Tariff Act, 1975 <https://www.indiacode.nic.in/bitstream/123456789/8774/1/A197551.pdf> . Accessed 03 October 2021. 34
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One of the challenges which exist under the Income Tax law is that under Section 47(vi) only transfers in a scheme of amalgamation of capital assets by an amalgamating company to an amalgamated Indian company is exempted from capital gains tax. Since De-SPAC transactions have the potential to have a foreign amalgamated company, the capital gains exemption in such cases would not be available and these transactions will be treated as “transfers” and attract capital gains tax under Section 45 of the Income Tax Act, 1961.40 Similarly, Section 47(vii)(b) exempts transfers by shareholders in a scheme of amalgamation who hold shares in an amalgamating company only if the amalgamated company is an Indian company. Thus, even in such cases a shareholder will have to pay capital gains tax in a deSPAC transaction containing a foreign amalgamated company.41
Concerns under Anti-Money Laundering Law The money laundering concerns with SPAC may often be undictated and should be considered as a major regulatory concern due to its distinct and separate functioning from other companies and the traditional IPO route. Some of the major money laundering concerns of SPACs are discussed in this part. When any SPAC is in the process of formation and IPOs without having any typical checklist to assess the information upon the sponsors, independent due diligence mechanism, information upon the company for the merger or acquisition at the latter stage can be considered quite detrimental to the future of the SPAC. It can become the major cause of concern for a rise in money laundering activities since there is inadequate or incorrect disclosure of information and the firm is very likely to undertake any illegal or suspicious business activity. Apart from this, Devarsh Shah and Dharmvir Brahmbhatt, ‘Tax Implications on SPAC: To SPAC or Not to SPAC?’ (The CBCL Blog, 08 June 2021) <https://cbcl.nliu.ac.in/taxation/tax-implications-on-spac-to-spac-or-not-tospac/> accessed 03 October 2021. 41 Devarsh Shah and Dharmvir Brahmbhatt, ‘Tax Implications on SPAC: To SPAC or Not to SPAC?’ (The CBCL Blog, 08 June 2021) <https://cbcl.nliu.ac.in/taxation/tax-implications-on-spac-to-spac-or-not-tospac/> accessed 03 October 2021. 40
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Global Law Assembly Technical Report Series SPACs do not have any operating business activities in the initial stage and the target company’s information is not disclosed and often unknown. This could potentially mean the confidence of the investors is upon the reputation of the sponsors, management, and executives of the SPACs. Therefore, since the target for acquisition is not identified before the IPO closing because any such identification would warrant the disclosure to the securities market regulator of the country. Therefore, SPACs have an increased risk of fraud, omissions, insider trading, non-disclosure of essential documents and fees and payment. The Financial Industry Regulatory Authority report also elaborates several risks that are associated with SPACs such as the funds and movement of money for any SPAC related transactions should be specifically disclosed for transparent assessment of what the fees in the SPAC transactions are and the money that is being utilised for the same.42 Insider trading is also another major concern with SPAC and hence the interests of the sponsors should be specifically disclosed along with the history and assessment of the board members. 43 As already mentioned there should be target acquisitions and its identification prior to the completion of the IPO procedure. Hence, usually a disclosure should be made to the securities market regulator that no specific target company for acquisition has been ascertained by the SPAC. The SPAC sponsors and executive members are to be elected in a manner that there is no conflict of interest or any existing interest or link with the target company for acquisition. Once the target company for acquisition has been identified, the financial statements of the target companies require an assessment and also an assessment has to be made if these financial statements comply with the securities law of the country in which the target company is being acquired. This includes the earnings, audited financial statements and essential documentation of the target company, Additionally, it is usually 42 Securities and Exchange Commission: Division of Corporate Finance, ‘Special
Purpose Acquisition Companies’ (U.S. Securities and Exchange Commission, 22 December 2020) <https://www.sec.gov/corpfin/disclosure-special-purposeacquisition-companies> accessed 17 September 2021. 43 TenIntelligence, ‘Special Purpose Acquisition Company (SPAC) Due Diligence Considerations’ (TenIntelligence, 2021) <https://www.tenintel.com/spacs/> accessed 19 September 2021.
