Current Mechanism for Governing Special Purpose Acquisition Companies in India

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

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

15 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>.

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

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

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

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

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

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.