JOINING THE SPAC BANDWAGON - HAS THE MOMENT PASSED?

The lack of such disclosure requirements may be what makes the SPAC route for going public attractive to target companies, however, they may not be the best for investors

"SPACs" or special purpose acquisition companies are companies which are created for the specific purpose of acquiring a target private company. A SPAC is formed with the specific intent of investing in a specified sector or a specified economy. The SPAC is formed by an individual or group of individuals and goes through an Initial Public Offer ("IPO") process.

Once the SPAC has been raised through funds from investors and has gone through an IPO, it acquires a target private company in its specified sector or economy. The target company can then trade on a stock exchange under the SPAC's ticker. Thus, the target company has the option to go public via the SPAC as opposed to going public vide an IPO. The rigorous rules of an IPO are more cumbersome and more expensive than those of a SPAC. The SPAC route is also more desirable for investors as it mitigates many of the risks associated with an IPO listing.

In the event, the SPAC does not acquire the target company within the stipulated period, the SPAC is liquidated, and its funds are returned to investors.

In India, the Companies Act, 2013 ("Companies Act") does not currently contain explicit provisions for listing on overseas stock exchanges through SPAC vehicles. The Company Law Committee ("CLC"),in its report dated March 2022, observed that the SPAC route may be particularly profitable for Indian companies in cases where overseas investors possess a keener awareness of a company's potential than their domestic counterparts. The CLC particularly examined the listing of the Indian company Renew Power Private Limited.

Additionally, the CLC looked into the potential for Indian incorporated SPACs' listing on overseas stock exchanges. It was brought to the CLC's attention that SPACs are currently regulated and recognized across multiple jurisdictions such as the UK, USA, Canada, Singapore, and Malaysia. Therefore, the CLC felt that enabling the listing of India incorporated SPACs on global exchanges would open up avenues for Indian companies to operate and carry out business in such jurisdictions.¹

SPAC IPOs in the US accounted for more than half of the USD 67 billion in IPO capital raised in the US in 2020 according to Goldman Sachs. However, globally, SPAC listings have plunged due to increased regulatory scrutiny arising from concerns of weak investor protection mechanisms and vague disclosures². New underwriter liability guidelines have been issued by the Securities and Exchange Commission of the USA ("SEC") and this has spooked most underwriters including Goldman Sachs who is said to have been ending its involvement in SPAC vehicles.³

It is in this global scenario that the CLC examined whether Indian companies should (a) list overseas through SPACs and (b) whether SPACs incorporated in India can list on domestic and global exchanges. It is important to note in this context that the Securities and Exchange Board of India ("SEBI") has been vested separately with the task of determining the regulations applicable to the listing of SPACs on domestic stock exchanges.

The CLC has recommended introducing an enabling provision to recognize SPACs under the Companies Act and allow entrepreneurs to list SPACs incorporated in India on domestic and global exchanges. The CLC also recommended relaxing the requirement to carry out businesses before being struck off and providing exit options to the dissenting shareholders of a SPAC (if they disagree with the choice of the target company identified) which the options must be laid down in the Companies Act.⁴

It is further important to note that the creation and listing of SPAC vehicles in India involves the overplay of a multitude of laws including the Companies Act, the Foreign Exchange Management Act, 1999 ("FEMA") and the regulations made thereunder and SEBI regulations. It may not be a simple tax to introduce new laws, rules, or regulations to provide for SPACs as it will involve numerous regulators and the laws will have to be in consonance with one another.

As regulators overseas find loopholes in the SPAC structure and increase their regulatory scrutiny and regulators in India are yet to pass legislation enabling SPAC investments, it would appear that the moment in the sun for SPACs has passed.

Additionally, and very importantly, as a regulatory review of SPACs increases in the USA, it is clear that they may not be the most perfect structure from an investor protection mechanism perspective. Do Indian regulators want Indian investors to be exposed to the risks associated with investing in SPAC vehicles? The answer, in my view, should be negative.

The rigorous process of an IPO and the disclosure requirements under the applicable listing regulations are for the purposes of ensuring that the investors in a company going public are fully informed of the risks associated therewith. The lack of such disclosure requirements maybe what makes the SPAC route for going public attractive to target companies however they may not be the best for investors.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.