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advisable to have an external and independent due diligence advisor who would play an important role in assistance of the information required on the target company. Further they would also provide an unadulterated perspective on the risks and opportunities and compliance of the target company with the anti-money laundering laws of the concerned jurisdiction of the target company and if regular adequate disclosures have been made. Provided the information and already existing regulatory framework of the SPACs within several countries, firms involved in the SPAC process also must take necessary steps to understand and monitor the risks and the method of incorporating this in the development of the anti- money laundering tools. Essentially the beneficial ownership of the shares should be disclosed and be transparent. However, the existing problems with the SPAC shares are essentially held by the shareholders and hence the beneficial ownership lies with them. SPAC unit of share is composed of equity and warrants, and the equity might be reportable but the unit as a whole may be non-reportable. However, the information of beneficial ownership should be accurate and adequate. Round tripping is another common phenomenon that can take place especially in case of the De-SPAC procedure in case of any outbound merger of an Indian company where the target company within India is acquired through reverse merger or share swaps which would require a prior approval from the RBI and several compliance measures to be undertaken. This can sometimes cause round tripping of funds for some of the resident shareholders which is considered as illegal which can convert illegitimate funds into legally sourced assets or income for the SPAC which can raise several concerns.
Concerns under Company Law Legislation and regulations governing company laws are not suitable for the establishment and functioning of SPACs in India. There are several aspects within the regulations which are not conducive for the development and functioning of SPACs. For instance, the government’s actions against shell companies for legitimate state aims has a direct consequence on growth and
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Global Law Assembly Technical Report Series development of SPACs in India. The Government has been wary of shell companies owing to concerns of tax evasion, avoidance and other economic related offences. 44 Considering that a SPAC does not undertake business functions, it requires a delicate policy approach. It is reported that SEBI has suggested defining a shell company as any entity having no significant operational assets and or business activity of its own but acting in a pass through capacity as a conduit. 45 It would be a challenge for the policy makers and regulators to distinguish between an illegal shell company and a legitimate SPAC. Considering that any definition will be further subjected to judicial interpretation, the scope and ambit of defining an illegitimate shell company and a legitimate SPAC will require consideration. At a fundamental level, the Companies Act, 2013 does not provide any provision for establishment or functioning of SPACs. Rather, some of the provisions in the Companies Act, 2013 creates an impediment for establishment and development of SPACs in India. Under Section 248 of the Act, the Registrar of Companies (RoC) has the power to remove the name of a company if a company fails to commence its business within one year of its incorporation. Considering that SPACs are given 36 months and require that time to identify a target company and further complete the business combination, the power of the RoC to strike off a company which fails to commence operations within one year is a major hurdle. Since the said provision does not provide any exception to exclude SPACs from its ambit, the
Gulzari MA, ‘Is Corporate India Ready to Board the Spac-Ship?’ (The CBCL Blog, 09 May 2021) <https://cbcl.nliu.ac.in/capital-markets-and-securitieslaw/is-corporate-india-ready-to-board-the-spac-ship/> accessed 27 September 2021. 45 Press Trust of India, ‘Govt, Regulators Mull Challenge-Proof Definition for Shell Companies’ (The Economic Times, 13 May 2018) <https://economictimes.indiatimes.com/news/economy/policy/govtregulators-mull-challenge-proof-definition-for-shellcompanies/articleshow/64145993.cms?from=mdr> accessed 27 September 2021. 44
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opportunity for a SPAC to identify a target company and further commence operations does not arise.
