Concerns under Securities Law

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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, 201819. 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

19 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.

An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001

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 202121 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 SPACs23 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

21 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.