Challenges Concerning Legal Framework and Regulations

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

30 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

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

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.