Concerns under Private International Law Private International law is that portion of international law that comes into question when courts in one country are faced with a foreign element or claim that would lead to conflict between the private entities and citizens across various countries and is often referred to as “conflict of laws” in the common law countries. Therefore, the domestic courts of a country will have to deal with three questions when any private international law issue arises; firstly, which country would have the jurisdiction in dealing with a dispute and the conditions which would allow the country to entertain the same?; secondly, which law would be applicable?; and thirdly, how would the foreign judgement be made enforceable? 46 At this juncture it is important to examine how pertinent these questions of private international law would be in case of SPACs and how it would pose several jurisdictional issues in case any dispute arises. There are possibilities of several contractual disputes that can arise in the course of the SPAC lifecycle. The shareholders of the SPAC can sue the SPAC executives in failing to perform their fiduciary duty in and in conducting successful negotiations with the target company. Further they can also claim that the SPAC executives were grossly negligent in conducting and gathering any relevant information and meetings to effectively constitute a SPAC merger. However, this is an easy question to answer when the SPAC has initiated a merger with the company in the same country the SPAC is present. The problem would however arise if the SPAC merger were initiated with a target company with an overseas SPAC. Would the shareholders be liable to claim damages from the SPAC directors on the ground that they consciously chose to not conduct successful negotiations with the target company and buy more time thereby risking the shareholder’s investment amount in the
Hugh & Hazel Darling Law Library, ‘Private International Law’ (UCLA School of Law, 2021) <https://libguides.law.ucla.edu/privateinternational> accessed 07 October 2021. 46
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Global Law Assembly Technical Report Series SPAC?47 However, the question would be different if majority shareholders are in a different country from where the SPAC executives/directors are present. The defendants in case the suit arises can merely take the claim that since the SPAC directors and executives are present in a different country from the SPAC shareholders, the domestic contractual laws would be inapplicable. In this instance, there is a conflict of application of the substantive and procedural law which is an impediment to any subsequent dispute resolution. There is potential for numerous disputes to arise in case of cross border De-SPAC transactions. From the Indian perspective, the framework practically complicates the listing of SPACs within India, however it allows De-SPACs of Indian target companies undertaken by any foreign or overseas SPACs. The overseas SPAC has the option to acquire the target Indian company through the merger of the target company and the overseas SPAC or through the acquisition of the target company’s share capital in consideration for cash, shares or a combination of both.48 Apart from the domestic challenges that De-SPAC transactions would pose, there are certainly other issues that can arise. Firstly, if the target company’s shareholders can oppose the merger or acquisition and can claim that the company can negotiate a better compensation amount for the merger. This can be claimed under section 236 of the Companies Act, 2013 which specifies the procedure as to how the minority shareholding can be purchased. However, the question would be how the minority shareholders of the target company would initiate the proceedings against SPAC claiming a better price for their shares. Is the SPAC subject to the domestic laws of where the target company and shareholders are located or since the subject matter of the dispute and the SPAC executives are located Quinn Emanuel Trial Lawyers, ‘Litigation Risk in the SPAC World’, (Quinn Emanuel Trial Lawyers, 2021) <https://www.quinnemanuel.com/thefirm/publications/litigation-risk-in-the-spac-world/> accessed 07 October 2021. 48 Ayesha Bharucha, Aishwarya Gupta and Aman Mihir, ‘Are Cross- Border DeSPACs FeasiblePart I’ (Lexology, 15 July 2021) <https://www.lexology.com/library/detail.aspx?g=3c9e62fc-a44d-4cbd8587-9d43d91d213b> accessed 07 October 2021. 47
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outside India, or would the shareholders have to proceed to the country where the SPAC is presently functioning? Secondly, the SPAC executives/directors can easily defend the shareholder’s claim by rejecting the extension of jurisdictional status of the dispute and claim that the Indian contract and Companies acts/ rules would be inapplicable towards them and the calculation of fair market value (FMV) of purchase should be done in accordance with the domestic laws of country or should be aligned with laws of the overseas SPAC thereby creating a conflict between the application of domestic laws. 49 Furthermore, even if a presumption is made that the case has been admitted within Indian courts and the domestic laws would be applicable and the litigation has favored the shareholder’s interests, the enforcement risks would arise which would warrant the Indian courts to order the defendants located in foreign place to enforce and pay the costs accordingly which might not be complied with thereby escaping accountability. Thirdly, exceeding the jurisdictional threshold to admit cases in the domestic laws of the country can be counterproductive for the SPAC framework. Since the privatization of securities law has also become increasingly relevant through arbitration and if parties are dealing with two countries and investments that have cross border impact, then the conflict of laws is an inevitable occurrence.50 Therefore, the choice of law (substantive as well as procedural law) should precede any target company acquisition or cross border merger and the contract should be well formulated and drafted in such a way that it specifies the choice of law in case any dispute arises between parties and stakeholders. This would assist in comprehensively dealing with dispute resolution settlement mechanisms and the application of Akila Agrawal, Yash Ashar, Ravi Shah and Avani Dalal, ‘Using SPAC Vehicles as a Means of Listing Outside India’ (India Corporate Law: A Cyril Amarchand Mangaldas Blog, 14 September 2020) <https://corporate.cyrilamarchandblogs.com/2020/09/using-spac-vehiclesas-a-means-of-listing-outside-india/> accessed 07 October 2021. 50 Robert Hillman, ‘Cross Border Investment, Conflict of Laws and the Privatisation of Securities Law’ (Law and Contemporary Problems, 1992) <https://scholarship.law.duke.edu/lcp/vol55/iss4/13/> accessed 07 October 2021. 49
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Recommendations to Solve Regulatory Concerns of Special Purpose Acquisition Companies In light of the aforesaid discussions and potential as well as looming concerns of SPACs highlighted from an Indian context, this part of the report is focused on providing recommendations from firstly; a regulatory perspective that will ensure that sufficient regulatory safeguards are suggested; and secondly, from the perspective of providing suggestions to solve the concerns of SPACs themselves.
Securities Law The first reform required in terms of securities law and its application over SPACs is that the SEBI ICDR Regulations will have to be amended to be made more SPAC- friendly. Currently, SPACs can only raise capital through an IPO in stock exchanges which are a part of the International Financial Services Centre giving it limited scope for raising capital. If amendments can be made in the SEBI ICDR Regulations which are pari materia to the International Financial Services Centres Authority (Issuance of Listing of Securities) Regulations 2021 with a few exceptions, then SPAC IPOs can be introduced in all stock exchanges permitting all institutional and retail investors to invest in them. This means introducing SPAC specific eligibility, IPO process, offer timings, disclosures, offer document, issue size, pricing, underwriting, offer period, application, allotment and postmerger or post combination regulations in SEBI ICDR Regulations. In pursuance of the above amendment, it is necessary that Regulation 6 of the SEBI ICDR Regulations also introduce an “exception” clause in the regulation for SPACs which will exempt them from preceding year requirements since separate eligibility requirements will already be brought in a separate Chapter as stated above.
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The second reform required is the amendment of SEBI (Alternative Investment Fund) Regulations to explicitly permit them to invest in SPACs so that venture capitalists and other alternative investment funds of the same class will freely be permitted to invest in SPAC IPOs. The third reform required is the increase in the cap rates prescribed for fair market value of shares by the Liberalised Remittance Scheme of the Reserve Bank of India for SPACs so that SPAC shareholders do not face the consequences of not being able to meet the cap limit requirements.
Law on Mergers & Acquisition Although valuation concerns pertaining to mergers and acquisitions of SPACs can be dealt with, by adopting administrative and accounting best practices, the regulatory concerns will require solid reforms in order to reduce SPAC troubles. The first reform required is to solve the challenges which can be faced by SPACs in obtaining regulatory approvals from the Reserve Bank of India and the Foreign Exchange Management authorities. It is necessary for there to be separate fast- track regulatory approval procedures so that the SPAC process is not faced with unnecessary delays since there exists a strict statutory time limit for completing the entire business combination. The second reform which is required is that in cases where the acquirer company is a foreign company and the target company is an Indian company, it is necessary that the stringent requirements applicable to foreign subsidiaries should not be made applicable to the target company after it is acquired by the foreign company through the SPAC route, at least for a limited period of time so that the number of SPAC routed public listings can increase in the Indian context.
Tax Law It is recommended that a proviso is inserted in Section 47(vi) which will treat a transfer in a scheme of amalgamation of capital assets by an amalgamating company to an amalgamated foreign company in case of SPACs to be treated as an exempted transfer for the purposes of levy of capital gains tax so that De- SPAC
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An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001
transactions are not discouraged because of the current tax treatment. It is also recommended that a proviso is inserted in Section 47(vii)(b) whereby transfers by shareholders in a scheme of amalgamation who hold shares in an amalgamating company are treated as exempted transfers for the purposes of capital gains tax even if the amalgamated company is not an Indian company where the transfer in a scheme of amalgamation pertains to SPACs. This is necessary in order for shareholders to not be discouraged for proactively being a part of the SPAC process.
Anti-Money Laundering Law Considering the fact that SPACs are shell companies by their very nature, it is needless to say that money laundering concerns are one of the biggest challenges which are preventing countries from encouraging the SPAC ecosystem. Therefore, in the Indian context as well, it is necessary to create separate SPAC antimoney laundering disclosure requirements which will prescribe SPAC- specific restriction parameters on the type of target company, anti- money laundering duties of the sponsor and antimoney laundering disclosures. In fact if the scheme of the proposed anti- money laundering regulations for SPACs can require the SPAC to undertake anti- money laundering inspections and reporting from an independent entity then it can prove to be a resourceful tool to address the anti- money laundering concerns of Indian regulators for SPACs.
Company Law It is of utmost necessity that an exception is granted under Section 248 of the Companies Act, 2013 for SPACs so that the RoC does not strike off the name of the SPAC treating it as a company which has not commenced business operations. This Section can of course, be made applicable after the business combination has completed or after a period of 36 months whichever is earlier but up till that time, it is recommended that an exception clause should exist for SPACs that will enable them to complete the business combination without being striked off. This reform can prove to encourage SPACs of Indian origin at a large scale. Furthermore, it is also necessary that specifications about restrictions and compliances for related party transactions
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Global Law Assembly Technical Report Series are notified for SPACs through delegated legislation under the Companies Act which will contain SPAC specific disclosures and also provide an inclusive list of what forms of transactions for SPACs amount to related party transactions.
Private International Law In order to deal with contractual dispute concerns arising out of SPAC transactions, it is necessary that the choice of law and the clause of resolution of disputes are clearly stated out in the contractual documents of the SPAC transactions and that a specific disclosure requirement of the choice of law and the dispute resolution clause is made in the prospectus itself so that subscribers and prospective shareholders clearly know the correct forum to approach to enforce their rights. It is also suggested that statute based alternative dispute resolution methods such as mediation, arbitration and expert determination should be promoted for resolving disputes in SPAC related transactions and activities so that private international law issues can be avoided and the disputes do not go on for several years because of jurisdictional issues.
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An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001
5 Epilogue In light of the discussions and legal propositions advanced in all the chapters of this research, it seems to be clear that the SPAC framework is still at an extremely nascent stage in the Indian context since SPAC transactions can only be conducted in the International Financial Services Centres Authority framework. Therefore, if serious steps are taken towards solving the securities law, tax law, anti- money laundering law, mergers & acquisitions, company law and private international law concerns, then it can prove not only beneficial for encouraging SPACs of Indian origin, but it can also effectively address the concerns of Indian regulators leading to increased interest from foreign SPACs to acquire Indian targets, to speed up the listing process, to encourage the acquisition and growth of start- up companies and to increase certainty in prices of security instruments in the Indian securities market.
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